Top Tips for Purchasing a Franchise
By Matt Adams
Vice President, Business Banking
As we all meander through our lives and rush hour traffic, we interact with many types of people and businesses. Whether we’re buying a morning coffee or a sandwich at lunch, we make purchases from what we perceive as a large corporation. But many of us might be surprised to find out, that these supposed corporations, are actually a franchise. What is even more surprising, is that many are locally owned small businesses!
A franchise is a company that allows a group or individual to provide services or products using the company’s name. There are several types of franchises and many reasons why companies choose to operate as a franchise versus a corporation, but they all have one in common: They need someone to represent their company in a market. This is where many entrepreneurs get their start. Representing a franchise is a very appealing option, as the franchise provides you support in many ways, i.e. marketing, product development, brand recognition, etc. But there is a cost for this support and not all franchises operate the same, so if someone isn’t careful, it can turn into a losing proposition. Here are some tips to try to avoid some pitfalls and have potential success.
Tip 1: Research, Research, Research
When it comes to starting a franchise, you can never have enough information. Before even contacting a franchise to express your interest, do a deep background on the company. Start by simply searching the internet. You can typically get existing locations, reviews, products, and services fairly easily. By doing a deeper dive, you might be able to find articles or publications that reveal future franchise expansion, length of time in a market, and more importantly: legal issues and franchise failures. Another research avenue is contacting an existing franchisee. While not all may be forthcoming with information, you should be able to get an understanding if they have a good relationship with the franchise.
Tip 2: Know Your Numbers
This is an obvious and broad comment but there are many aspects to the numbers that often get overlooked or misunderstood. The franchise will have performed market analysis, gathered financials from existing franchises, and put together projections for each franchise area. These can vary greatly from market to market and need to be properly vetted. For example, the cost per square foot for a business space can change drastically within a few miles of each location. There may be many hidden costs that are unaccounted for as you put together your projections and budget. From the cost of construction to city permits to licensing to professional services, they all add up quickly. Be sure to make a thorough and exhaustive list to save headaches down the road.
Tip 3: Build a Quality Team of Professionals
There are a lot of moving parts when starting a franchise. Relying on one or two individuals to guide you through them all may seem efficient but it may end up costing you a lot of time and money. Everyone has their role in the business world and they all bring different valuable experience. Having a good accountant, attorney, banker, broker, etc. will greatly assist you on your path to success. Getting them each involved and on the same page is important. A recommendation from one might conflict with a requirement from the other and they all view information from a different perspective. One of the most important documents involved in starting a franchise is the Franchise Agreement. This is your contract between you and the franchise. It outlines the relationship between the franchisee and the franchisor and how everything operates. Have each of your professionals review this independently. They will all find pieces that are important to them and it’s highly likely they all will be different.
Tip 4: SBA Franchise Approval
A key piece to starting a franchise is financing. Most people go to their bank to receive the funds to get started. A large amount of franchises financed through a bank will need an SBA guaranty. The SBA (Small Business Administration) has a franchise directory that lists all approved franchises. Before you begin the loan process, ask the franchise if they are approved and then confirm with your banker. If the franchise isn’t approved, they will need to begin the approval process and be approved before they can be financed. This can cause a significant delay and if unaccounted for, may lead to several more significant problems.
Tip 5: Value Your Time and Money
Starting a business requires a considerable amount of time and money. Always remember that you are making an investment of both and pre-determine what kind of return you want in the end. Get an idea of how much time and money will be required to be successful and then double it. Underestimating either of these can and will certainly make success seem unattainable.