5 Questions to Ask Before Diving Into Franchise Ownership

By Eric Bell

Investing in a franchise requires extensive due diligence. Not only do investors need to understand the initial costs and what financing options are available, but they also need to carefully research the franchise model, the franchisor’s experience, the franchisor’s approach to running the business, and the culture of the franchise.

Just as important as researching the franchisor, future franchise owners need to assess their personal strengths, weaknesses, and work/life balance aspirations to make sure the franchise system they choose matches their personality and long-term goals. The extra time put in during the due diligence phase will pay off in the end.

Here are five questions to consider that can help you make the right franchise investment decision:

1. How much will it cost?

The costs associated with buying a franchise vary widely, depending on the industry you choose and the brand within that industry. There are many low-cost franchises that start around $10,000, but the majority of franchises require investments of $50,000 to $200,000 to get started. There are also many with startup costs that are far beyond this range, especially those of well-known brands including fast-food chains and retail stores.

Understanding how much your initial investment will be and the associated fees will help you to narrow down the industries and brands you are considering. For example, the cost of entry for a brick-and-mortar retail store or fast-food chain is going to be significantly higher than the cost of entry for a home-based business.

Almost all franchisors require their franchisees to pay a one-time upfront fee know as the franchise fee. Ultimately, you are buying the right to use the franchisor’s brand and business model, while also receiving ongoing support in management, training, marketing, and more. In addition, with most franchises, there will be ongoing royalty fees, which usually are a percentage of revenue, to pay after the franchise is open.

Some franchisors offer incentives for women, veterans, and minorities. When you research the initial investment requirements, ask if there are franchise fee discounts. These types of incentives could make the difference in whether or not you can afford that franchise.

The franchise fee and startup investment cover the costs to open the doors of your business. Also remember to budget at least six months of operating capital while your business ramps up.

2. What are my financing options?

Most franchise investors bankroll their franchise through some form of self-financing. This could be a home equity loan, a second mortgage, using money from savings, or even withdrawing funds from a retirement account. Here’s a quick overview of some of the options:

  • Rollover for Business Startups (ROBS)—ROBS allows you to use money in your retirement accounts (401(k), traditional IRA, or another eligible retirement account) to invest in a franchise.
  • Small Business Administration Loans (SBA)—SBA loans are government-guaranteed loans. They are a great financing choice because they offer long repayment terms and low interest rates.
  • Financing through the franchisor—Many franchisors have relationships with lenders that you can leverage. Preferred lenders have an understanding of the franchise’s business model, and may be more likely to offer financing.
  • Home equity loan or line of credit/second mortgage—This is an option for homeowners who have equity in their home. You can borrow against the equity to help finance your franchise.
  • Family and friends—If you have family members or friends who are willing to invest in your franchise, this could be a fast (and low-interest) way to raise necessary capital.

It’s important that you evaluate the many financing options available before you make a financing decision. The good news is obtaining financing as a franchisee is often easier than as a new, independent business owner.

3. How happy are the current franchisees?

During the exploration phase, it is critically important to meet with and interview existing franchise owners. Current franchisees will help you understand exactly what the day-to-day looks like, what their major challenges have been, and whether their relationship with the franchisor has been up to par. They can also help you understand what costs, if any, have unexpectedly arisen.

Speak with as many franchisees as possible. They may be busy, but they will want to give you their time as they understand the importance of growing the brand they have personally invested in. The information gleaned from these interviews can be invaluable. Some questions you should consider asking are:

  • What has been the most rewarding part of being a franchisee?
  • What has been the most unexpected struggle?
  • How many hours a week do you work? Is that more, less, or about the same as you expected?
  • What is a typical work day really like?
  • Are you happy with the financial returns to date? Do you feel you are on your way to meeting all of your financial goals?
  • What was the franchisor’s role in helping you open your doors?
  • Is the franchisor accessible when you need them to be?
  • Has the ongoing training and support from the franchisor been adequate?
  • Would you invest in this franchise opportunity again if you had to do it all over?

4. What type of support and training does the franchisor offer?

Franchise ownership requires you to not only invest your money but also your time. The initial phases of getting a franchise business up and running can be challenging, and over time you will require guidance and support. You want to make sure you are joining a company managed by experienced professionals, who have created a proven model that will grow with your business.

Franchisors should provide training programs that cover all aspects of owning and operating a successful business, from initial and ongoing training and assistance to marketing and advertising support. Most franchise systems also provide local support through franchise field representatives.

Proper training and support is not only essential in helping franchisees achieve the success they signed up for, but it is also crucial to building a franchise system that is consistent from one location to another. Without that consistency, the brand is not likely to grow to the levels everyone is working towards.

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5. Is the franchise a good fit for me?

Do your core values, abilities, and goals align with those of the franchise system? As a franchisee, you will be signing a long-term contract and be required to run your business as dictated by a prescribed set of guidelines. Franchisors can be very diligent about enforcing policies and procedures to maintain uniformity and ensure future success within a franchise system.

Here is what to consider when evaluating if a particular franchise is a good fit for you:

  • What are your personal goals for making this investment?
  • Does this franchise represent a particular field that you’re interested in pursuing?
  • How many hours are you willing to work?
  • Are you an independent thinker and worker, or do you work better when given some parameters?
  • Would you be happy operating the business for the next 20 years?
  • What specialized skills or talents will you bring to the business?
  • Does the franchise require technical experience or relevant knowledge?

Making the final decision

Buying a franchise is a big commitment that requires hard work and dedication. The most successful franchise owners are those who truly enjoy their business and putting in the time necessary to make it a success.

If you like the idea of being self-employed, and operating an established business, then a franchise may be the right opportunity for you.

RELATED: 8 Warning Signs You Shouldn’t Buy a Franchise

About the Author

Post by: Eric Bell

Eric Bell has 15 years of franchise industry experience and currently serves as General Manager of www.franchisegator.com. He began his career in 2002 as a Hollywood Tans franchisee in Atlanta, where he also served as area manager and helped develop the company’s Atlanta territory. In October 2005, Eric joined Franchise Gator as a sales representative, and went on to hold several positions, including sales representative, sales manager, and director of sales and service. Eric is a member of the Southeast Franchise Forum and is a Certified Franchise Executive.

Company: Franchise Gator
Website: www.franchisegator.com
Connect with me on Facebook, Twitter, and LinkedIn.

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Don’t Put Too Much Faith in Learning from Failure

Don’t Put Too Much Faith in Learning from Failure

We have heard and most of us believe that we learn from failure. But what’s the evidence that corroborates that? Perhaps our belief on failure followed by success doesn’t rest on a solid foundation, writes Professor Scott Shane, professor of entrepreneurial studies and economics at Case Western University.

There’s only one problem with the “failure helps” perspective. There’s no serious scholarly evidence that prior business failure enhances later entrepreneurial performance. Quite the contrary, the existing evidence indicates that entrepreneurs who failed before perform no better than novice entrepreneurs and significantly worse than previously successful entrepreneurs.

…More difficult to explain is the truism that “entrepreneurs learn from failure.” Our collective belief in its veracity stems less from a reasoned look at data and more from what we want to believe. The idea that prior business failure helps fits perfectly with the motto “if at first you don’t succeed, try and try again.”

You might say it’s fine to think that entrepreneurs learn from failure even if there is no evidence that it’s true. But this inaccurate belief has a cost. —Scott Shane, Small Business Trends

 

BMM Staff
Mon, 12/31/2018 – 05:40

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Shuttered Cold Stone

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Why Blockchain Is Important for Hotel Owners

Why Blockchain Is Important for Hotel Owners

Blockchain has been around for ten years now, probably most famously as the technology behind Bitcoin. Specialists say that its qualities make it a natural to generate significant improvements for hotels and their travel industry networks.

In 2017, blockchain projects flourished, where ICOs [Initial Coin Offering] managed to raise billions. 2018 was a crash year for cryptos, even though the sums raised this year were twice as high as the previous one. Blockchain projects promised a lot, however 71% of them still have no working products. The argument was that blockchain is still in its infancy, and many are supposed to deliver their products in 2019. And one of the best places to watch where blockchain will rise again is in the travel industry. —David Petersson, Forbes

How can blockchain help hotel owners and does it look like it will be cost effective?

Blockchain technology has several advantages to offer the hospitality industry, with one of the most obvious being the security and stability benefits. For instance, all data is decentralised and traceable, and the database can never go offline, or be removed through a cyber-attack, which can be important when dealing with financial transactions.

In addition, the technology could have a vital role to play in simplifying actual payments. At present, this can be somewhat complicated, especially when dealing with overseas settlements. With the use of blockchain technology, the entire process can potentially be streamlined and made more transparent, increasing trust. —RevFine

BMM Staff
Wed, 01/09/2019 – 21:35

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Blockchain network

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When Listening to Business Gurus Is a Waste of Time

When Listening to Business Gurus Is a Waste of Time

Business advice is available from various online or hard copy sources. Much of it turns out to be mostly fluff, sparse on the hard facts that one really needs to know in business. On the other hand, there is valuable information out there. The avalanche of information has to be handled well, with the chaff being rapidly and efficiently discarded.

With the explosion of social media over the last five years has come an explosion of gurus. Everyone and anyone can become a guru with internet access and good lighting for their photos. The thing about being a guru is that there are no rules or criteria for it. Went through a bad breakup and decided to write about it? You can become a relationship guru. Gave up sugar for a year and took photos of all your sugar-less meals? Congrats, you can now be a health guru.

…What I am saying is, there comes a time that you need to stop consuming other people’s content. There comes a time when what you’re reading is the same old advice, just in a different color scheme, on each website you visit. And there comes a time when you need to call a little bs on some of these business gurus advice. —Kara Perez, Due

Photo by Matt Cornock, Flickr

BMM Staff
Thu, 01/10/2019 – 07:18

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Kindle Fire

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What I Wish I Knew Before Buying a Franchise

By Eric Stites

Dennis Monroe had worked in operations management for over 30 years when he decided to buy a ColorAll franchise (an on-site auto body repair service) with his business partner. The pair owned and operated their ColorAll franchise in Phoenix, Ariz., for nine years before exiting the business and retiring. Looking back on his franchise experience, Monroe says he would do it all over again—but with a few alterations.

Labor challenges can cripple a business

“Our franchise was initially very successful,” explains Monroe. “We landed large, national accounts, but eventually, due to poor tech performance, the business went downhill.”

One of the reasons for his business’s decline was the unexpected challenge of having to hire skilled employees. “In our case the biggest problem was the unpredictability of auto body tech’s quality and responsible customer relations, which ended up costing us a lot of very profitable customers,” says Monroe. “I had no problem finding customers who appreciated the value and convenience of our service, only to lose many of them because of the tech’s job performance.”

Hiring can be a top challenge for many business owners. While it is often most pronounced in the food and beverage industry, where low unemployment rates and increasing wage pressures have left restaurants scrambling to find the help they need, it is prevalent across almost every sector.

In senior care, for instance, hiring challenges have been spurred by the rising numbers of aging Americans. “For national senior care franchises, recruiting thousands of skilled, dependable caregivers to match the specific needs of each family is no easy task,” says BrightStar Care, a national private duty home care and medical staffing franchise.

In the automotive space, hiring challenges are evolving as the automobile undergoes a rapid transformation, becoming more than just a transportation tool, but a “powerful digital device,” according to an article by PwC. While Monroe struggled with finding competent technicians, many in the automotive space today need workers with an entirely new skill set.

A common misconception of franchising is that all of the hard work has been done for you, but as Monroe explains, “You can’t depend on the franchisor to make your business successful. The corporate franchisor should provide training, startup support, national marketing, and name recognition, but it is up to the local franchisee to make the business work and create profitability with its customer base.” A large part of this, of course, is hiring.

Finding skilled workers who will represent your brand well and treat your customers right, while also providing excellent service, is a tremendous challenge for any business owner. However, as Monroe discovered, if you’re in an industry that depends on skilled talent, the inability to secure that talent can quickly cripple your business.

The franchise contract should be considered long and hard

While Monroe struggled with finding quality talent to keep his business afloat, he says that owning a franchise offered him great independence and personal satisfaction. The experience was so positive for Monroe, that despite his issues with underperforming technicians, he says he would do it all over again. He also says he would choose a franchise with less dependency on tech performance, and negotiate more favorable contract terms up front.

An attorney can help you evaluate terms in the franchise agreement and the company’s Franchise Disclosure Document (FDD). There is a lot of information covered in a franchise agreement and the FDD; a few areas that should be looked at closely include the royalty payment structure, the right to close, the right of first refusal, litigation statue of limitations, non-compete clause, and franchise territory, to name a few.

Not all franchisors will be open to negotiation. Still, it is always in your best interest as a prospective franchisee to evaluate franchise documents closely, and with the help of an experienced franchise attorney.

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It’s also important for prospective franchise owners to speak with current and former franchisees during the research phase. The insights franchisees provide can be invaluable, and it’s advice that many franchisees willingly will offer to interested new owners.

As Cindy and Phil Bacon, franchisees of FASTSIGNS say, “Do your due diligence and contact as many franchisees as possible.” Heather and Seth Allison, franchisees of American Poolplayers Association similarly advise, “Talk to other franchisees first to get their perspectives, and make sure your franchise is well-established and highly rated.”

Franchise opportunities offer a pathway to business ownership—and potential profitability—for interested entrepreneurs. Choosing the right franchise and structuring your agreement so that it fits your needs long term can be a challenge, however. And this is why it is so important to speak with current and former franchise owners, who can offer a wealth of information and insight into the world of franchise ownership.

RELATED: 10 Signs of a Great Franchise Opportunity

About the Author

Post by: Eric Stites

Eric Stites is the CEO and Managing Director of Franchise Business Review, a leading market research and consulting company specializing in franchise satisfaction and performance. Franchise Business Review’s mission is to work with the very best franchisors and franchisees to continuously improve system performance. Eric designed and created the Franchisee Satisfaction Index (FSI), which has quickly become an industry standard for measuring and benchmarking franchisee satisfaction. Eric is an active member of the International Franchise Association (IFA), serving on the IFA’s Franchise Relations Committee, as well as past Chairman of the VetFran committee

Company: Franchise Business Review
Website: www.franchisebusinessreview.com
Connect with me on Facebook, Twitter, and LinkedIn.

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In-N-Out Manager Pay Surprisingly Good

In-N-Out Manager Pay Surprisingly Good

QSR managers work hard, but in spite of that are not generally thought to have particularly good wages. That’s not the case for In-N-Out Burger managers. They make substantially more than college graduates with some of the better marketable degrees.

A typical architect in California earns about $112,000 a year, according to the jobs site Indeed. For lawyers and software engineers, the average figures are more than $115,000.

But beating them all — by a lot — is an unlikely job title: In-N-Out Burger store manager.

According to the latest numbers from the Irvine hamburger chain, the average yearly pay of its restaurant managers is now more than $160,000. That’s roughly triple the industry average. —Mike McPhate, The California Sun

In-N-Out Burger photo by Chase N.

BMM Staff
Mon, 01/28/2019 – 06:38

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In-N-Out at night

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