One option people consider when planning to start a business is buying a franchise. There are many advantages to buying a franchise versus starting your business “from scratch.”
A well established business model and a successful, well recognized brand can provide a great jump start into entrepreneurship.
But deciding which franchise to buy requires a lot of thought and research. You should conduct a thorough analysis to determine whether a particular franchise opportunity is right for you.
Consider how much real benefit you are getting from the franchiser and whether or not it is worth the cost. The Small Business Administration offers some guidelines for evaluating franchise opportunities.
The first recommended step is to obtain a copy of the franchiser’s disclosure document, also known as a Franchise Offering Circular. Be sure you thoroughly understand this document and get answers to any questions you have.
You will need some assistance from an attorney and an accountant as you evaluate the franchise, particularly as you investigate the background of the franchiser. This includes looking for past legal problems and evaluating financial performance.
You want to know whether the franchiser is financially stable and that the owner(s) can and do live up to their agreements.
The franchiser should be able to provide information concerning the cost to start and operate the franchise, including the franchise fee, training fees and royalty payments. But keep in mind that even though the franchiser provides you with a list of estimated startup costs, you must do your own research to be sure you have the most accurate numbers possible.
The franchiser may require you to buy certain equipment from them or require you to use particular suppliers. They may specify your territory, what you can and cannot sell and possibly the types of customers to whom you can sell. These requirements will affect your potential revenue and costs.
You need to know what type of support is available from the franchiser. Assess issues such as the level of training offered, the quality of the training, what personnel will be trained and whether additional training will be offered after startup.
Support personnel from the franchiser should be available during planning, startup and after you begin operating. You need to find out how much individual assistance you can expect and if someone will be able to come to your location if needed.
You will most likely pay an advertising fee as a percent of your sales in addition to the royalty fee. You need to find out how these funds will be spent and what level of advertising takes place in your area.
You will have no control over how the franchiser advertises, but the franchiser may place restrictions on any advertising you do yourself.
The franchiser should provide you with information about current and former franchisees. You need to talk with and visit as many of the current and former franchisees as possible.
Prepare a thorough checklist of questions to ask before contacting the franchisees. Some of the questions you would need to ask involve their level of satisfaction with the franchiser’s services, how long it took them to begin making a profit, what their background was before starting, how long they have operated the franchise and, for former franchisees, why they are no longer with the system.
Franchisers may provide information concerning how much money you can earn. But keep in mind that these are typically based on overall averages and there are many variables that affect earnings, including your management abilities and where you are locating the business.
Franchisers also may provide a business plan template or even a sample plan where all you have to do is “fill in the blanks.” This can be helpful, but do not rely too much on business plans and projections provided by the franchiser because the information cannot be specific enough.
Develop your own business plan and financial projections based on your research and your own knowledge. You need to consider how your market area’s characteristics will affect sales and do your own research on actual costs of items such as rent, leasehold improvements, inventory, utilities, personnel, etc.
More detailed information about evaluating franchise opportunities can be found at the SBA’s Web site, http://www.sba.gov/. In addition, the Federal Trade Commission publishes “Buying a Franchise: A Consumer Guide” which is available here.
Connie Edwards is a business consultant with the University of Georgia’s Small Business Development Center. Contact her at 651-3200.