Buy a franchise

You minimize many risks of a start-up: the brand is established, the marketing is developed, the operating procedures are in place. You can put your time and energy into your operation.  Access to funding may also be easier since there are many organizations that fund franchises. There is also typically a robust market in which to later sell you franchise, which makes your “exit strategy” more predictable.

• Your finances: Determine how much you’re willing to invest to purchase the franchise and for the initial costs of running the business.
• Your talents and personality: Be honest about your skills and personality. For example, if you prefer to follow a formula, then franchising might be best for you. On the contrary, if you’re an experienced business owner, or like to do things your way, you may want to consider buying an existing business or starting your own.
• The full cost of ownership: Make sure you understand what comes with a franchise purchase. In addition to the purchase price, there could be initial inventory requirement, start-up fees, state, local, and federal taxes, ongoing royalty fees, marketing fees and others.

It depends on what you want from the franchise. If you want a reliable revenue stream and are happy to hire someone to run day-to-day operations, you have a range of choices. If you want to be actively engaged, and part of an industry for which you have a passion, and you have found a franchise that excites you, that could be good indicator that it’s right for you.

• Industry: Can you see yourself aligned with the market segment of the franchise and are you comfortable with the nature of the work that would be required of you personally?
• Track record of franchise: How long has the franchise been in business?  Does it have a good reputation? Does the franchise provide active support, especially in the initial phase? Have you gotten good feedback into day-to-day operations from franchisees?
• What you will be required to do: Are you a person who can learn another’s procedures, and willingly follow them, even when you would do it differently?  Can you commit to the time required? Are you good at evaluating employees? How much paperwork will you personally have to do?

The cost to buy a franchise varies by franchise system and location. The average initial investment for a single unit franchise is between $100,000 and $300,000. But franchises can be as low as $10,000, or higher than $500,000. Typically, you will need a minimum net worth and annual income (not including the franchise’s projected income) that all but guarantees you have sufficient capital to fund and run the business or qualify for financing. Then there are fees once you own the franchise.

• For an existing franchise location: If you do not have a strong financial background, review the finances with an accountant or your financial planner. Most financial items to be reviewed are the same as for purchasing an existing business - the financial records for the last three years: the profit and loss, the balance sheet, and the cash flow. Look at revenue growth year-over-year. Have expenses or debt increased as a percent of revenue?  Are accounts payable current? Some red flags include a business that has negative cash flow, significant debt, or has not been able to pay its taxes, royalities, or other franchise fees.
• For a franchise opening in a new location: You will be reliant on financial information from the franchisor. These pro forma statements are estimates used to project earnings, receivables, inventory or other quantifiables. Speak with other franchisees.  Depending upon the opportunity, a physical building may have to be constructed so you will want to keep in mind all that entails. Dig into market research - does the financial projection seem overly optimistic based on your knowledge of the location, the demographics, and economic trends?