Quick and Easy Guide to Buying a Franchise in 7 Steps
Entrepreneurs are drawn to franchising because it is one of the safest ways to open a business. Buying a franchise model is buying a concept that is already developed. The tools and resources to guide your success are keenly sharpened. Think of franchising as following a roadmap. Without a map to outline your business trek, you will be stranded. Instead of getting a tow, you’ll be declaring bankruptcy. But with a roadmap, your are provided with a track record of success, a strong brand, and support system where you can leverage your skills to operate a business you can be proud of. Not to mention make some well-deserved money in the process.
According to Investopedia, the definition of a franchise is: “a type of license that a party (franchisee) acquires to allow them to have access to a business’s (the franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name.”
Of course, with any investment, there is risk and challenges ahead. The best way to prepare for the inevitable is to be prepared. This 7 step guide will help anyone interested in buying a franchise the roadmap to do it right!
1) Ask Questions First, Buy a Franchise Later
The key to partnering with the franchise of your dreams is due diligence. The first step is research. First, figure out what kind of business you want to own. Since you have decided to buy a franchise you can forego traditional start-up routines. Successful franchises have already explored market gaps, capitalized on niche consumer trends, developed unique revenue streams, and refined back office systems that will save time.
So, before buying a franchise, you need to pick an industry. Do you see yourself owning a business services unit like The UPS Store? Running a pet grooming franchise? Or do you want to be a fast food titan?
Take a reflective look into what truly makes you happy and where your passion lies. This will keep you motivated when unforeseen events occur. Next, you will need to identify your budget. Pour over your personal finances to delineate your equity. Your capital, liquid assets, and net worth will all help you paint a picture of how much you have to spend. You may consider taking out an SBA loan or contacting a CPA to help with the process. This self-appraisal will be part of the template used to shop before buying a franchise.
Once you have determined the style of franchise, and verified your finances, you can begin researching various companies in your prospective segment. As your extensive research goes underway, you will be hearing a lot of sales pitches. Franchises across the board put huge efforts into selling their models. This is why it’s important to find the perfect fit for you! Select options that align with your values and vision—find a business you want to own. Also, take into consideration your personal strengths and weaknesses. Does this franchise provide support in areas you will need help with? Will this franchise support the areas you have experience in?
Researching and buying a franchise is a life-long decision and should be treated as such!
2) Make a Business Plan
Take into consideration all the research you have compiled. Review all the information you have gathered from prospective franchisors and compare this with your own research into the marketplace conditions of the industry you are interested in. From these statements, create a business plan. This should include all your investment costs and projections for your return on investment (ROI). Differing franchise fees, royalty fees, and potential price of inventory all need to considered. A huge mistake many novice franchise owners make is underestimating their startup costs. You don’t want to run out of money before you can get the doors open!
The quality of your business plan can affect the likelihood of getting an SBA loan, knowing how to analyze a franchise agreement, and will detail your legitimacy of buying a franchise.
3) Tour Franchises and Attend Discovery Days
Once you have tapered through definite non-fits and have discerned a few franchise models you are really excited about, it is time to start reaching out to franchisors. This is the first step in an ongoing conversation you will have with their team.
Some franchise models have ‘discovery days.’ This is a tour of facilities that will show you what you can expect as a unit owner. Always request to speak to current franchisees. One of the most important questions to ask them is, “Would you do it all-over-again if you could?” If franchisors are reluctant to get you into contact with franchisees—this is a red flag!
Good franchisors should be supportive and knowledgeable. Their goal should not be to sell you their franchise, but to provide you with the knowledge to make an informed decision. During your initial conversations—in person or conference calls—you will typically undergo an interview process. The goal of this interview is for all parties involved to examine the details of you buying a franchise.
4) Review the Franchise Disclosure Document & Sign the Franchise Agreement
Once you have made the final decision to proceed with the franchise that is the best match, you will need to review the franchise disclosure document (FDD). The FDD is a non-negotiable legal document that exhibits all pertinent information you will need to know.
An FDD includes:
- Franchisor/CEOs/Parent Companies/Affiliates
- Business Experience
- Initial Fees/Other fees
- Obligations of Parties
- Financial Performance Representations
After receiving the FDD, carefully scrutinize every detail. If it will make you feel more comfortable, you can hire a franchise attorney, or an accountant to help you decipher the details. This is not always necessary, but if you feel it is needed—please feel encouraged to do this. Once you are 100% confident and have met all the requirements for franchise ownership you can sign the contract with the franchisor.
5) Training and Support
A well-equipped and reputable franchise model should have an internal orientation and training program. This is usually a requirement of all new franchise owners, despite personal experience. Some franchisors also require on-site training. This is a good thing! This will be first-hand applicable experience. This training will also provide face time with a veteran franchisee. One of the biggest mistakes you can make is ignoring the advice of experienced franchisees.
You should also be wary of travel expenses during a company’s training program. Many times you will need to visit corporate headquarters, book a hotel, or purchase materials for training. These will be paid at your expense so be aware of the costs before starting a training program.
6) Location, Preparation, & Construction
One of the biggest variables in your franchise’s success is having a strategic location. For brick-and-mortar locations, the storefront should have high visibility, be easily accessible, and centrally located to your prospect consumer. During your research of an intended market, you should develop a feel for the demographics of the area. Franchisors often assist with securing locations.
You will also need to consider the competition. Most territory agreements will ensure that a franchise will not cannibalize the company, but competing businesses in your sector can threaten your business. Find the most advantageous location and begin construction.
A build-out design is dependent on the type of franchise you choose to go with. A restaurant franchise will need a different build-out than a personal services franchise. If you are planning to have retail area, make sure that your contractor can build the space you need. Franchise companies may support you by supplying blueprints, securing locations, and providing brand aesthetic.
7) Ready Your Franchise for Opening Day
After buying a franchise, there is still an immense amount of work that needs to be done before you can have a grand opening. Most small businesses begin with a soft opening to fine tune the system. Franchises provide many things like support with hiring and training staff, providing a POS system, and facilitating an initial stock order.
Revolving around what type of franchise you have decided to open will dictate the tasks that need to be done. Many franchise owners focus on marketing to potential consumers. Much of this is done digitally. Be sure not to market beyond your staff’s ability to service customers, especially during the first few months of being open.
Now, the Grand Opening! Once all the kinks are worked out you can begin perfecting your franchise and if you work hard, you can see a swift ROI and even continue on to expand your franchise empire!
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