3 Important Things to Do Before You Ever Invest in a Franchise
Have you ever driven past a big-time chain like Starbucks or McDonald’s and wished you owned one? If your answer to this question is yes, then that means you’re interested in becoming a franchisee. Participating in a franchise is one of the many different ways that people choose to go into business for themselves. Investing in a franchise can be an attractive option for business owners because it gives entrepreneurs access to branding power which inherently attracts foot-traffic to a location. But, before you commit to taking on this path of entrepreneurship, it’s important to understand the responsibility that comes with pursuing franchise-location ownership. This is because investing in a franchise automatically involves a lot of bureaucracy, financial commitment, and corporate oversight.
How do Franchises Work?
A franchise is a business model where one business owner (the “franchisor”) sells the rights to their business logo, name, and operational model to an independent entrepreneur (the “franchisee”). The benefit of having such an agreement is that you as the franchisee won’t have to use a lot of resources building a consumer base from scratch. On the other hand, the franchisor can collect royalties from you for the privilege of accessing their business model and marketing power. Of course, there are pros and cons which apply to have such an arrangement, but whether or not investing in a franchise is suitable for you ultimately depends on what your individual business goals are. If building a brand from scratch would pose too many risks for you, then being a franchisee might be an appropriate choice.
Do the Math
Even though certain franchises look like they can guarantee revenue if you invest in them, it’s extremely important to assess whether investing in a franchise would place too many demands on your life before committing. Franchisors often charge a heavy premium on franchisees in order to business. This means it can take a long time before investing in a franchise breaks even.
Here are three preparations to make before investing in a franchise:
- Quantify your Investment – Review your financial condition and decide how much you’re willing to spend to purchase — and ultimately manage — the business. This will help you determine what type of businesses or brands are best for your budget. Keep in mind that the more recognizable a franchise is, the more expensive it is to participate.
- Consider your Talents and Lifestyle – There are plenty of industries to choose from if you’re thinking about being a franchisee. It’s advisable to choose an industry which is compatible with your own qualifications. Be honest about your skills and experience, as they can help you eliminate unrealistic business ventures.
- Review the Full Landscape of the Market – Business doesn’t happen in a vacuum, you have to compete with other franchisees and independent business owners. Look at the existing infrastructure of your business environment and make sure you understand everything that comes along with your investment. Don’t be afraid to ask questions about contracts, leases, existing cash flow, and inventory. The more you know, the better equipped you’ll be to make a sound decision.
Identifying a franchise you want to invest in is only the beginning. Considering the fact that you’ll be dealing with established corporations as franchisors, it’s best to find professional help in order to advance with your desired investment. Consider hiring an attorney and an accountant to help with this process. This is because the tax rules surrounding franchises are often complex. A specialist in franchise law can assist you with evaluating the franchise package/tax considerations whereas an accountant can help you determine the full costs of purchasing and operating the business. If you take a cautious analytical approach towards this decision, you’ll avoid many of the pitfalls which trap entrepreneurs who don’t do their homework.