This is a guest blog post by Bob Steinberger.
Many people entertain the idea of becoming their own boss, striking out into the world of business and controlling their future. Franchising is an amazing opportunity that makes this dream a reality for thousands of franchisees. However, once you have decided that you are interested in becoming a franchise owner, the process of choosing that right franchise for you can be very complicated.
There are some best practices, such as considering franchise fees, understanding your passions and seeking help from others, that we will discuss in this article to help you on your journey towards finding the right franchise.
Investing in a Franchise
Depending on the franchise, the start up costs and franchise fee, purchasing a franchise may be one of the largest investments you ever make. With the ability to replace, and hopefully drastically increase, your income, the earning potential makes many franchises well worth the investment.
But others are marked with extravagant franchise fees and poor success rates.
Because of the discrepancies in the cost and values of franchises, you as an investor need to evaluate what you are receiving in relation to the fees you are paying. Some complexities in business models merit the support and guidance from the franchisor. Other times the franchise’s brand recognition pays for itself.
Whether it is the business model, the recognition or systems in place, make sure that you are making a wise investment with that particular franchise. For example, if you were to buy into a taco franchise that had an initial investment (start up costs and fees) well beyond $300,000, you might reconsider, knowing you could start your own taco business for potentially a fraction of the cost.
Understanding Your Passions
Likely you decided to buy into a franchise because you are looking for the support of a successful business model and a franchisor. However, some decide to franchise because they simply fall in love with a specific business.
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No matter where your inspirations come from, it is important to consider three primary motivations:
- Industry Based: choosing your franchise around an industry, product or service that you are passionate about
- Schedule Based: choosing a franchise that allows flexibility in scheduling or develops a schedule that fits with your life
- Earning Potential: choosing a franchise based on the opportunity for high income earnings
When evaluating franchises, make sure you identify the importance of each of these motivations and how they relate to your life. By choosing your franchise, you will be choosing a new career and investing a large majority of your time to make it successful. You need to be in an environment where you are passionate about the business and willing to put the needed energy into making it successful.
Investigating the Franchise
Once you have narrowed down your franchise selections, it is incredibly important to do some research on the franchise and its history. Franchisors provide audited financial statements in the Franchise Disclosure Document (“FDD”) so you can understand the financial strength of the franchisor. In addition, some franchisors provide potential franchisees with earnings claims or a range of how other franchisees are doing financially.
This will help the franchisee understand how long it will take to turn a profit, how much staff you will need to hire/train, where the best locations are for the retail store front, etc. By understanding all of these details, you can choose a franchise that both fits your passions and will be successful to the degree that you are hoping for.
With new franchises constantly entering the marketplace, researching and evaluating franchises can be overwhelming. You are not alone in this process. There are several sources you can look to for support, including brokers and consultants.
Consultants require a fee, but give you unbiased advice and research on current franchises. Brokers make their money based on the sale of the franchise, which is based on a cut of the franchise fee. Make sure to evaluate the credentials of your support, as well as their motivations. If the broker you are working with only presents high fee options not completely aligned with your needs, it might be time to seek out a new broker.
The Paper Work
Once you reach the buying process, you will be presented with a mountain of paperwork, disclosures and other legal agreements. The 23 mandatory disclosures in the FDD alone fill an entire binder, marking out exceptionally important information such as obligations, fees, litigation, restrictions, renewals, royalties and more.
While the presentation of the disclosures is supposed to give you transparency when it comes to the franchise, unless you happen to have a business law degree on the side, odds are you will feel overwhelmed and confused.
This is the point where good legal counsel comes in, helping you wade through the paperwork and actually see the business and specifications clearly. A good franchise lawyer will also help you evaluate the legitimacy of the requirements, as well as protect you throughout the process. This includes ensuring you understand all the nuances or other binding agreements, such as what happens in the event of litigation, and issues related to termination or royalties.
Buying into a franchise can be an incredibly rewarding and profitable endeavor, but like with any investment, buyers need to be well educated about all aspects of the franchise they choose. Not only are you making a large investment, you are tying your professional career and income to the success of the franchise. Make sure to do your research, understand your passions and seek help in the final evaluation, and you will definitely increase the odds of finding the right franchise for you.
Bob Steinberger is a lawyer that specializes in franchising and a part-owner in a video game franchise. For additional content from Bob, please visit www.legalmattersllp.com.
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