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The Financial Investment in Buying a Franchise

A large investment doesn’t mean a larger return, just as a smaller investment doesn’t mean a smaller return. Aside from the initial investment, you will also need to cover the start up period of owning a franchise and gearing up to your breakeven point. You can purchase a franchise alone or have business partners. Your business partners can be silent or active in the franchise business.

A well conceived, comprehensive business plan is crucial. You must clearly and convincingly communicate what you intend to accomplish and how you plan to achieve your goals. The experience of writing a business plan forces you to become more focused about your specific business. Be realistic with your expectations. Optimism is great to have but unrealistic expectations create skepticism.

Finding the Right Fit in Selecting a Franchise

Does the franchise require technical experience or special training? If so, does the franchisor offer training for you and is there a cost to that training? Are you able to continue your training along with any employees or staff after your opening?

Do you have a special skill set that you can apply to owning a franchise specific to the concept? What experience do you have as a business owner or manager? Will your experience be directly applied to owning a franchise?

Evaluate the Franchisor’s Experience
Many franchisors operate well-established companies with years of experience. However, there is no guarantee that a successful business experience translates into a successful franchising experience.

Consider the following when evaluating a franchisor’s experience:
  • How long has the franchisor managed a franchise system? A franchise may be built on 50 years of experience in an industry and only a few years as a franchisor. The franchisor should have several years experience managing franchisees with a solid track record of success.
  • Does the franchisor have corporate locations and how successful are those locations?
  • How long have the community of franchisees been in the system? What do they say about the training, support operating systems and integrity of the franchisor?
Your Financial Goals in Owning a Franchise

When buying a franchise it is important to consider your own financial goals.

Here are some questions to answer in selecting the best franchise to meet your financial goals:
  • How many hours are you willing to work?
  • Do you intend to operate the business yourself or hire a manager?
  • Are you in this for the long-term?
  • Would you like to own a single outlet or expand to own multiple franchise locations?
  • Can you cover any unforeseen down periods?
  • Do you have a stake in the business?
  • Do you have a positive frame of mind?
  • Can you follow a proven system?

Buying a Franchise is Buying a Brand

The more widely recognized the name, the more likely it is to draw in customers.

Consider the franchisor’s brand and differentiators and ask yourself the following:
  • Does the company have registered trademarks and licensing programs that offer immediate name recognition?
  • Does the franchise opportunity give you rights to a company’s reputation for quality products and services?
  • Does a higher number of franchisees mean the better it must be?

The larger a franchise becomes the more franchisees will benefit from heavy advertising which will build the brand awareness. A synergy begins to be created in which success begets success. The franchise begins to squeeze out competition through its sheer size. The franchise can buy products in large quantities at significant discounts, which is passed on to the franchisees. The synergy just grows and grows.

Using a Franchise Broker

Franchise brokers help people who want to buy a franchise. They often advertise on the Internet and in business magazines that they will help you select among various franchise options.

When choosing to work with a franchise broker, consider the following:
  • Do they have a profiling system to identify your strengths and weaknesses?
  • How will they introduce you to a franchise model that will play into your strengths?
  • Will you be matched to a reputable franchise?
  • Keep in mind that it is your investment and to research every franchise in their inventory through validation with the franchisees.

Understanding the Franchise Disclosure Document

Under the Franchise Rule, you must receive a franchisor’s franchise disclosure document at least 14 days before signing any contract or paying any money to the franchisor.

Consider the following when reviewing a franchise business and their franchise disclosure document:
  • Franchisors are not required to disclose information about potential income or sales. If they do, by law they must make the substantiation for their claims available to you. This is called Item 19 or an earnings claim.
  • A franchisor may claim earnings by an average income. For example, an $850,000 average sales statement could be based on totals from a select pool of stores or a wide range of data.
The FDD (Federal Disclosure Document) will outline the following:
  • The franchisor and any parent, predecessors and affiliates
  • Business experience
  • Litigation
  • Bankruptcy
  • Initial Fees and other fees associated with the franchise
  • Estimated initial investment
  • Restrictions on sources of products and services
  • Franchisee’s obligations
  • Financing
  • Franchisor’s assistance, advertising, computer systems and training
  • Territory
  • Trademarks
  • Patents, copyrights and proprietary information
  • Obligation to participate in the actual operation of the franchise business
  • Restrictions on what the franchisee may sell
  • Renewal, termination, transfer and dispute resolution
  • Public Figures
  • Financial performance representations
  • Outlets and franchisee information
  • Financial statements
  • Contract
  • Receipts

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Published on: 2011-04-24 (1827 reads)

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