June 22, 2021
The choices you make during the purchasing process are crucial. And it all begins with picking which franchise opportunities to follow. Buying a franchise is a long and complex commitment, and if you’re like most first-time franchise buyers, it’ll be one of your largest.
There are numerous options available. According to a report, there are currently over 3,000 franchisors in the United States, with an average of 300 new companies entering the market annually.
You will not be interested in all of these possibilities. In fact, once you select what type of franchise you want to own, you start looking into geographical availability and getting a sense of which franchised brands connect with you and which ones don’t, you can find yourself deciding between only two or three franchise systems.
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While cutting down your alternatives from 3,000+ to two or three is simple, narrowing down your options from two or three to the final one is a different story. While franchises are individual business owners, their success is strongly dependent on their franchise owners in a variety of ways.
Many of the business decisions franchisors make have a direct impact on their franchisees’ operations, from the fees they collect to how much they spend on advertising and how aggressively they protect their brands. As a result, if you don’t make an informed decision, you can find it difficult to succeed as a franchisee.
With all of this in mind, how can you make an informed decision about which franchise opportunity to pursue when purchasing a franchise? When you’ve limited your choices down to two or even three to five franchise opportunities, evaluate the following 5 factors:
The initial cost
The total amount of money you’ll need to start your franchise and get it up and running is known as the initial investment. The initial investment varies greatly depending on the type of franchise. While a fitness center or restaurant can easily cost a quarter-million dollars or more to operate, a mobile franchise can be started for as little as starting at $30,000.
Fees for royalties and marketing
Once your operation is up and running, you’ll have to pay your franchisor royalties and marketing costs on a regular basis. Royalties and marketing costs are often calculated as a proportion of gross revenue, and franchisees are expected to pay on a monthly basis. There are certain exceptions, and you should read Item 6 of the FDD carefully to discover the recurring expenses associated with each franchise opportunity you’re pursuing.
Although there are some stipulations for royalties and marketing costs, franchisors are allowed to charge whatever their franchisees are willing to spend. Most franchisors may levy minimum fees, which implies you must pay a set sum each month regardless of your franchise’s sales. Furthermore, some franchisors ask franchisees to pay “lost future royalties,” which means that even if your franchise fails, you must still pay what you would have due if it had been profitable.
The majority of franchises come with the territory. The exact conditions of the franchise agreement determine what it means to be given territory as a franchisee. Some franchisors offer “exclusive” areas in which no other franchisees are allowed to sell their goods or services. Others, on the other hand, merely limit the geographical area where franchisees can spend their marketing funds.
Initial and renewal terms
When you purchase franchise opportunities, your rights are not indefinite. The initial duration of your franchise agreement will be specified, as well as a set of conditions that must be met in order to extend your franchise agreement after the original term expires.
As an entrepreneur, the last thing you want to do is labor for two or three years to establish your business and finally start earning a respectable living, just to have your franchisor refuse to renew your service contract. You may have not even recouped your initial investment at this stage. As a result, having a longer initial term rather than a shorter one is often preferable, though you should avoid locking yourself into a long-term deal with no way out if your franchise isn’t lucrative.
Operational limits and assistance
What exactly do you get for your money when you acquire a franchise? You are often paying for two things: the right to use the franchisor’s brands; and the ability to utilize the franchisor’s business process and receive support services as a franchisee. If you require assistance and are unable to obtain it, you will be dissatisfied and wish that you had taken a better franchise.
Another issue to examine is how much each franchisor regulates the activities of its franchisees. Reviewing Items 8 and 11 of the FDD, as well as meeting with current and past franchisees of each system will give you a sense of this. While you want to know that your franchisor will provide and enforce system-wide standards to ensure consistency and build client loyalty, you also want to know that you’ll have the freedom you need to grow a business.