Franchise businesses are seemingly everywhere. The sector is made up of brands we all know and spans nearly every industry, including:
- Restaurants and fast food
- Gas stations
- Hotels
- Gyms
- Salons
- Real estate brokers
This list could go on and on.
As an aspiring entrepreneur (or an existing small business owner, looking to expand your empire), buying a franchise might be the way to go. Making this decision starts with questions you must ask yourself, like:
Do I have enough experience to launch my own brand?
Do I want ongoing support as I open and grow the business?
In this beginner’s guide, we’ll walk through the advantages of a franchise, as well as the disadvantages, to help you decide if it’s the right move for you. Then we’ll explore the steps you need to take to get started.
What Are the Advantages of a Franchise?
1. “You’re in business FOR yourself, not BY yourself.”
This phrase represents the key benefit to starting a franchise business. A representative from the franchise will work closely with you as you start the business and provide ongoing support as you grow through the years. In the beginning, they will help you by:
- Guiding you through the design and build of your location
- Helping you hire and train your staff
- Giving feedback on revenue expectations
- Making sure everything meets the standards of the franchise
In addition to the franchise representatives, there is usually a large network of franchisees, possibly in your area, that can give you advice and help you set expectations.
2. Brand recognition
When you open a franchise, you get a lot of brand awareness on day one. Area residents know the brand, and depending on the type of business, there may be a lot of hype as your building goes up. This can lead to a big rush of business once the doors open, or you could start taking calls for appointments right away.
3. Easy financing
In many cases, it is easier to get financing for an established, well-known franchise business. A lot of the time, the franchise itself will have its own financing program. Commercial bankers in your area can help finance a new franchise and the Small Business Administration (SBA) has a Franchise Directory with preapproved companies.
4. More buying power
When working with vendors, you get the benefit of the purchasing volume of hundreds — if not thousands — of locations. A franchise will have agreements with services, such as contractors, suppliers, point of sales system providers, to keep your costs lower.
What Are Disadvantages of Buying a Franchise?
1. Less control
When you open a franchise, you will have to adhere to all of their specifications, including:
- What suppliers, vendors and service providers you work with
- Creative design and colors for your signage and location
- Advertising
- Where you can be located
Even the type of computers you use in your office may be determined by the franchise. For example, they may require you to use a Microsoft device even if you prefer Apple products.
They may require you to work with their preferred partner vendors and service providers. This could prevent you from keeping your money local if that’s something you prefer. Or it could put you in a position where you can no longer work with vendors you have already developed relationships with.
2. Brand recognition
This one made both lists. As much of a boost as immediate brand recognition can be to you as a franchisee, any bad press for the company can hurt you. There have been instances where the actions of a public figure for a franchise or an individual franchisee did or said something to harm the company’s reputation. This situation could cause customers to boycott your business, even if you were not involved or don’t agree with the position of those individuals. Product recalls or foodborne illness issues in other markets is another example of a situation that could impact your business and brand image.
3. Rights acquisition
Before you can open a franchise, you have to buy the rights to your area. You’ll need to call the franchisor and find out if the market is available for your geographical area and adjoining area and what the cost is to hold the rights. If someone already owns the rights, you may still be able to buy them but will need to work with the owner and the franchisor. If you anticipate expanding into neighboring markets in the future, you can ask for first right of refusal for your market or state as you grow the franchise.
4. Mandatory renovations and store refreshes
Many franchises mandate that you renovate, remodel and refresh your location every so often. For example, your franchise agreement might require you to do it once every 10 years to keep up with the chain as its image evolves. Refreshes and renovations are always good things for businesses, but these costs will come out of your own pocket as the franchisee; and the timing may not be to your specific location’s needs or plans.
Buying a Franchise: How to Get Started
After weighing the pros and cons, if you’ve decided to take the next steps, here is how to get started.
1. Do your research
Look up some information about the franchise and make sure you meet the requirements to become a franchisee. Most of them have minimum net worth and liquid capital requirements. If you don’t meet the requirements, you can bring in partners to buy into the franchise with you. Then you’ll need to make sure the rights to your territory are available. This may require a phone call to a franchise account representative.
Your research can also include whether or not there are existing franchisees in the area who are ready to sell. Buying an existing franchise may reduce the amount of startup capital needed.
2. Look through the franchise disclosure document
This document should have details about the success rate of the franchise, including how many have succeeded and how many have failed over the last several years. You should also be able to find the range of revenue and income opportunities in this document.
3. Start working with your team
Once you have a franchise disclosure agreement, you’ll want to start reaching out to your team.
- Work with your real estate broker to start looking for a location.
- Look over the tax and financial implications with your certified public accountant (CPA).
- Comb through the agreement and the legal ramifications with your attorney.
- Talk about your financing needs and options with your commercial banker.
4. Reach out to franchise owners
It is good to have peer mentors within the franchise. Ask an existing franchise owner if they will let you shadow them for a day. This way, you can see what the day-to-day operation will look like, know if it’s a good fit and learn a few tips for how to be successful. Even a simple phone call will help you understand their journey to obtain and grow the franchise.
Northwest Bank: We’ve Done This Before
Commercial bankers at Northwest Bank understand your local area and can help you get the right financing for your franchise business, whether it be an SBA loan or a conventional loan. We have helped finance many franchise businesses and can provide insight and feedback to help you through the startup process.
Learn More: Megan Phelan Serves up Big Acai Bowls in Okoboji
We can review your business plan and the projections of the franchise disclosure agreement and help you piece your own business plan together.
Contact a commercial banker today to start your journey.
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