Many people have the goal of owning their own business. To expedite this process, becoming a franchisee of an established brand may be an attractive option, as entrepreneurs can build off a proven formula for success to guide their decisions as business owners.
However, opening a franchise location is not a fast track to riches, as the 90% 5-year success rate lauded by many franchises is a myth. While franchising can provide entrepreneurs with some advantages, franchisees must work just as hard as traditional business owners to make their venture a success.
As a result, the following tips offer some helpful advice for people looking to buy a franchise for the first time.
1. Do some serious self-reflection.
One of the enticing aspects of buying a business is the opportunity to be your own boss. However, when purchasing a franchise, your freedom of ownership is conspicuously confined.
While you will have the freedom to set store hours, menu prices and decide who to hire, your creative license as a franchisee is extremely limited. Unless local ordinances mandate otherwise, your store will have to look and feel like every other franchise location across the nation.
Therefore, if you are the type of person who has no problem conforming to standards and operating your store under some user-manual-like guidelines, then purchasing a franchise could be a great opportunity; if you are looking to go into business to see your own unique vision fulfilled, then it is probably best to look into private ownership.
2. Perform independent research and analyze your findings.
One of the tricks for how to sell a franchise successfully is to make the opportunity look as enticing as possible to potential franchisees. Franchises will often market the success of their top performers who make close to a quarter of a million dollars each year.
However, while it is possible to make income well into the six figures as a franchisee, it often only comes after years of experience in which you have had time to build a strong team and open multiple locations. In reality, Franchise Business Review discovered that 37% of franchise owners make less than $50,000 annually — barely more than an entry-level job.
This is not to scare you away from buying a franchise. It simply means that becoming a franchisee is not a meal ticket to ride a well-known name to immediate riches — as those selling the brand may lead you to believe. Like any type of business, owning a franchise requires a great deal of skill and hard work. Dig deep into the documentation and see if the company is in a strong financial position and if they have a sustainable business model. If you determine that company growth can be reasonably expected for the foreseeable future, then there is every reason to think that your location will have a strong chance for success.
3. Assess the local market.
One of the key metrics for how to value a business is to take a look at a business’ current market, analyze how that market is set to evolve in the coming years, and determine what share of the emerging market the business can realistically expect to capture.
For a privately owned business, this type of market research may involve looking at other stores in the area, researching whether any new construction is scheduled for the location and deciding whether the current supply in the market will satisfy future demand. While this type of process pertains to franchisees, it is often complicated in that you may be competing with another store in your chain and that the franchise determines how and how much you are allowed to spend on marketing. As a result, a potentially ripe market may be restricted by factors outside of your control.
4. Know how much money it will take to get your branch off the ground.
While starting any type of business will undoubtedly require a large upfront investment, there are some special considerations that franchisees must make:
- Franchise fees: Most franchises will charge a onetime fee for the right to become a franchisee. While this fee can be as low as $10,000 to well over $100,000, the average franchise fee is between $20,000 and $50,000.
- Start-up expenses: These are independent of the franchise fee. They can include lease costs, construction and/or renovation costs, equipment costs, purchase of inventory and the ability to cover operations for up to six months. Often, these will need to be covered by some type of financing, so you have to make sure that you are not burying yourself in debt from the get-go.
- Ability to withstand loss: As with most businesses, franchise locations are usually not profitable in the early going. It may take several months, or more, before revenues exceed expenses. On top of that, the franchise will likely take between 5% to 6% of revenue as royalties, which must be considered as you map your route to profitability.
5. Determine if the franchise is compatible with your goals.
Finally, if all of the aforementioned steps seem feasible and you are ready to become a franchisee, it is time to set your goals. Are you buying the franchise strictly as a way to earn an income and are willing to work hard for potentially modest remuneration? Do you want to start with one location and eventually open more stores over a large geographic location, becoming one of the franchise’s top performers? Or do you simply view buying the store as a business opportunity and have used a business valuation calculator to help determine how much profit you could make by purchasing the store, improving its operations, and selling it at a profit to the next franchisee?
Despite some ready-made advantages of building off an established brand, owning a franchise is hard work for franchisees. By performing the necessary self-reflection, conducting independent research, assessing the local market, calculating all upfront costs and aligning the franchise with entrepreneurial goals, first-time franchise buyers can help make their foray into business ownership a success.