Because buying a franchise is such a large decision that will impact your life in many ways, it’s important that you take your time with the decision, and properly research the franchise you’re considering. Make sure you mark these 10 tasks off your list as well.
1. Do Your Homework
No business transaction should happen without you first researching everything you can about the opportunity, and that goes doubly for investing in a franchise. The Franchise Disclosure Document includes great information about the brand, its franchises, and its revenues, so read it thoroughly.
2. Get to Know the Franchise Team
It’s imperative that you find out everything you can about the team you’ll be working with for the foreseeable future. Review the business experience, how long each individual has been with the franchisor, and any other details you can about key franchisor executives.
3. Get Clarity on the Total Investment Necessary
Simply knowing the initial franchise fee doesn’t give you the full picture of what setting up your new franchise, launching it, then sustaining it will actually cost.
In addition to paying the franchisor an upfront franchise fee, you will also be required to pay ongoing royalty payments, which are typically a percent of your monthly sales. Find out what these royalty payments cover, and whether you have any other payments, such as a marketing fee, that are separate.
4. Build Your Budget
Once you know all fees and costs that the franchisor will charge you, you can add to that costs like:
- Real estate
- Building modification
- Inventory
- Payroll
- Your own salary
- Utilities
You’re not guaranteed to make a profit in the first months of launching your franchise (in fact, your goal should simply be to break even), so build your budget for the first year, and include any and all expenses, including paying yourself. The last thing you want is to have invested so much and then run out of money, forcing you to sell or shut down your franchise.
5. Know Your Net Worth
One of the criteria a potential franchisor will assess to determine if you’re a good fit for becoming a franchisor is your net worth. This refers to how much capital you can access to invest in your franchise. What this number tells franchisors is how well you manage money and how good you will be in terms of helping the franchisor build out its brand. If you have a high net worth, this tells a franchisor that you can be a bit picky about the opportunities you pursue, and they’ll want you all the more.
6. Consider Forming an LLC or Corporation
One of the smartest decisions a new franchisee can make is incorporating or forming an LLC for their franchise. Why? Both business structures provide protection to the individual: should the franchise be sued or have debts collected, the individual’s assets can’t be touched. There are some tax benefits to each as well. In fact, some franchises require an LLC to be formed as a condition of their franchise agreement.
7. Open a Separate Bank Account
Never mix your personal financial transactions with those of your franchise! It makes for an accounting and tax prep nightmare. One of the first things you should do before opening your franchise is to set up a separate business bank account, and maybe a business checking account as well. You’ll need your employer identification number, as well as proof that you’ve incorporated or formed an LLC, so wait until you get approval on your business structure application before proceeding.
8. Know Your Financing Options
Not every new franchisee has the funds to fully outfit a new business, and even if they do, it’s often still a good idea to take out a loan to conserve cash. There are several financing options to consider, depending on your credit profile, including an SBA loan, franchisor funding, or a line of credit.
9. Choose Your Industry and Franchise Carefully
One big decision in selecting the best franchise is to decide what industry is the best fit. Ideally, you’d choose one
you have experience in, or are passionate about. Choosing an industry simply because you think it will make you rich fast rarely works. You’re better off in a field that you know something about.
Look at different franchises in the industry you land on to compare and contrast. What makes one brand (or location) more successful than another? It’s imperative that you understand what makes for a successful franchise.10. Talk to Other Franchisees
One of the perks of the Franchise Disclosure Document is where it lists the names, addresses, and telephone numbers of current and former franchisees. Take this opportunity to contact a few to get insight on their experience working with this franchisor.
Susan Payton is the President of Egg Marketing & Communications, a marketing firm specializing in content writing and social media management. She’s written three business books, including How to Get More Customers With Press Releases, and frequently blogs about small business and marketing on sites including Forbes, AllBusiness, The Marketing Eggspert Blog, and Tweak Your Biz. Follow her on Twitter @eggmarketing.