Starting a business can take many shapes and forms, but it can be challenging to find the perfect business model. For those who don’t have the funds to buy an existing business and don’t want to start from scratch, a franchise might be a great fit for you. Franchises exist in a lot of industries, including business service providers (UPS store), convenience stores (7-11), educational institutes (Mathnasium), real estate (RE/MAX) and many more, according to Incorporate.com. When you buy a franchise, you take advantage of an existing business’ brand, logo, business model and trademarks, but the work of making it profitable will be up to you. Here are considerations for getting started in becoming a franchise owner.
Starting a franchise comes with a number of built-in advantages, said Farhan Advani, director of marketing at Buy Here Pay Here. Those advantages include standardized financial and accounting systems; supervision and consulting; programs for national and local advertising; consistent packaging, financial assistance, and support on choosing a location and operations.
There are all kinds of franchise opportunities, but the goal is to “capitalize on a successful enterprise” said Kamyar Shah, COO, and founder of Kamyar Shah consultation firm. “Proven sales success can be the first thing you notice when analyzing the franchise you are considering for adoption,” he said.
He encourages research into the market to make sure the franchise “stands the marketplace test”. For example, he said, don’t start a taco stall if there’s no evidence of people enjoying that kind of food.
Just because a brand may seem well-known or popular doesn’t mean you should rush into franchising it, said Nunzio Ross, CEO, and founder of Majesty Coffee. “You have to decide for yourself if you are passionate about this line of work, the products they sell, and the services they offer.” He adds that it’s crucial that the skills, operational procedures, and leadership style are a good fit with the franchise.
There are several financial aspects to consider when it comes to buying a franchise, said Michael Knight, co-founder and head of marketing at Incorporation Insight, which supports startups and small businesses. He said you’ll want to consider the initial charge — those funds you pay to acquire the right to all trademarks, business operations, and brand exposures. Then, look into whether you’ll need to spend money on construction to build a kiosk, office space or storefront. Lastly, what will you need to spend on equipment, furniture, and fixtures “Depending on the franchise, costs can range from less than $10,000 to several million dollars.”
Additionally, Knight adds, “It is critical to assess whether there is a demand for the product or service. You want to know if there is to secure a favorable return on investment and reduce the prospect of losing income.” A proven sales record is ideal. Also, if other franchisees have websites where they can leave reviews about their experience, you may glean important info about the benefits, drawbacks and hidden costs.
To make sure your personal assets are kept distinct from your business ones, you should create an LLC, a limited liability company, said Sean Darlow, founder and business manager of Affiliate Sloty. LLCs provide the same limited liability as a corporation, but are simpler and more affordable to run, according to NOLO.com.
In order to open a franchise, you’ll need to know how much liquid capital you have on hand, said Rob Huntington, CEO of franchise technology company Metric Collective. “This describes how much money you have immediate access to…including money in your checking and basic savings accounts, and any money you have invested that you could quickly cash out.” You will need this when you make your initial investment in the franchise. Illiquid assets don’t count, such as your home, other assets or investment accounts you don’t immediately have access to.
If it turns out you do not have enough liquid capital to purchase your franchise but have good credit and solid data that this franchise can turn a profit, you can look to other sources of investment, Huntington said. You may be able to seek nonpersonal financing from a third-party source, home equity, friends and family, bank financing, as well as veteran and minority lending programs. Additionally, “Some franchisors are willing to finance a portion of the initial franchise fee,” he said.
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