Comprehensive Guide for the Prospective Franchisee

Buying a franchise can be a great way to start your own business. When you buy a franchise license, you acquire rights to use the franchise’s brand name and operating methods. Training and support are likely to be part of your purchase, too. If the franchise opportunity you buy is well-known and well-established, you gain instant name recognition, and avoid a lot of the trial and error involved in learning the best way to create and deliver the products or services you will be selling. As a result, you can get your business off to a running start.

But buying a franchise doesn’t guarantee your new business will be successful. Too much competition from other businesses, a bad location, lack of management skills, difficulty in finding good employees, changing consumer preferences, and even lack of commitment on the part of the owner can all do franchisees in, just as they can cause any other type of business to fail.

You can minimize the risks of failure by understanding all that’s involved when you buy a franchise and by being honest with yourself about your own strengths, weaknesses and motivation for starting a business. Use the information below to help you assess your own ability to succeed as a franchisee and what general type of franchise opportunity might be best for you.

Financial considerations
Buying and opening a franchise will be a major investment. You’ll need money not only for the initial launch of your location, but also to keep the business running until sales pick up enough to cover all your expenses. Here are some questions you need to consider closely before deciding to purchase a franchise.

• How much money do you have available yourself to invest?

• Where will that money come from?

• How much can you afford to lose?

• Will you buy the franchise on your own, or will you have partners who will also be putting in money?

• If you have partners, how much control will they want over your activities?

• How will disagreements between the partners be settled?

• If you plan on getting a loan, where will you get it?

• What will you use for collateral?

• Will working in the franchise you buy be your primary source of income?

• How will you pay for your household expenses until the time that your franchise becomes profitable enough to pay yourself a good salary?

Franchise Costs
Costs for buying and opening a franchise vary considerably. The list below outlines expenses often associated with opening a franchise. Use the figures to estimate the amount of startup capital you’ll need for the type of franchise you are considering, the amount of cash you’ll need each month to cover expenses, and to estimate the amount of business you’ll need to bring in to make the business profitable.

Conformity and Control
One of the mainstays of franchising is that the consumer knows what to expect when making a purchase, no matter where they are. The Big Mac they order will taste the same in Los Angeles, CA as it does in Hicksville, NY. To ensure such consistency, the franchisor may control some facets of your business. Among them may be:

• Site location
• Area in which you may operate
• Design of premises
• Seasonal décor
• Signage
• Need for and timing of renovations to premises
• Hours of operation
• Products and services you may sell
• Source of inventory and supplies
• Operating procedures
• Bookkeeping methods
• Content of ads you run

Before signing a franchise agreement, be sure to find out what specific parts of your business will have to conform to the franchisor’s specifications.

Franchise Agreement Terms
A franchise agreement usually runs for 15 to 20 years. If you fail to comply with the terms of the agreement your franchise license could be taken away.

Renewal of the franchise agreement usually isn’t guaranteed, either. Neither are the terms of the original agreement. So, at the end of your contract, the franchisor could change the terms, or not renew the agreement at all.

Territory and Competition
Even though the franchise you choose guarantees you a territory, there’s no guarantee you won’t have competitors nipping at your heels. You could pull into your parking lot one morning and see a competing pizza place or weight-loss center going up across the street. Or, a major retailer might open up on the other side of town, diverting drive-in or walk-in traffic away from your franchise location.

As a franchisee with a fixed location, you could be more affected by demographic changes than businesses that aren’t tied into long-term agreements, too. So, look at details such as the ages of consumers in the area you would serve, and what the trends are expected to be. And, consider how your business would do in a specific location if a major employer closed shop or moved out of state.

Questions to answer before you proceed
A decision to purchase a franchise is a significant one both financially and personally. Your income, time you have to spend with your family, and career may all be affected by your decision to invest in your own business.

Before you move ahead on your decision to invest in a franchise, answer the questions below. Don’t just think about the answers. Write them down on paper. Doing so will make you think more closely about your answers and whether or not investing in a franchise is right for you.

Personal goals and needs

• What are your long term goals?
• What is your immediate reason for wanting to buy a franchise?
• What are your monthly living expenses?
• How much savings do you have?
• What additional income sources do you have?
• If you need financing, how will you get it?
• Do you have a good credit rating?
• Does your spouse significant other support your decision to buy a franchise?
• How much tolerance for risk do you have?

Skills and Interests
Your personal interests, skills, productivity and ability to manage will all have some role in how successful and happy you’ll be as a franchisee. Before you choose a franchise, consider these questions:

• What special skills, experience or education will be needed to run the type of franchise you are interested in and to deliver the products or services that will be sold?
   
• Do you have that knowledge?
   
• If not, how will you get it?
   
• Have you ever worked in this type of business before?
   
• Have you ever owned a business before?
   
• Do you have any management experience?
   
• Do you have any computing skills?
   
• Are you organized and good at keeping records?
   
• Do you like selling?
   
• Do you like dealing with people?
   
• How many hours per week can you work in your business?
   
• Do you want to spend the next 15 to 20 years of your life running a convenience store, selling coffee, running a cleaning business, or managing whatever type of franchise you are planning to buy?
   
• Are you interested in owning just one franchise location or many?

Market considerations
There are franchise opportunities in a wide range of industries. Before you decide on the industry and type of franchise to buy, consider both the short term and the long term market for the products and services you’d be selling.

• What type of customer do you expect to attract?

• How many of those potential customers live in your service area?

• Is there likely to be a long-term demand for this product or is it a fad?

• Is the overall age of consumers in your area changing? If so, is the population aging? Or are young families with small children moving in? Do any large corporations plan to move out of state, and if so would that change the economy of your area?

• What new consumer trends might have an effect on sales?

• Is the franchise seasonal?

• If so, how will you make money off-season?

• How frequently will a single customer buy your product or service?

• How many customers will you need a month to be profitable?

• What other factors could affect the type of business you are considering?

Copyright 2005 Franchisetrade.com