Buying a franchise can be intimidating and it's important to ask the right questions before you make one of the most important decisions you'll ever make. I've compiled a list of frequently asked questions when buying a franchise which I hope will help you understand our world.
Most importantly, there are no silly questions. Buying a franchise is a complex process and the answers to many of these depend on several factors which is why using a franchise advisor is a wise choice. Our services don't cost the buyer but not using our services might lead to costly mistakes.
- What’s hot in franchising right now? Answer: not important. Yes, there are franchises that catch a lot of people’s imagination at the same time. There’s one every year or two, and they sell like hotcakes. Sometimes they are great opportunities, sometimes not so much. Pay attention to your own needs, your own strengths and weaknesses, and try to understand whether any given opportunity really makes sense for you. If you get sucked into something just because it’s “hot” right now, you may be in for a rude surprise later.
- Can I own a franchise without leaving my job? Yes, you can. The majority of franchises do still look for an owner-operator who will devote themselves to the new venture full-time, at least during the launch and early ramp-up period. But there are also many opportunities that are set up for what is called “semi-passive” ownership. Usually this means hiring a manager to take care of the day-to-day business, while you focus on the bigger picture: things like real estate selection and buildout, hiring the manager and the initial team, and then managing the manager. But don’t underestimate how much time might be involved in those semi-passive activities. Also, bear in mind, a business run by an outside manager is usually going to be more expensive to operate and take longer to break even, for the simple reason that you have to pay the manager. On the other hand, if you are paying the manager a lot less than you are earning in your own day-job, this could still be a good deal and save you money.
- Can I launch a business together with my spouse? Yes, and in fact this is one of the best ways to go into business. (Provided, of course, that your spouse wants it too!) A married couple has several advantages over any single individual in a business startup. First of all, two heads really are better than one. You’ll be collaborating, which is definitely better than being on your own with your worries and challenges. Second, one partner can give full-time attention and all that new-owner creativity and energy to the venture, while the other maintains a family income to hedge your bets financially. Third, this means that you can usually qualify for better loan terms as well, because the lenders see a steady source of income for repayment.
- What happens when the franchise agreement expires? These are typically 10-year agreements, but if you are in good standing you will normally have the option of extending once or multiple times. You won’t pay the franchise fee again, but you will pay a “renewal fee” of anywhere from a few thousand dollars up to 20% or even half of the then-current franchise fee, depending on the specific franchise agreement that you sign. Importantly, you will renew on the then-current terms offered to franchisees. Could be different royalties, etc. Still, this remains your business, and it’s in nobody’s interest to close you down if you are doing well.
- What if I want to get out of the business again before the franchise agreement expires? A: don’t go into franchising as a short-term opportunity. Even if a venture is not going optimally, it would be a shame to just walk away and close up shop. Sometimes the franchise even has legal recourse or a penalty that they could theoretically levy to keep you from doing that. But even without this, you don’t want to abandon your business. What you would prefer to do, if you want to move on, is sell it; and this is very much an option with a franchised business. The franchisor may even help you do it. If you’ve built something of value, you may get a substantial multiple of cashflow from a buyer, letting you exit with a windfall to supplement the annual earnings you enjoyed while you ran the business. One thing you do have to be aware of if you are selling is that the franchisor has a veto right over the buyer. Just as they got to know you before awarding you the franchise, they will want the new owner to be a good fit for their system, too. But it’s not in their interest to prevent the deal – they would much rather have a new owner than have you close your business leaving nothing in its place.
- What kind of opportunities are out there in franchising? A: a tremendous range of opportunities. Definitely not just food, and not just McDonalds. There are some 4,000 franchise systems active in the US. These range from one-person, home-based opportunities, up to multimillion dollar ventures. The business sectors I work with range from Advertising to Vending Machines and cover just about everything in between.?
- Will the franchisor require me to open up more than one business? One thing specific to franchising is that in many systems you can scale up with a cookie-cutter approach. Some successful franchisees own literally dozens and dozens of locations. And there are some franchises that are only interested in signing up new owners who plan to be empire-builders. They might have a minimum requirement of 2, 3, 4 or more locations. But this is not usually the case. Most franchises will welcome you as a new single-unit franchisee, if they believe that you will be successful in the business.?
- Why is the franchisor insisting that I have to open multiple locations? This does happen sometimes, and it usually means that the franchise is trying to pace itself in terms of the growth of its support structure. Signing up 50 new single-unit franchisees all at the same time means a mountain of support work for the franchisor to get everyone trained and successfully launched. It’s a lot easier to support 10 franchisees with 5 locations each. This is especially true because those multi-unit franchisees will be starting out with one each and expanding into their second, third, etc, locations gradually, gaining experience and knowhow as they grow. By the time they have opened their 5 locations, they will probably not need much support from HQ at all anymore. They may in fact be well-situated to enhance the system’s further growth by providing some support services themselves for new franchisees.?
- How much money can I make? There are franchises where the average business owner makes $200,000 or less in revenue per year, and others where the top performers have net earnings deep into the seven or even eight figures. It does depend to some degree on the business model you select. For example, if you launch a carpet-cleaning business in which you are the sole cleaning tech, you are likely to have a much smaller business and a lower profit potential in the short term than if you launch a used-car dealership with a vast inventory and dozens of full-time employees. On the other hand, over time, the lion’s share of your outcome will depend on you. Over a long enough period of optimal management, that carpet-cleaning business can expand to become a million-dollar empire; or if mismanaged consistently, that car dealership can go broke. If you are looking for specific numbers, your best course of action is to interview the franchise’s current franchisees to find out how they are doing, and base your own likely performance on that.?
- What is the most profitable franchise? This is the wrong question. There are business models where the average annual earnings per franchisee can be 2-3 times more than their initial capital outlay. Or even more. There are others where this number is closer to 15% per year. But these averages obscure the fact that every average has a variance: there are some franchisees in every system who are doing much better and others doing much worse than the average. And this is actually by far the more important information. The real question is not which franchise is the most profitable on average, but which business will you be most profitable in. In other words, which one is most suitable for you, given your specific situation, your skill-set, your preferences and personality, your family situation, geographical location, age, appetite for work, role and contacts in your local community, etc, etc, etc.? Business ownership is not a one-size-fits-all sort of thing. Is this a business you will love and therefore devote your best efforts to? Is it a business that will require skills and personality traits that you have to offer? As a result, are you likely to be among the top performers or the bottom? Those are the right kinds of questions to ask.
- How much will I have to invest? That depends on you. There are business opportunities you can get into for under $10,000 (though not many), and there are some that will cost several million dollars, and there is everything in between. Things factoring into the cost of the investment include the size and location of any brick & mortar facility you will need, the amount and type of remodeling, furnishings, vehicles & equipment, the size of your initial team, the expected ramp-up period prior to profitability, and so on. In addition, make sure you know what you are going to be living on while the business ramps up, before it becomes cashflow-positive. In some business models, this may be many months or even a year or more. Find out during your research what kind of a breakeven period to expect, and be ready for that. Whichever business model you are contemplating, don’t go into a venture under-capitalized.
- Do I have to come up with the whole investment amount in cash? No, you don’t. As a rule of thumb, if you are applying for a Small Business Administration (SBA) loan, you will probably need to come up with 20-30% of the total investment amount yourself, as your equity contribution to the venture, plus you may be required to have a certain amount of liquid capital in reserve (what is called post-closing liquidity). For example, for a $500K project, you may need to have $200K, consisting of $100K to $150K in equity plus another $50K to $100K in reserve. But SBA loans are not the only way to go. You might be able to get a home equity or portfolio loans, both of which would be cheaper than the SBA. Alternatively, maybe equipment leasing or a non-bank lender would work. Some franchisors are even willing to carry the cost of the franchise fee for up to several years or to trade off a lower franchise fee in exchange for a higher royalty. Also, don’t forget about retirement-account rollovers. Those are not debt. They allow you to utilize your 401(k) or other retirement funds, investing in your own business instead of in the stock market, without facing any tax penalties for early withdrawal. These retirement-account rollovers are a very popular means of financing a franchise.
