Key Takeaways:
- Buying a franchise allows entrepreneurs to leverage a proven franchise business model, established brand recognition, and ongoing training and support instead of starting from scratch.
- Researching the market, competition, and available franchise opportunities helps ensure your franchise investment aligns with local demand and long-term growth potential.
- Carefully reviewing the Franchise Disclosure Document (FDD), evaluating startup and ongoing costs, and speaking with current franchise owners are critical steps to making a confident, informed decision about franchise ownership.
So, you’ve decided that business ownership and buying a franchise is the next step you want to take. But the first hurdle you’ve got to overcome is – where do I even start?
Like any other investment you may make, purchasing a franchise comes with many intricacies. That’s why you need to take some time to do proper research, figure out your goals, and understand what support and guidance you’ll receive from your chosen franchisor. A franchise investment is a strategic decision, and it’s essential to fully understand the franchise business model before moving forward. The key to buying any business is research, which is why we’ve highlighted some important things you’ll need to consider:
First, What is Franchising?
Franchising is a powerful business model that enables individuals to own and operate their own businesses while leveraging the strength of an established brand. According to the International Franchise Association, franchising is a marketing method where a franchisor grants a franchise owner, commonly known as a franchisee, the right to use its trade name, business system, and ongoing support in exchange for a franchise fee and ongoing royalty payments. This arrangement allows franchise owners to benefit from a proven business format, including an established franchise company offering circular, comprehensive marketing resources, and operational coaching and support designed to help them succeed.
Franchising is a contractual relationship between a licensor (franchisor) and a licensee (franchise owner). By joining a franchise business, you gain access to a network of experienced professionals, established marketing strategies, and a recognizable brand, all of which can give you a significant advantage over starting a business from scratch
Understand the Market and Its Competition
The first thing to look at is whether your chosen franchise is targeting an area of demand. Will it provide your local community with something they need, or could it be a fad that’ll be here today and gone tomorrow? Franchises operate across a wide variety of industries, including fast food, hotels, gyms, home services, automobiles, and more, so consider which sector best fits your market. It’s also worth considering whether the franchisor’s brand is already reputed and recognized by customers so you won’t have to work as hard to gain their trust and business.
Don’t forget about competitors either – these can have a detrimental effect on your business. Consider what level of competition there is and whether this is on a local or national level. Look at how many other companies or franchise brands there are within your local area and whether they’re as recognized, if not more so, than the franchise you’re looking at. Knowing whether you’re going to be able to compete with these businesses will be fundamental to the success of your own franchise.
Before making a decision, be sure to research available franchise opportunities within your chosen industry and market.
Don't Overlook the Financial Evaluation Process
Before you commit to a franchise business, conducting a detailed financial evaluation is crucial. Start by carefully reviewing the Franchise Disclosure Document (FDD), which provides a breakdown of the franchise fee, estimated start-up costs, revenue, and ongoing expenses. It’s important to calculate not only the initial investment but also the ongoing royalty payments, marketing fees, and other operating expenses that come with running a franchise.
Prospective franchise owners should assess whether the particular franchise opportunity aligns with their financial goals and resources. Consider the potential return on investment by analyzing projected sales, gross sales, and operating expenses. Don’t forget to factor in your own financial situation and risk tolerance. By thoroughly evaluating the financial aspects of the franchise, you can determine if the opportunity is a good fit and avoid surprises down the road. Remember, a well-informed investment is the foundation for long-term success as a franchise owner.
Review the Franchise Disclosure Document Closely
Every potential franchise owner must obtain and read through the franchisor’s Franchise Disclosure Document before signing any agreements. These documents can be 50 or more pages long, but don’t be put off by this. The FDD contains key pieces of information, including franchise fees, financial statements, revenue trends, the franchisor's background and legal obligations, the type of training offered for franchise owners, and whether there are any additional costs that might not seem obvious at the start (e.g. opening day expenses when you have to do a promotional giveaway). It also details the number of franchised and company-owned outlets within the system. The Federal Trade Commission offers a thorough guide on how to read and understand an FDD.
Buying a franchise need not be a stressful and overwhelming experience, as many franchisors offer help, advice, and training throughout. However, it’s crucial that you do your research beforehand, asking for one-on-one legal help if you’re unsure of any of the finer details. Armed with your research, skills as an entrepreneur, and unwavering commitment to success, you could soon find yourself being your own boss and watching your franchise grow from strong to stronger.
Talk to Other Franchise Owners About Their Experience
One of the best ways to find out whether it’s worth buying a business is to speak to exisitng franchise owners. Many franchisors will invite you to a “Discovery Day” where you’ll be able to meet like-minded people, but you should try to do additional homework, too. Call up other franchise owners and ask them how they feel their business is working, whether they’ve had enough support and felt adequately supported by the franchisor, and if they feel there’s plenty of growth left in the franchise.
Be sure to ask about the challenges faced by new franchise owners, including the initial learning curve and available resources. And, if you have the time, ask them if you can shadow them for a day to really get to grips with the franchise, learn what it involves, and see how experienced owners successfully manage their franchise. Hear from a few on our owners on the benefits of a franchise model:
See if Franchising with Neighborly® is Right for You
Facing the risks of entrepreneurship comes with the territory. But being able to mitigate those risks through proper research and supportive guidance could be the right move for you as you create your own individual business with the help of others who are already enjoying success with theirs.
Curious if a franchise with Neighborly makes sense for you? Download your free franchise guide today for more information that will explain the issues and challenges that entrepreneurs often face.
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