By Daniel Cargille
Opening a business or investing in a franchise is a huge decision and when you ultimately decide on the franchise to invest in you’re going to be locked in for the long-term. The idea can look attractive because it’s the job of the franchisor to create an alluring business plan that paints a beautiful picture of growth and profits. The fact is that no investment guarantees success. You need to ask the right questions and look over the material carefully to ensure that an investment is right for you.
Any investment can potentially tank on you, especially when you consider the current state of economic fluctuation in the US. Because of this you need to follow careful procedures to examine whether or not a franchise opportunity is the right choice for you. Use these 3 points to evaluate whether a franchise is the right one for you.
Franchise Evaluation Guidelines 1 – Hidden Costs
Frequently a potential franchise owner will miss the hidden costs associated with opening a business such as this. It’s not that the franchisor purposefully hides these costs it’s just that the costs vary depending on location, size, needs, market, etc. On top of the franchise fees you may have to deal with outfitting a location, additional rental or lease fees, license fees, inventory and supplies, etc. Depending on the franchisor you may also have to pay additional fees to get the marketing rolling for your location.
Startup lag can also create problems for a lot of first time franchise owners that don’t accurately project their capital needs for the first year. Trusting in a brand to carry you isn’t enough. It’s best to have income set aside for the first year. A good franchisor will often provide estimates on what you should bring to the table as a franchise investor.
Franchise Evaluation Guidelines 2 – Handling Marketing
Find out who will handle the marketing for the franchise – you or the franchisor? Will it be split? In some cases a brand can carry itself based on recognition and brand power but you can’t rely on this alone to carry your business. Part of your evaluation is finding out how much you have to invest in getting your brand known, launching in the local marketing and how much the company will invest in improving visibility for your franchise.
Your marketing analysis and evaluation should also include an understand of the local economy and competition, demographics, etc. Not only does this give you insight as to how well a particular franchise might do but you’ll also see how much competition you’ll have both from competing brands and other franchises within your own brand that can water down the customer base.
Franchise Evaluation Guidelines 3 – Finances
When you’re buying into a franchise you’re making an investment that you hope will pay off one you start putting real work into growing it. To ensure that you do make a good investment you want to study the financial information of the franchisor. Look over their financial disclosure documents and get a legal consult to help with this if you’re unsure of how to read the information. Pay special attention to growth and where the money comes from for the franchisor. Growth from royalties means the customer base is growing. Growth from selling franchises may not indicate true market success.
