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Friday, Apr 13, 2018
5 Things to Consider When Evaluating a Franchise Opportunity
Interested in purchasing a franchise? Becoming a business owner can be an exciting time, full of new developments, thrills, and challenges. However, you need to do your research when considering a potential franchise opportunity. While you might only be able to see an amazing and unmissable chance, some careful scrutiny is required to make sure you’re not missing any red flags.
So, what should you look for when doing your due diligence with a franchise opportunity? Here are five important factors you’ll want to consider.
How much training and support is available?
Almost every franchise owner will deal with a few stumbles and missteps as they get their new business up and running. At times like these, it’s helpful to rely on the experience of the head office for support and guidance. In many cases, franchisors will require new business owners to complete training sessions that help smooth the transition into franchise ownership. When evaluating any franchise opportunity, make sure you understand what kind of training is available, whether any specific learning is required before opening your doors, and how responsive and helpful the franchisor is likely to be when you reach out to them. Besides asking the company for these details, it’s also a good idea to ask other franchisees about their individual experiences, and find out whether they have specific issues or complaints in this regard.
Will the opportunity be intellectually stimulating over the long term?
There are always mental hurdles involved in running your own franchise, but the day-to-day tasks tend to be more mundane. By and large, most franchise business opportunities are in the retail and service sectors, and don’t require high levels of education or sophisticated training. While this simplicity is often what helps the business model work as a successful franchise, it also means your working life may not be as intellectually stimulating or demanding as it might be in a different environment. If you’re a well-educated person with specialized training (or even if you’re not), ask yourself whether you’ll be satisfied taking care of the grunt work, or inspired by tackling the everyday tasks of your franchise opportunity. You don’t want to wind up in a situation where your motivation is sapped by a lack of stimulation and variety. Be sure to pick a franchise that’s in an industry that interests you.
What are the true costs of franchise ownership?
Besides the fixed cost of buying a new franchise, and the startup investment it requires, franchisees must also pay ongoing royalty fees to the parent company and contribute to overall marketing efforts. The details of these payments should be clearly explained in your franchise disclosure document, so make sure you study it carefully, and have a second (more experienced) set of eyes take a look, too. Some costs, however, may not be included in this agreement but still need to be taken into account. For instance, how much will you pay each month in rent and utilities? Will you have to pay for you and your staff to receive training? Does the franchisor have specific requirements when it comes to property and liability insurance? How much do you expect to pay in wages and benefits? What legal and accounting fees are involved in starting your business, or setting up a corporation? Finally, if you’re going into debt to cover the initial investment, how much will you be paying in interest? Don’t make a decision until you have a handle on the impact of these costs.
Does the franchisor have expansion plans in your area?
Competition in the business world is always tough, and the last thing any franchisee wants is to be competing against the very company they represent. Before you decide on franchise ownership, ask whether you’ll receive any kind of territorial exclusivity, and how big that area will be. Additionally, try to find out whatever you can about the company’s plans for future expansion in your area, and whether they have plans for company-owned outlets or additional franchise outlets in your region. In some cases, franchisors are willing to offer existing franchisees the right of first refusal to purchase new locations in their geographic area, so remember to check whether that option is available, too.
What options will you have for an exit strategy?
While it may seem odd to think about the end before you’ve even begun, the day may come when you no longer wish to own and operate your franchise. Once that happens, what options will be available to you, and what are the costs associated with each of them? Try to imagine what your endgame will look like – are you in this for the long haul with plans to leave the business to a child, spouse or relative, or is your timeline significantly shorter, with the goal of an eventual sale? Consider the possibility of an illness or change in personal situation (losing a spouse, becoming a parent), and how that might impact your ability to run a demanding business.