Have you ever walked into a restaurant or shop and thought that you’d like to open a franchise?
This is how a lot of people do it. There can be a lot of impulse involved. But, should you buy a franchise business based on feeling alone? Probably not. By all means, choose a company that you have an affinity for. But make sure you do your research. Things you need to know can be categorized into three groups.
Know your Stats
Do some research into the numbers. Are many franchise owners coming and going? What is the turnover rate? If it’s high, there may be a red flag there. What about the rate of failure. If the franchises are often failing, there could be legitimate reasons. Perhaps the location was wrong, or the owner didn’t have the skills needed to succeed. Beyond this, it’s good to know what percentage of the stores/locations are franchised. If a company is putting more effort into its wholly owned branches, they could provide competition for you and your franchise. Should you buy a franchise business from a company doing this? It could prove to be a nightmare.
Know how the company operates regarding franchises
Some companies have been in business for years, and others may be new. A new establishment can still be business savvy and know what they are doing, but some might need more experience. Find out what the experience level of the managers is to gauge whether they are making sound decisions.
Further to experience, how supportive are the managers going to be? Sure you might get some fancy training initially, but is there anything after that? Another way to learn about the managers is to ask franchisees. What do they have to say? This leads us to our last group, what it’s like to be an owner.
Know what it is actually like to be a franchise owner
It’s important to visualize yourself as an owner. Who better to ask about this then current franchise owners? Find out what it’s really like to work there. Do they feel supported, successful, stressed?
Target middle of the road performers, not the stars of the company, to get an average feel. You might want to ask them if they’d buy the franchise all over again. Or, perhaps you can find a franchisee whose business has failed. Ask them if they know why and think about which reasons might be acceptable.
Before buying a franchise, consider the following:
- Start-up costs. A franchise can be a lucrative business, but some of them require a lot of cash to start. For example, to start a McDonald’s franchise, the company requires you to have liquid assets of at least $500,000. Startup costs can range between $1 and over $2 million. The franchise fee is $45,000. Some less expensive franchises to start are “Merry Maids” (minimum investment $25,000), “Wag’n Tails” (minimum investment $10,000) or “Cruise One” (minimum investment $3,500).
- Royalty fees. In addition to the hefty startup costs, you have to consider the royalty fees. McDonald’s charges 4% of gross sales. Taco Bell charges 5.5% in royalty fees. Subway charges an 8% royalty fee.
- Raw material cost. Many franchises require you to buy raw materials directly from them. Your material costs could be very high since you won’t be able to shop around. Some fast food franchisees pay 5-10% above market for their raw materials.
- Capital requirements. Most franchises don’t offer financing. Often you will have to use your personal savings or get a loan.
- Market saturation. Often franchisees sell too many franchisees, overly saturating the market. Market saturation results in diminishing returns for the franchisee.
- More of a job than a business. A franchise is in many ways a lot more a job with many rules and requirements than a business. If you want to create something entirely new, a franchise is not for you. If you want to really be your own boss, you might not be happy with a franchise.
So, should you buy a franchise business? While many use their heart to make an initial decision, research is important. If you delve into the numbers and look at global company practices, you might be in a better position to make a decision. But don’t forget to talk to franchisees themselves. They might even let you shadow them for a day or so. If so, use this time to really picture yourself in the role. Gaining this inside knowledge is going to be the most important thing you do.