If you are interested in investing in a franchise, it’s imperative that you realize that not all franchise opportunities are the same. Each corporate sponsor has differently associated costs, marketing and support structures that can cause franchisee experiences to differ greatly.
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As a franchisee candidate, you expect a return on your investment and the level of stability in your asset’s value.
Upfront research and investigation will help ensure your expectations are met. There are also many external factors to consider before investing in a franchise.
As with any business partnership, you should consult with an attorney, making sure legal counsel assists with reviewing any and all agreements prior to signing.
Here are five things to consider if you’re going into the franchise business:
#1. What is the demand for the product or service?
Analyzing a company’s year-over-year profit and expansion are crucial. You need to know if this is a speculative product or service or if they have a strong history of demand and revenue, the latter obviously being preferred.
#2. The specifics of the franchise agreement and operation
There are costs beyond the down payment that need to be considered. The franchisor may require that you purchase their equipment or lease the property directly from them, and they could hold you to set quality standards.
Franchisors often require a marketing fee to support national advertising at the corporate level, as well as a percentage of revenue. All of these contract and financial specifics need to be gone over with a fine-tooth comb prior to proceeding.
A franchisee should also obviously have all of their own finances in order and make sure they have the resources, time and risk tolerance to pursue any franchise investment.
Navigating through these agreements, contacts, etc., can be tough. Yearwood and Company is a firm that has personal injury lawyers to franchisee specialists in Burnaby. They are a good example of a firm that you could turn to if you need help getting through tough-to-understand documents, etc..
#3. The strength and future growth of the franchise
The demand on the West Coast may not be the same for your franchise location on the East Coast. Existing franchisees in your area are a great opportunity to confirm the viability of the franchise.
Reach out to them to get their feedback. Make sure both the parent company and your franchise are well positioned in the target market before investing.
#4. You still need a business plan
Treat your franchise like any small business and develop your own business plan. This is a requirement for any business loans or third-party investors. Know how the numbers will work, project expenses and costs, and be able to point to a solid and well-thought-out strategy.
Do not rely on the franchisor’s corporate plan or strategy alone.
#5. Exiting or selling the franchise
In the event that things go bad – the parent company goes under, your revenue doesn’t meet expectations or the franchise isn’t profitable – you need to have a clearly defined exit strategy.
This goes back to the upfront due diligence. Make sure that the asset is a good resale candidate and that you aren’t tied into long-term obligations should the franchise fail to grow. Plan for the worst and then ensure that it doesn’t happen.
Both you and your legal counsel have a lot of work to do before you can agree to purchase a franchise. As with any investment opportunity, preparation and research will help improve your chances for success.
Chaleigh Glass
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These are great things to consider when opening a franchise. It can be hard to find good advice. Thanks for sharing!