Chris Conner has spent the last decade in the franchise industry working with several hundred franchise systems in management, franchise sales and franchise development work. Currently the president of Franchise Marketing Systems, Chris holds a B.S. from Miami of Ohio in Oxford and an MBA in Finance from DePaul University.
Below he shares four steps that will help those interested choose the right franchise for them.
Franchising is an incredible segment of small business. It truly can be the gateway for new entrepreneurs to learn how to start their own business and allow those who haven’t felt comfortable taking that first step into entrepreneurship to take the leap. Not all franchises are created equal and the reality is that the franchisor and in particular the CEO of the franchise system has enormous impact on how successful or unsuccessful a franchise system might be in its endeavor to scale through franchising.
The great franchises have one common trait: the franchisor looks to the franchisees as their partners and cares about them as much as they do their own businesses. When it’s done right, it’s hard to find another business vehicle that can match up with the speed, power and capacity for growth, empowerment and true leverage for both the franchisor and the franchisee. So when that investing opportunity comes forward, here are some tips I’ve found for myself personally and in working with franchise owners to help them choose the right franchise to invest in.
First, make a decision whether you should be a franchisee or a true small business owner.
Small business owners or genuine entrepreneurs have a hard time following rules and enjoy the complete freedom of making unhindered decisions as they run their business and take their own risks in building their brand.
A franchise owner is someone who prefers the structure, guidelines and proven business system that comes with a franchise offering. Franchisees are not generally as 'ego-driven' and are comfortable falling in line with a franchise brand’s overall requirements and guidelines. Decide which side of the road you are most comfortable on and you will avoid the long term headaches of choosing a path you don’t naturally fit into. If franchising is the choice, continue on with your search!
Second, identify your financial capacity to start a business.
Generally, most franchises will require that you have a certain amount of fixed capital to start your business. This amount might be for equipment, construction, inventory, supplies and other items needed to open the doors and start the franchised business model.
These tangible items can be added up and in a franchise disclosure document (FDD) should be itemized in the Item 7 disclosure helping you understand how much money will be needed to open the franchised business. Whatever that number is, say $100k to start the business, I would recommend having double that amount before you consider starting the business.
The additional $100k in this scenario would be used for working capital and funding needed to get the business to break even cash flow. If you are planning to finance your new franchise, you need to have a 680 credit score minimum and whatever the total amount is you aim to borrow, you should have 30% of that amount in cash and have a total net worth of 1.5 times that amount. So for our $100k hard cost business, I should have $200k in total funds which if I intent to finance, I should have $60k in cash and a net worth of $300k. The quicker you identify these numbers, the less heartache you will suffer in falling in love with franchise systems you can’t afford.
Third, research markets before you research franchises.
Knowing that the franchise you are getting into has market opportunity should be your first target. Once you have identified the markets with the greatest opportunities, then you can nail down the franchise brands that you connect to. Very often, people fall in love with a franchise brand first and then convince themselves that there is a market there to support their love interest and a bad business decision is made. Great market research can be done on the web or through free and paid market research data you can access through a variety of databases. Put together your plan, then find the franchise system that helps you achieve that plan.
Fourth, interview the franchisor like you would the most important life decision you’ve ever made.
This is a business partner, marriage and family decision being made, don’t take this lightly. Understand the terms of the agreement you are getting into with the FDD/franchise agreement and really get to know the franchisor. The good franchises are lead by people with integrity, vision and a deep concern for people who invest in their system. You will feel this when you find the right franchise marketing system when the people behind the brand come across as genuinely interested in you.
Franchisees from a healthy franchise system will respond to your questions with glowing remarks as opposed to rehearsed referral scripts. Take the time to get to know who you are doing business with and make sure they are a fit for you personally and professionally.