Question: I currently own a small business that is successful, but is not a franchise. I am looking at buying a franchise-based business. What is the negative side of owning a franchise? What are the major concerns to look for with owning a franchise company?
Answer: Of course, there are many successful franchise concepts and franchisees; however, franchise license terms, financial requirements, site location and other aspects of franchise opportunities need to be researched like any other new business venture. We have provided helpful suggestions and industry information below to help conduct your due diligence on a franchise opportunity. Also, even when starting a franchised business, a business owner should develop a comprehensive business plan to assess the feasibility of the business, analyze the local market potential, determine the capital requirements, and evaluate other elements for successfully launching and implementing the business. The following are some suggestions for assessing an opportunity.
A. Franchise evaluation: Due to the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch. Also, surveys show that the success rate of franchised businesses is much higher than businesses started from scratch. The start-up costs (franchise fees, inventory, etc.) may be higher and you have ongoing royalty costs; however, buying a franchise can be a very effective method to enter a competitive business and quickly gain market share due to the immediate name recognition.
The typical pros of a franchise are stronger brand recognition and support services — operational, marketing and product purchasing. The typical cons are the higher investment costs, license restrictions and royalty fees. A mature regional or national franchise generally offers less risk, but you still must thoroughly analyze the local market competition, demographics, start-up costs, sales potential and site selection to make a new business venture decision.
Franchising laws vary by state, but generally a franchisor must have a Uniform Franchise Offering Circular (UFOC) that explains the concept and franchisor support. Franchisors are limited on the financial information and projections they can provide to potential franchisees, but with franchisor, franchisee and industry information, you can obtain a good understanding of the operating potential of franchise operations. While comparable data is useful, every business has to develop its own revenue and expense budget and other financial projections based on planned staffing, facility costs and other assumptions for the specific business operations.
If you determine that purchasing a franchise is the best approach for you, we recommend that you use a local lawyer and financial advisor to help you analyze the concept and franchise agreements.
B. Business background: As to checking on a particular business or company, you can use the following methods:
1. Contact other franchisees or others that have worked with the company: The franchisor should have a list of franchisee references, but keep in mind that companies will only provide references they know are satisfactory.
2. Visit important websites: Check out the Better Business Bureau, the State Consumer Protection Services, the Secretary of State and the Dun & Bradstreet Credit Report.
C. Business plan: As we discussed above, in addition to evaluating the franchise opportunity, you will need a business plan in order to develop your financial projections and marketing strategy and consider other operational aspects for the business. Experts agree that the best way to start a new business and improve your odds of success is with a comprehensive business plan. Preparing a comprehensive business plan requires the individuals starting the business to think through the steps required in order to start, grow and manage their enterprise.
Writing a business plan can involve many issues — researching the market competition, researching trade area population demographics, feasibility study, site selection, staffing, capital requirements, marketing plan, insurance, financial projections, state and local licensing, business entity selection and formation, operational issues and others. While there is no single formula to developing a business plan, and while one plan may be more elaborate and detailed than another depending on the specific needs of the business, some elements are common to all business plans.
Writing a comprehensive business plan can be a challenge; however, it is generally a manageable process with a good outline and use of other business plan tools and samples. Outlining the business sections and topics you need to cover helps you develop accurate and concise information for each section. One suggestion would be to review business plans for similar enterprises and use one or more as a template to think through the process and help you develop your marketing strategy, financial projections and other elements of your plan.
Often local professionals (accountants, CPAs, consultants) can be helpful in developing the marketing strategies and financial projections for a business; however, in order to minimize the cost you will need to do much of the research and planning yourself. For free professional assistance, the Federal Small Business Administration (SBA) sponsors Small Business Development Centers (SBDCs) that provide personal assistance with business plans and the volunteer Service Corps of Retired Executives (SCORE) offer small business services, but they too will require you to do most of the research.
About the Author
Bill Wade is a serial entrepreneur who has founded or co-founded over 25 companies since 1989. Bill thrives on the success of others and started Company.com with businesses in mind. Company.com ranked #10 in the Business Products and Services category in the Inc.5000 for 2015.
All content provided herein is for educational purposes only. It is provided “as is” and neither the author nor Office Depot, Inc. warrant the accuracy of the information provided, nor do they assume any responsibility for errors, omissions or contrary interpretation of the subject matter herein.
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