Buying a franchise can be a great move for a would-be entrepreneur who doesn’t want to create a new business from scratch. In theory, franchisees acquire a model that already works on every level, from branding to pricing to marketing. But making a go as a successful franchisee can be a lot more complicated than simply finding an appealing brand and plunking down some cash.
If you’re thinking of becoming a franchisee, how should you prepare yourself? We recommend you do these 12 things before you buy a franchise.
Give yourself a personality test.
There’s a reason military veterans tend to be successful franchisees. They’re used to following the rules and operating within a highly regulated system. If you’re the creative type who likes to cook without recipes, paint walls wild colors and experiment with mood lighting, you’re probably not cut out to be a franchisee. You have to know that you’re going to be an implementer, not a creator.
Study the field.
Avail yourself of publicly available information on the ABCs of franchising. An excellent place to start: The Federal Trade Commission’s Guide to Buying a Franchise. Did you know that many franchisees are required to spend a designated amount on advertising and yet have no control over how those ad dollars are spent? Two other helpful sites: The International Franchising Association’s Franchising 101 guide and The American Association of Franchisees and Dealers’ Road Map to Selecting a Franchise.
Assess your strengths.
How do you feel about cold calling? Business-to-business sales? Teixeira used to run a franchise called Vehicle Tracking Solutions, which sold GPS systems to trucking companies. The product involved technology, which attracted tech-savvy franchisees. But some of them hated sales, the most essential part of the business. They flopped. Teixeira recommends asking friends and family to help you evaluate how well your personality matches the business you’re considering. Experience also matters. Thinking of running an Applebee’s? What do you know about food service and management?
Count your money
Look beyond the minimum requirement for buying a franchise, usually listed as the franchise fee and the cost of equipment. Getting a franchise up and running can involve hefty marketing costs and the need to survive on break-even books, or a period of net losses, before your business catches on. Even if you’re franchising a well-known brand like 7-11, customers have to discover your new location.
Don’t believe the “Franchise Lie.”
An urban legend about franchise failure rates persists: Franchises only fail 5% of the time. Not true. They fail at roughly the same rate as other businesses, which is to say two-thirds of businesses with employees last two years, and half survive at least five. Yet many franchisors make claims like this: “after five years in operation, more than 90% of franchises continue to operate while less than 25% of privately owned companies stay in business.” Wrong.
Dig for dirt.
Take advantage of sites and search for negatives about the franchise you’re considering. Blue Mau Mau also reports on the franchise industry.
Talk to franchisees.
Talk to at least 10. Ask about pros, cons, and hidden costs. What did they learn that they didn’t glean from their research before they became franchisees? How long did it take them to become profitable? How much did they budget for their enterprise, and how much did they wind up spending? What was the toughest part of building the business? How supportive is headquarters? How challenging is it to hire good staff? Ask if, given what they know now, they would do it again or recommend the franchise to a close family member? Keep in mind that ego is a big thing. Some franchisees might not want to admit that they’ve struggled. All the more reason to talk to as many as you can.
9. Consider hiring professional help.
If you have accounting know-how and feel comfortable reading a balance sheet, you’ve insured a past business and you’ve negotiated legal contracts, you may not need an accountant, insurance agent and lawyer. But with some self-interest you should have a lawyer and other professionals review your financial health and how it will be affected by the franchise arrangement before you sign a franchise contract.
10. Explore working in a store.
This is the best way to see how a franchised business works from the inside, and whether your personality fits the company culture.
11. Do a cost/benefit analysis.
Make an old-fashioned pro versus con list. Draw a line down the center of a piece of paper and on one side, write down the benefits you’re getting, like established brand, proven market, training, recipes if it’s a food franchise, staffing guidelines, store design. On the other side list the costs and liabilities, including franchise fee, money you’re required to pay for marketing, mark-ups on merchandise and ingredients the chain requires you to buy, the share of sales you must pay in royalties. Consider whether you could hire a consultant to help you open up your own donut or sandwich shop, and instead of paying royalties, mark-ups and marketing fees, keep that money for yourself.