Finding the Right One
The first and often most difficult step is actually choosing the franchise you want to buy into. There are hundreds of options, everything from junk removal to senior care or gourmet hamburgers to house painting. Each comes with its own strengths and weaknesses, but the key is either doing something you’re really good at, or at the least very passionate about. Getting a product in mind is crucial to this process. Would you like to own a moving company, a coffee house or a movie theater? What services are needed in your area? What subjects can you confidently create a business around? All of these are important topics to consider when making your decision.
Check Out the Competition
Once you’ve a narrowed down a product, start looking at franchises that might consider letting you open a store in your area. Be sure to investigate whether one has existed in that town before, look at the competitors you might face and try to stake out real estate to operate the business out of. If you’ve decided on a few companies to pursue, get in touch with them and ask for their offering circulars.
The offering circulars are typically massive 200-plus page documents that contain all the information about the franchise, like annual revenue at each location, what’s expected of franchisees, and a list of former franchise owners. The Wall Street Journal recommends that you “pay special attention to three-year percentage figures on franchise turnover. Anything double-digit could be reason for concern. Also read the section on litigation. Lots of lawsuits can signal a troubled system.”
Get the Details
After comparing the businesses and circulars, the next step is to look at price points. Buying into a franchise isn’t cheap. A lot of the legwork has been done for you, and the parent company requires franchisees to pay for that. You’re likely going to be stuck paying an initial fee to use the franchise name and resources. The initial fees you’ll pay range anywhere from a few thousand dollars to a few hundred thousand dollars, depending on the franchise name recognition and assistance, among other factors. You also might be stuck paying operating license, insurance and grand opening fees.
The next cost is the royalty payment. Franchise.org states that “you may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. You often must pay royalties even if your outlet has not earned significant income during that time. In addition, royalties usually are paid for the right to use the franchisor’s name. So even if the franchisor fails to provide promised support services, you still may have to pay royalties for the duration of your franchise agreement.”
Outside of fees the franchise places on you, you’re also going to need to think about the actual cost of getting your business in operational shape. The Wall Street Journal recommends that you “look at the costs for software rental, equipment maintenance, audit, administrative and similar services. Some franchisers require you to pay for training at their headquarters. Also check what you’d need for initial inventory and store-construction expenses and how much of a cash reserve you’ll need to have in the bank.”
After all of this is figured out, don’t buy in just yet. Go visit several of the franchise operations. Figure out how they’re run, talk to the owners and investigate what challenges and successes they’ve had. Ask how helpful the franchise has been. Does the parent company keep its promises about support? Do they see the fees go toward anything that benefits their business? Always discover if the owner thinks their investment was worth the hassle, and if they plan to renew the license.
The final step is negotiating the contract. If it’s a newer franchise you might be able to pull some leverage and negotiate out any undesirable clauses. But if the franchise is well-established, you’re likely stuck with the contract as is.