What You Need to Know Before Buying a Franchise Pt. 2

Part 2 of 2: Deciding if Buying a Franchise Makes Sense for You

Franchise Opportunity pros and cons

In the first part of this series, you gained an important overview of franchising. You now know that there are actually three types of franchises — and that buying into another company’s business or products can apply to any type of business, rather than just fast-food and casual dining restaurants.

While buying a franchise can be a good way to grab onto some of the success of a popular business, be aware that it can have both upsides and downsides. Before you decide to invest substantial money and time, read on to introduce yourself to both sides of the picture. Spoiler alert: if you are not already somewhat knowledgeable about franchising in your particular chosen industry, I will recommend seeking expert advice there.

Let’s Start with the Positives

If you’ve been itching to start your own business venture — without all of the uncertainty of starting from scratch — buying the appropriate type of franchise offers a number of potential benefits, including the following:

  • A head start: Whether you buy a full business model franchise, or even if you buy into a product brand, you don’t have to plan as many startup details. And, your business may well benefit from name recognition as you develop a customer base.
  • Blueprints from the franchisor: Savvy franchisors typically protect their brands by providing you with ample instructions and standards that you must follow when using their names. Some hold training classes that teach how to handle all aspects relevant to the franchise that you bought.
  • Marketing assistance: At the very least, most franchisors often provide print and online materials that promote their offerings. Sometimes, you don’t have to spend on expensive media advertising because parent company TV ads drive customers to your door.
  • Franchisor support: The best franchisors probably make occasional visits to your business to monitor operations. Some hold regular franchisee meetings that keep everyone apprised of new products and procedures while answering any questions — and introducing franchisees to each other. Also, franchisors are generally available to guide franchisees through any issues that arise. Remember: they want you to be successful.

Despite the Upsides, Franchising is Not Always All Pie and Honey

Every franchise is unique, so there are no guarantees that everything will go smoothly. The following are some of the potential downsides:

  • Less-than-expected support: Some franchisors are more interested in making a quick buck rather than taking an active interest in their franchisees. You don’t want to feel smothered by their micromanagement, but you need enough preliminary assistance to avoid feeling like a startup.
  • Inadequate funds: Once you scrape together the money needed for the initial franchise payment, do you have enough remaining funds for daily operations? If you don’t do lots of research before signing the franchise contract, you can’t develop a realistic budget before striking the deal. You need enough money to keep the doors open until you start making predictable sales.
  • Insufficient business acumen: You still need the business management skills, energy, and attention to detail to run a franchise. Even if your business follows your passion, the required daily tasks can be difficult or even boring. Make sure that you can handle it all (or can hire someone who can fill in the gaps).
  • Too much local competition: I happen to live in an area that is replete with auto parts stores. Since most of them are not also replete with customers, it would probably make little sense to buy the franchise for another one. Unless you have a unique angle that local customers are not finding from similar businesses, location makes a difference.
  • An unproven business model: Just because one business’ success drives them toward expansion does not guarantee a win for a franchisee. You might want to see how well other franchises do before jumping on board.
  • A lack of potential customer loyalty: How much does a brand name matter in your industry? Customers might be more likely to stop into a UPS store rather than Really-Kwik Shipping Services, but they might not care if they buy Brand X versus Brand Y widgets. If the brand name doesn’t drive customers to your business, then you might want to re-think making the investment.
  • Potential for buyout of the parent company: Big companies often buy out smaller ones, with unexpected changes that franchisees have to absorb. If you can’t afford the changes or just can’t abide by a sudden change in the rules, you have to turn to the original contract to find a remedy. Does your contract contain an exit or other clause that would protect you in this situation?

Advance Preparation Helps Mitigate Potential Downsides

Let’s assume that you have already compared many franchise opportunities, and you selected the perfect one, knowing that you already have management experience or are willing and able to learn. Before you sign on the dotted line, you still need additional preparation.

Money issues come first, so make sure that you have the money on hand or available financing. For that matter, do you have the personal resources to support yourself and your family until profits start rolling in? Has your spouse heartily approved of the venture? Don’t forget that you have to consider more than the initial franchise fee. Make sure that you consider every possible operating cost of the business. A financial expert, such as a virtual CFO, might be an excellent resource for making your numbers realistic.

You also have to read and understand every word of the contract. Retaining a franchise attorney to review the contract and educate you about potential risks is also a smart move. You wouldn’t buy a house without an attorney, so why would you enter into a major business venture without knowledgeable legal advice?

Another type of valuable advance advice can come from other franchisees in the business that you are considering. In some cases, the franchisor might give you some names, but even if they offer names, an Internet search might reveal other business franchisees who are willing to talk openly to you. References are one of the best ways to find out how well the franchisor gives support, along with any other considerations that you may not expect.

Never Forget: You Are Still Starting a New Business

Granted, buying any type of franchise seems easier than starting from scratch, but let’s be real. Even if you have witnessed the success of other similar franchises, you should never jump in without substantial preparation.

Every business owner is different. In addition to having varying financial and personal scenarios, a franchise that thrives in one region might not capture customer interest elsewhere. A business that sells ice might be great year-round in southern Florida, but not so much in northern Alaska.

There are mountains of things to consider. But, if you take your time — and seek good advice along the way — the rewards of buying a franchise can be immeasurable.

The Entrepreneurs' Resource

About ChooseWhat