Once upon a time, I owned a franchise – The UPS Store – you might have read this on my about page here.
I had the store for three years before we sold it. Many people ask how we liked it or why we sold it. The answer to that is simple, it was no longer a good fit.
Like all business transactions, buying into a franchise is a big decision. From finances to long term operation plans, there are a lot of things to think about before signing on the line. Before you jump into buying a franchise here are 10 questions to ask yourself:
- Is it the right fit? Having the right fit is important. Is is something you’re excited about? Are you passionate about the services/products they offer? If you’re not excited or passionate about what the franchise offers, you’re just setting yourself up for failure.
- How long has the franchise been in business? Whether the business has been around a long time or it’s the new kid on the block could help you make marketing decisions. Is it a well known brand? Or do you need to spend time building the brand?
- Do you have enough capital? Most franchises have a minimum requirement for the amount of capital you have. Whether it’s needs to be physically in your bank account or just proof of assets depends on the franchise.
- Do you have enough savings to cover you for the first three years of business? Some people think when you buy into a franchise you’re just buying a turn-key business and waiting for the money to roll in. This is usually not the case. It takes time to build your franchise whether it’s with a well known brand or not. Most businesses don’t see a profit unti year three. Having savings to cover you the first three years means having cushion for financial backup in case you don’t make enough money to cover your costs until then.
- What type of training do they offer and what does it cost? Many franchises require in person training at their corporate office for Phase I training to go over company culture, equipment training, etc. Some also offer a Phase II hands-on-training time with a regional trainer at their franchisee location. Beyond initial training, you should check if there’s quarterly training seminars you can attend locally.
- Are there opportunities to network with other franchisees? Some franchises offer quarterly training seminars. If they are close to you in proximity, it’s an opportunity for you to meet other franchisees. Networking can go a long way allow franchisees to help each other with tips, resources and even marketing opportunities. It could even result in cost savings, if you’re close enough where you can share supplies expenses ie meeting minimum buying requires and splitting the costs or sharing marketing or advertising costs.
- How much royalty do you need to pay every month? You usually need to pay royalties every month. Is it a % of sales or a set $ amount regardless of how much you make in sales? 8% vs $800 makes a big difference. You should also find out how it needs to be paid. Do they automatically deduct it from your account or do you manually send it in yourself. In addition, ask whether there are exceptions to royalty payments. If you don’t have enough to cover costs do your royalties get waved? Some franchises take their royalty regardless of your sales which means you might not have enough to cover costs if your sales for the month aren’t very good. A relative of mine joined a franchise that waived royalties for the entire first year for any new franchisee. That could be a difference between not being able to pay your rent for the month.
- Open a brand new franchise location or buy an existing one? With franchises that have been around a while, some offer you the chance to buy into an existing franchise location rather than building out a new location. It’s like buying a house or building a new house. Which is better? It depends. You need to weigh the pros and cons for yourself. How have the sales been for the last few years at the existing location? Do you want to keep current employees or hire new ones. You can ask the current franchisee for employee assessments and how much is currently being spent on operations. Think about why the current franchisee is selling. Do you like the location? How about the leasor of the location? What are the fees/costs associated with the current lease? Can you start a new lease or do you take over the existing one?
- Are regional marketing opportunities available? Does the franchise do sponsorships such as local races and events? If so, does that benefit you? Do you need to pay additional to be part of the sponsorship or is it included in your monthly marketing/royalty fees? Can you do joint sponsorships with other franchisees?
- Does the franchise provide marketing materials? Does the franchise send you monthly POP displays and pamphlets? Can you order extra marketing materials for free? It’s important to know whether you need to create your own marketing materials as this is another financial aspect to consider.
This is just a short list of questions to get you started in your decision making.
There are several reasons for a franchise to succeed or fail. Make sure you consider all aspects of owning a franchise before signing up.
Don’t forget to think about your exit strategy too. Whether your franchise is successful or not, it’s important to have an exit strategy and understand what’s involved with exiting the business.
- Just starting out in your search for a franchise? You can check out Entrepreneur 2013 Top Franchise 500 here
- Take a look at SBA.gov for resources
- Federal Trade Commission website has information about starting a business also
If you’re looking at buying a franchise or you’ve decided to buy or not buy one, I’d love to hear about your experience. Leave me a comment so we can chat.