Looking for a career change? You might be considering buying into a franchise, which is an option that works for many people. But it isn’t perfect for everyone, and not all franchises are a good fit for every person.
Consider Your Goals, Personality, and Experience
There are a lot of misconceptions that buying a franchise is the equivalent of buying a business in a box. It’s not, and there are a lot of things you need to consider about yourself before considering buying a franchise.
What do you want from the franchise business?
You’re probably considering buying a franchise for a specific reason. Do you want the franchise to become your main course of income, or is it going to be more of a hobby? Do you want to build equity, or own more than one franchise?
Knowing the specifics of why you want to buy a franchise is important, and will reflect on the entire rest of your deciding process. You can’t find the best franchises to buy without knowing why you’re buying it.
How much time and money can you invest?
Buying into a franchise opportunity is not a cheap or easy task. Loans won’t necessarily be easy to come by, either, especially without a physical location. You can expect to need a loan of about $100,000 and up, depending on what you need to account for, and you’ll need an excellent credit score, at least.
In addition to the initial franchise fees, you’ll need money to live on while the franchise is being established. Plan for at least six months, and out to a year to be safe.
Additionally, you need to be prepared to spend a lot of time at the franchise. It isn’t built and able to run itself. You need to be ready to commit to training, solving inventory problems, coming up with advertising, and more.
How much risk are you ready to assume?
Franchises can be risky – they fail as often as any other business and nothing is guaranteed. How risk-averse you are can help to determine your next move.
Well-established companies tend to have longer track records of success. However, it’s the newer, riskier businesses that offer higher returns when successful.
What’s your exit strategy?
Nobody really likes to think about this, but it’s an important factor to consider. Plan ahead and have an exit strategy. Do you want to own this franchise for a bit and then flip it for profit, if you can? Or is this franchise where you’d like to remain for the rest of your working days?
Knowing what your goals are regarding exit strategies will help to determine the franchise you choose since some businesses have different restrictions on selling to other franchisors.
What skills and experience do you have?
By no means are you restricted to choosing a franchise that you have previous experience with, but it does help to have some knowledge on the industry. Are you comfortable with sales? Have you managed people, and are you good at it? Do you want to work in a more manual industry, or interact with people from a retail counter?
The best thing to do is to find a franchise that combines your skills and experience with things you love doing. For example, if you love to barbecue, you might want to try opening a BBQ franchise like Chaps. Take aspects of both parts of your life and turn them into a flourishing franchise.
The Must-Know Factors to Consider Regarding the Franchise
Once you know a bit more about yourself and what you’re hoping to achieve, it’s time to learn about the franchises you might be interested in.
Franchise Fees and Initial Investments
Some of the best franchises to invest in are also going to be some of the most expensive ones. Franchise fees alone can cost you tens of thousands of dollars. But there are fees other than the franchise fee that you should worry about.
Co-op marketing fees, sometimes just labeled as marketing fees, are easy to miss in the fine print of your contract. Many companies will require that you pay into this marketing fee, which contributes to national advertising. Make sure you ask a lot of questions – how much of your money goes into this fee and how often are good starting questions.
A lot of businesses will require you to pay royalty fees for operating your franchise. Some businesses won’t do that, or if they do they make it a negligible amount that you won’t really miss once you have a steady or thriving business.
These are usually flat-rate royalties, rather than the more popular percentage-based ones. Think of them like taxes – the more successful your franchise, the higher royalty percentage you pay.
You don’t want to put your money into an investment that’s just a rolling fad. You also don’t want to invest in something boring that will have minimum turnover. Make sure that there is ample demand for the franchise you intend to supply in your area. Do the relevant market research ahead of time, it’ll save you from many headaches down the line.
Restricted Covenants and Renewal Rights
Restricted covenants are the things that you, as the franchisee, can or cannot do during and after ownership of a franchise. This includes restrictions on competing business interests. Most of the important covenants will relate to post-term relations, during the period following your ownership of the franchise.
Renewal rights, in a best-case scenario, will be perpetual. But you should double-check the renewal rights before you sign anything. Additionally, there may be restrictions on the length of renewal periods following the initial ownership of a franchise, and how many renewals you’re entitled to.
History of Litigation
Litigation history for the company backing the franchise is important and should be considered. Take note of any litigation involving third-party suppliers. But, those litigations are less important than the cases brought against other franchisees.
The larger the corporation behind the franchise, the more cases they might have levied against them – smaller franchises should not have a large number of litigations against them.
Resolution Possibilities in the Event of a Dispute
Also, you should know if your contract allows you the right to litigate or seek private mediation if you have a dispute with the franchise company. This includes knowing who pays for the cost of attorney and court fees, where necessary.
Restrictions are often included in your contract with a franchise business to ensure consistency across franchises and to make sure that you are compliant with the current business model of the mother company.
Restrictions that may be included in your contract are:
- Location and territory of the franchise
- A list of approved suppliers
- Operation methods
- Services and goods that are permitted for sale at your location
- Appearance and overall design of the premises
Make Sure You Read the Financial Disclosure Documents
When you’ve found a franchise company that you believe will suit you well, you still have to do some more information. Reach out to the company and get a copy of the company’s Franchise Disclosure Documents, or FDD. Under the law, you must receive this document at least 14 days before you are asked to sign any contracts or pay any money to the company or any affiliates.
The FDD may be a huge collection of information, but take your time to read through it all. Have legal counsel with you if that would make you more comfortable. The FDD includes the company’s background, litigation history, any instances of bankruptcy, initial and ongoing costs, and more important information.
There are a lot of things to consider before committing to buying a franchise. We’ve listed the most important factors to keep in mind here, but during your research, you may find more that you’d like to consider as well.