Starting a business through franchising, which involves opening a branch of a pre-existing company that offers products or services, can be an excellent avenue for entrepreneurship. By paying a fee, you gain the opportunity to operate a private enterprise within an established framework, potentially benefiting from a reputable brand’s recognition and marketing efforts. Although you often have the freedom to determine your own hours, policies, and hiring practices, it’s important to adhere to the standards set forth by the franchisor. Owning a franchise offers a blend of independence and support, but just like any venture, success and a favorable return on your investment are not guaranteed.
Before you dive deeper into the franchise acquisition journey, take the time to gain insights into how franchising operates, including its advantages and disadvantages. Reflect on your personal expectations to ensure they align with the demands of this business model.
Questions to consider
Similar to investing in the stock market, it’s crucial to examine your motivations and beliefs regarding franchise ownership and self-employment. If your reasoning doesn’t match the realities of operating an established business, you might face unexpected challenges when outcomes deviate from your expectations.
Keep in mind that managing a franchise is not a fast-track to wealth and is unlikely to generate substantial income quickly or with minimal effort, particularly during the initial stages. Prior to embarking on this journey, engage in self-reflection to clarify your goals.
What is your time frame?
As you proceed, evaluate your timeline and the amount of time you’re willing to dedicate weekly or daily to this venture. Are you planning to work for five years before moving on, or do you foresee a commitment of 10 years or more?
Clarifying your time expectations can guide you in determining if a franchise aligns with your goals, as well as what kinds of franchises to explore. Some franchisors may require you to undergo initial training and be heavily involved in day-to-day operations, whereas others might anticipate less hands-on commitment. Depending on the franchise type, you may find yourself needing to be actively engaged for a significant duration, regardless of whether you hire staff to oversee operations or complete most tasks.
What is your professional style?
It’s also essential to reflect on your personality and how you operate within a pre-defined structure. The idea of joining established systems might be appealing to certain individuals, but many franchisors prohibit modifications by individual operators or locations. If you thrive on autonomy and creating your own systems, a rigid franchise—especially one with limited flexibility—may not be suitable for you.
Besides policies and procedures, you may also be bound by contract to seek approval for various aspects, such as modifications to what you can sell (e.g., menu changes or additional services at an automotive business), the location of your franchise, and the frequency with which you can update your equipment or premises.
Can you manage the expenses?
While it’s common knowledge that you’ll need to pay a franchise fee that can amount to several thousand dollars, don’t forget that there are additional expenses tied to launching and operating your franchise. Based on your agreement, you may also have to purchase essential equipment and supplies, manage payroll, and handle marketing costs while also covering construction expenses for your establishment.
The Federal Trade Commission (FTC) states that it could take a full year to start seeing profits with your new business, so you need to have enough funds in reserve to bridge any potential profit gaps. The franchisor is required to disclose any necessary working capital expenses in item seven of the Franchise Disclosure Document (FDD). This section typically provides estimates for what costs may look like over the initial three months, but keep in mind that these are merely projections.
Have you carried out your research?
If you conclude that pursuing a franchising opportunity is right for you, ensure you conduct thorough research before moving forward. Here are some foundational steps:
Review the FTC’s Consumer Guide to Buying a Franchise: This guide, created by the Federal Trade Commission, provides valuable insights into the franchising process, the legal obligations of both franchisees and franchisors, and what to anticipate from different sections of the Franchise Disclosure Document. Understanding the typical procedure can help you identify red flags and formulate questions to ask prior to application.
Examine the FDD: If you’ve chosen a franchisor and are weighing a potential application, request and analyze the Franchise Disclosure Document (FDD). This document should cover 23 topics, encompassing the franchisor’s background (section one), disclosures related to bankruptcy (section four), initial and ongoing expenses (sections five through seven), and financial statements (section 21). Make sure to read it thoroughly, and don’t hesitate to seek clarifications or pose questions.
Consult with a franchise-savvy attorney: As reported by Forbes, franchise agreements are often non-negotiable, so understanding what you’re committing to is vital. Pay attention to the royalties owed to the franchisor, the upfront expenses for supplies and services before achieving profitability, and the duration of your agreement with the franchisor. Having a legal expert to provide guidance and highlight potential issues can be extremely beneficial, particularly if this is your first franchise acquisition.
Concluding insights
Clarify your motivations before entering into a contract with a franchisor, and utilize the preceding questions as a foundation for your inquiry. It may also be wise to consult an attorney with franchise expertise and a tax or business advisor to ensure you make an informed decision tailored to your circumstances. Owning a franchise can present an excellent business opportunity, but comprehending the terms and commitments involved is essential.
