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Dec172021
OWNERSHIP

Four Things to Do Before You Buy a Franchise

Buying a franchise can be a great way to go into business for yourself but not by yourself. It allows you to invest in an already established brand with a proven business model. While this backing can help improve your chances of success, a franchise is not merely a “business in a box.” There are multiple types of franchises and thousands of brands to choose from; all opportunities are not created equal. There are many important factors to consider to ensure you are able to maximize your business potential and achieve success. Here are four things to do before you buy a franchise to help you find the best fit for you.

Assess Yourself

Brand consistency across all locations is the lifeblood of a franchise network. As a result, there will be clear rules and well-defined processes and procedures to follow to ensure customers receive the proper brand experience. Consider your personality. If you prioritize creativity and flexibility, you might find it difficult to adhere to franchise guidelines and operate within a highly regulated system. The level of flexibility and autonomy varies from brand to brand, so be sure to take that into consideration. 

Also assess your strengths and weaknesses. Think about what you enjoy doing and what you find challenging. Be honest with yourself and consider how these factors will play into the business. 

What do you have experience in or what are you passionate about? Although you will have the opportunity to learn, it’s best to buy a franchise in a field you are familiar with. Take that a step further and compare different brands within the sector. Ultimately, make sure you understand what makes a franchise successful.

Do the Math

Start by calculating your net worth. Franchisors will use this indicator to determine if you have an adequate amount of capital to invest in your franchise. 

Next, understand all of the costs associated with starting a franchise. In addition to the upfront franchise fee, consider the cost of real estate, building modifications, equipment, inventory, payroll and utilities. Add in recurring fees as well, like royalty payments and contributions to the advertising fund. Refer to the FDD for a breakdown of initial fees, ongoing fees and an estimated total initial investment.

Once all costs have been identified, create a budget. Keep in mind it will take time for your business to become profitable. Talk to the franchisor and other franchisees in the network to get an idea of how long that may be and plan accordingly. 

Explore financing options. It’s often a good idea to borrow in order to conserve cash. Depending on your financial history, there are several options available such as an SBA loan, commercial loan, home equity loan, retirement plan or franchisor funding.

Keep Business and Personal Finances Separate

When starting a franchise, it’s imperative to keep your business and personal finances separate. Open a new bank account specifically for the business. Although it may seem easier to manage your finances from one shared account, it can quickly become an accounting and tax prep nightmare and could potentially expose you to higher risk. If all your money is in one account, a financial issue with the business could jeopardize your personal assets and vice versa.

As an added layer of protection, consider incorporating or forming an LLC for your franchise. This will create a separate entity for the business protecting you as an individual and shielding your personal assets in the event the franchise is sued or has debts collected.

In addition to protection, keeping business and personal finances separate also improves your professional image and makes it easier to determine the value of your business which is important for securing credit. It also aids in identifying tax deductions like writing off business expenses. 

Perform Due Diligence

Take the time to do your homework and research carefully. One of the most valuable sources of information for investigating a franchise opportunity is the FDD. This legal document is a gold mine of objective information to help inform your decision. In addition to the costs mentioned previously, it also contains details such as the company background, litigation and bankruptcy history, resource restrictions, support and training provided, financial statements and an outline of the franchisor’s obligations as well as the franchisee’s.

Consider hiring professional assistance. A franchise attorney can help interpret the details and an accountant can analyze the financials and aid in creating a budget.

Another great source of information is the franchise team itself as well as other franchisees in the network. Get to know the staff you’ll be working with and learn about the key franchisor executives. Talk to fellow franchisees to get a feel for their experience with the company, how satisfied they are with the franchise relationship and if they would do it again or recommend it to a family member. 

Starting a franchise is a major decision with many factors to consider. Before you sign on the dotted line, be sure to consider your interests, strengths and weaknesses, budget carefully, set up a separate bank account for the business and above all else perform due diligence to thoroughly vet the opportunity.