Thinking about Franchising? 7 Things to Consider Before Taking the Leap

Photo: Open Sign on a Door

Starting a business may be a lifelong dream, but it can also be daunting. Franchising can seem like a great alternative, since some of the work — a business model, location, processes, and much else — has already been perfected by someone else. On the surface, at least, a franchise seems like a sure thing. Before you sign on the dotted line and make a significant investment in time and money, what should you know about franchising? Alliant Business Systems takes a closer look.

Understand the Model

Understand that you won’t just own the franchise. You’ll be putting in a lot of work in front of the public and behind the scenes. At one time or another, you’ll be involved in training, bookkeeping, payroll, customer service, janitorial, and literally every other aspect of the business. Maybe you look forward to the front-of-house tasks but hate bookkeeping. Maybe you love numbers-crunching but you really don’t like people. Your franchise will require you to take on responsibilities you may not have anticipated, and which may fall outside your skill set or your comfort zone.

Know Your Finances

Franchise fees vary widely. Entrepreneur notes that the initial fee can be as low as $15,000, but reminds us that the fee alone can easily stretch into six digits, with some franchisors requiring cash reserves in the range of half a million dollars. Royalties and franchise fees, marketing fees, required purchases, payroll, rent, and other expenses can push your annual operating costs well into seven figures. Covering not only the startup costs but the ongoing costs — especially in the early going — requires more financing than many individuals will have on hand. That means business credit for your new business plays an outsize role for most.

Find the Right Fit

Maybe you have a vague idea that franchising is a good way to start your own business, and you think that a simple Google search will help you find the best franchising opportunities. Think again. Many reviewers purport to be neutral but aren’t, and even those who genuinely try to evaluate the merits of an opportunity bring their own biases to the table. Instead, think of your existing skill set and the things that would make you eager to open your business’s doors every morning. Then, you can find a franchise that’s a better fit with your goals and values.

Research Thoroughly

Your research needs to include more than your choice of franchise. You should be speaking to current and former franchisees (if the franchisor resists, run). You should also do market research to gain a better understanding of the location and whether it’s capable of sustaining a business. You should find out the patterns of openings and (more importantly) closings that have taken place in recent years, which franchisors are legally required to document on a franchise disclosure statement. You should also have everything vetted independently by your own lawyer and financial professional.

Read the Fine Print

Another reason to involve a lawyer: fine print, and lots of it. You’ll want a thorough understanding of your ongoing fees and obligations, the insurance you’re required to carry, the duration of your commitment to the franchisor, and what happens if you decide to exit early. There are other concerns and potential pitfalls, and it’s in your best interest to understand them thoroughly.

Do a Gut Check

You’ve researched the field, you know your finances inside-out and backwards, and you’ve taken time to talk with franchisees, financial professionals, mentors, and trusted friends. At this point, it’s a good idea to pause and do some self-reflection. Give some serious thought to your risk tolerance, your personality type, your patience with an impatient public, and your priorities. Let the initial excitement settle for a bit so you can identify any red flags you may have missed, or take the time for credit management if you need to. This is a long-term commitment, and it’s one you should enter with eyes wide open.

Draw Up a Business Plan

Now — and only now — that you’ve taken the time to understand your goals, finances, your own skills and shortcomings, it’s time to write a thorough business plan. Franchises require as much money as any other business to start, and in some cases can actually be much more expensive. In light of that, and the risks that go with it, your bank won’t look at your finance application as a sure thing.

No matter where you are in the franchising process, it helps to have an ally. A free business credit consultation from Alliant Business Systems can be an important first step toward the credit you need to make your business dreams a reality.