There are about 750,000 franchises in the world with more opening every day. Many people think that running a franchise may be the right career move for them. There are some facts, however, you will want to consider before you put out the open sign.
Know Your Market
Doing proper research into markets can help prevent poor investment decisions. There are at least two ways that you can determine if there is a market for the franchise in an area you are considering. Find out the total gross for the top stores in the market. Then, eliminate the top two or three choices as it will be hard to compete with them in the first year or two. Now, look at the figures and see if you can survive on that number. Secondly, consider if there is a need for the product in the area that you are considering. For example, if you are going to sell ice, then you might want to locate your business in Texas as opposed to Alaska.
Supply and Demand
A third factor that you will want to consider is supply and demand. Take a drive around the neighborhood and look to see if the business seems to be a great fit. You may also want to talk to the local chamber of commerce or an economic development committee to see what they think of your idea. Since it is usually cheaper to move into an existing brick-and-mortar store than build one from scratch, consider if there are prime locations available. If the competition seems too stiff, then it may be time to look at another neighborhood.
It may be time for a drive to some other locations. Introduce yourself to some managers and ask their opinion of the franchise. If they had it all to do over again, what advice would they have to offer you? Then, read the franchisees’ contracts to see which one seems to be the best fit for your business. Arbitration agreements can help resolve issues such as franchise valuing, terminations, IP use, or territorial disputes. It is never a good idea to sign any contract without first talking to a lawyer. In the case of buying a franchise, you may also want to talk to a tax accountant about the implications of making the purchase. Ask other owners if they have ever had to use arbitration agreements and how the process was for them. You do not want to get into a franchise where the arbitrator is only willing to see the side of the franchisor because they rely on them for their paycheck.
Consider the Cost
Look carefully to see how the contract reads so that you understand how much capital you will have to have to get started. Some companies require you to put up a small amount to buy a franchise, but they take a larger percentage of your profits every month. Others require a larger startup fee, but they take a smaller cut each month. In a few cases, after you have paid for many years, then you may not owe the company anything to use their name. Additionally, you need to consider other expenses that the franchisor expects you to pay on an ongoing basis. For example, many restaurants require you to purchase all your food and supplies through them so that they can control quality. You may also find that you have to pay them for advertising and marketing in your area. In addition to the money paid for using the franchisor’s name, you may be responsible for other costs. You may need to buy all the equipment and you may need to be able to meet payroll. Many people have discovered that they left high paying jobs to make less their first year or two as a franchisee.
Running a franchise is hard work, especially in the beginning. Many people have left jobs that they hated only to discover after they purchased a franchise that they hated the new job even more. You are going to spend hours working in a field, so make sure that you choose a niche market that you love. Many people have sat in a coffee shop and thought it would be a great experience to own one until they are there are 2 AM with a broken machine that they have no idea how to fix and all the staff has gone home for the day. While some franchisors do a great job of teaching their franchisees what they need to know and offering them ongoing support, others expect the franchisee to pay for the knowledge through the school of hard knocks.
While you can buy some franchises very inexpensively, others require you to have a large net worth. Franchisors see your net worth as a sign of how well you manage money. If you are good at managing your own money, then chances are that you will be good at handling your store’s money helping to ensure its success. Those franchisors requiring a higher net worth are usually pickier about who they accept to run their businesses while those who do not have a set amount or require a low net worth may not be as picky about how their businesses are operated.
Different franchisors have unique educational requirements. While there are a few franchisors who will accept people who have only a high school diploma, others want to see a bachelor’s degree or higher in business or a related field. Other franchisors look for people who have advanced in a career in a related field as these people usually have the skill set needed to be successful. In some cases, a wealth of experience is considered to be equivalent to a degree when it comes to educational requirements for franchises.
There are many different factors to consider before you purchase a franchise. Starting with these seven will help you determine if the decision that you are considering is the right one for you. It will also help you prepare to prove that you have the education, the experience, the desire and the net worth to be successful as a franchisee. While franchises have a better track record than starting your own small business as an unknown entity, you need to consider the pros and cons of each opportunity before signing on the dotted line.
Here are a couple other business articles we think you’ll find useful: