Key Factors in Considering a Franchise

Key Factors in Considering a Franchise

Mike Armour

For encore entrepreneurs, who often have a short time horizon for making their business fortune, buying a franchise is an attractive option.

As a rule of thumb, properly chosen franchises cash flow much quicker and provide a faster return on investment than a business which you start on your own.

There are downsides to owning a franchise, however. And the cost of entry is often rather steep.

So is buying a franchise right for you? And if so, what kind of franchise is your best choice? Here are some guidelines to keep in mind as you evaluate franchise opportunities.

Beware of the Hype

Buying a franchise is an attractive option for encore entrepeneurs

Ads from some franchisors offer assurance that it's easy to succeed as one of their franchise holders. Or they may imply rates of return that are genuinely eye-popping. The truth is, any startup is hard work, whether you franchise or not. And usually there is a direct correlation between the amount of work you put in (especially in the beginning) and your rate of return.

One appeal of franchising, to be sure, is the likelihood of success. Studies consistently show higher failure rates for businesses started from scratch than for franchised startups. Still, franchises do fail. Regularly.

In a word, all franchises are demanding, some more than others. Franchise success does not come without long hours, persistent effort, and tireless attention to details. Be forewarned, then. If you buy into a franchise believing that success is easy, you're in for a shocking disappointment.

Choose a Line of Business That You Truly Enjoy

Although franchises can be a path to riches, the path is not paved overnight. As a new franchise owner, expect that your next two or three years will be spent eating, drinking, and sleeping the business. You will rarely have time away from the business psychologically, even if you take time away from it physically.

As a result, only consider a franchise in a field which is fun for you and which will remain fun for the long term. It should be able to hold your interest and enthusiasm, even when you are putting in long weeks and juggling an endless array of startup challenges. Nothing could be more disappointing than to invest considerable money in buying a franchise and then find the management of it a drudgery.

Finances Limited? Check Out Home-Based Franchises

While many of the best-known franchised brands are brick-and-mortar establishments, other franchises can be run from a home office or from reasonably priced rental space, at least initially. Some examples are bookkeeping and payroll services. Their startup cost, including the franchise fee, is typically about $30,000.

Other franchises that are potentially home-based include those for which an office is needed only for record keeping and for dispatching workers to customer sites.

Franchises that provide in-home services are generally in this category. They include house-cleaning services, in-home care for the elderly, household appliance repair, and a host of similar businesses, such as commercial cleaning. You can usually run a consulting-type franchises from your home, as well. In fact, did you know that you can buy a franchise to help people find a franchise for themselves?

As a general rule of thumb, franchises with the potential of being home-based have a startup cost, inclusive of franchise fees, of around $30,000-50,000. There are some, however, that fall below this range.

Consider the Kind of Employees You Will Need

The type of employees you need to operate a fast-food franchise are altogether different from the employees that you would hire to provide in-home appliance repair. Early in your evaluation of any franchise, it's important to identify the type of employees you will need — their age, educational level, expected salary, how long they are likely to work for you before leaving — and ask if you are comfortable managing this kind of employee base.

Fast-food restaurants, as an example, are notorious for high employee turnover. Thus, for the owner of this type of franchise the training cycle never ends. And if the restaurant is in a small community, with a limited number of young people, the challenge of finding replacement workers is ever-present.

Know How Much Advertising Freedom You Have

One benefit of franchised startups is that the parent corporation normally carries on an active marketing program to increase the brand's recognition. Your franchise fee and annual royalty payments underwrite this advertising. But to what extent do you, as a franchise owner, have the freedom to advertise locally to directly benefit your business?

You may be surprised to learn that franchisers may not allow you this option. To cite a single example, owners of a Sprint franchise are sharply curtailed in terms of marketing. Any advertising that they undertake must first be approved at the corporate level. And no advertising is allowed to promote their store specifically. They can only promote the general Sprint brand.

As a result, Sprint franchise owners can't use direct mail, door hangers, email, web sites, or radio advertising to drive business to their store.

Ferret Out the Details When Comparing Franchises

When you begin to research franchise options, you quickly learn that there is no standard way for franchisors to describe the franchise fee in their advertising. Some will quote a figure which is the total cost of the franchise fee plus other typical startup costs. In other cases the fee quoted is the franchise fee only. Unless you read carefully, you can easily be misled.

Take the case of a UPS store. Ads on the web for UPS franchises speak of a minimum cash requirement of $60,000. On investigating deeper, however, you will discover that the franchise fee for UPS stores is several times that figure and differs according to size and location. Based on these factors the actual franchise fee can range from $150,000 to $350,000.

Why, then, the $60,000 figure? Because you cannot apply for a franchise unless you demonstrate that you have $60,000 in liquid assets (which can include retirement accounts or the combined resources of you and any partners). Thus, the minimum cash requirement is a qualification criterion, not the actual franchise fee.

Look into Franchisor Help With Startup Financing

Especially for a bricks and mortar business, the franchise fee may be only a fraction of the total startup cost. To illustrate, a McDonalds franchise fee is only $45,000. But the actual startup cost for a McDonalds restaurant ranges from one million to 2.2 million dollars. Even if you have $45,000 in hand, where do you find the balance of this cost?

Some franchisors assist with your financing, others do not. Burger King states up front that it "does not generally offer any direct or indirect financing to Franchisees." The franchising web site for Jack in the Box does not even mention financial assistance. You soon learn why when you read that to qualify for store ownership you must prove your financial ability to open a minimum of five stores and have a cash liquidity of $750,000.

Other franchisors are much more active in facilitating franchisee loans. Some have a lending entity that is a subsidiary of the corporation. Other franchisors have an affiliated lender with whom they work closely. As a minimum, most franchisors will assist you in finding a third-party lender familiar with their type of business.

Even though it is not financing per se, a few franchisors also allow the franchise fee to be amortized over several years. Or they may waive annual royalty payments for the first few years if you establish a business in a critical area for brand expansion.

A Final Word

As you can see, not all franchises are created equal. To step into this arena is to commit yourself to extensive due diligence on the front end. Franchises are usually for five to ten years, although some (like McDonalds and Jack in the Box are for 20 years). You are therefore going to live for years with your decision to purchase a franchise. Be sure you make the decision wisely.

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