Is Franchising Entrepreneurship?
I have many people who say, "I want to start my own business, but I don't have any ideas." I look at them sternly and reply, "it's okay, have you thought about franchising?" which usually elicits a skeptical expression.
Franchising gets a bad reputation. However, with the right approach and franchise, you can own a business and get a crash course on managing it all-in-one. So how is that bad?
Franchising is when an individual enters an agreement with a business to use their name, likeness, and methods at another location to sell products or services. McDonald's, Dunkin’ Donuts, and H&R Block are all franchises. In a franchise agreement, an individual pays annual royalties for the use of that business’ brand. In return, the individual gets training, trade secrets, marketing assistance from the parent company, and ongoing support. There are over 100 franchises in various industries, which range from home cleaning to fast food. The one downside to franchising is the associated monthly fee required to be paid to the corporate company for the right to use their name and brand. The upside is that much of the advertising is planned by the corporate company.
Typically to franchise a business, you submit an application that usually involves evaluating your experience and assets. If your application is accepted, you pay a franchise fee and are typically offered training before launching your business. So how do you know if franchising is right for you? How do you evaluate a franchise? Here are a few thoughts:
Choose a company and industry that you are passionate about. It will make staying up-to-date about trends easier due to your natural affinity for them.
Get to know the company to make sure you are a good fit. Though it may not seem like it, franchising is a two-way street. Just as they evaluate you to see if you would be a good franchisor, you must assess them to see if they would be the right partner for you. Speak to other franchisees and learn the support services that the corporate office provides you with. Words are always different from actions. The best way to gauge a franchise's performance and its corporate owners is to ask the people who have engaged with them daily.
Check their cash flow. As an entrepreneur, you want to generate profit. Franchises are great because they give you a proven method of running the business and generating revenue. However, it is your responsibility to exercise due diligence. Revenue does not mean profit, and depending on your business, location, the type of services or products it sells, and the franchise fees, their average revenue may not be typical for your franchise. So, make sure to check the cash flow and take into account your local state fees to compare. This will help you identify if the business is profitable.
Decide your role in the business. As a business owner, you will wear many hats. However, as a franchiser, your business may be open more hours than a typical work week. Will you hire staff and hire a manager, or will you serve as the manager? Whatever you decide, identify how many hours you can commit to working at your franchise. It is vital to understand this because you may not want to be stuck behind a cash register if an employee calls out sick. Once you determine what you want to do, choose a franchise that will give you that freedom.
Learn their vendors. Whether it is services or products, you may have to utilize vendors to sustain your business. Identify if those vendors are readily available to you in your location and if the corporation has requirements or limitations on who you can do business with. This is very important because if you can't get a particular vendor or that vendor goes out of business one day, it could significantly impact your business. It is essential to understand those dynamics because that will affect your bottom line as well. Finally, make sure to learn the exit strategies if you decide to end your franchise agreement.
Life happens, so there might be a time when being a franchise owner is not the right fit. If that is the case, you need to know what obligations, if any, you owe the corporation if you decided to close a location or want to walk away. Options like selling or transferring ownership may be available, but you’ll need to know how those options are vetted.
Once you have found a franchise you want to partner with (yes, it is still a partnership) consider the location and your ability to drive traffic to your business. Even though you may receive marketing support from your parent company, you need to identify how to complement it because, frankly, the more business, the better. Essentially, your location can make or break your franchise agreement. Many franchises have rules that they will not put locations within a certain radius of each other to ensure you are not taking business from a fellow franchisor, so recognize how that impacts your franchise.
Finally, it would help if you enlisted an expert such as a franchise lawyer and/or franchise broker to assist you in this decision. Overall, owning a franchise is still a great opportunity and offers a unique way to be an entrepreneur.