Franchise Q&A

I need to clarify something here. I have heard many people say they would like to have a certain franchise because it only cost x amount of dollars. When you buy a franchise, you pay a franchise fee, it is like paying your initial membership fee to a gym. This is not the total cost to open and run the business to the point of break even. The total cost to get started will be located in item #7 of the Franchise Disclosure Document (FDD).

Franchises are regulated by the Federal Trade Commission (FTC) so the information in the FDD must be true, correct, updated yearly and it should give a low or minimum to an approximate maximum to start the business. Generally it will include franchise fees, furniture, fixtures, marketing and advertising, deposits, computers, working capital for a few months, salaries etc. It is important to gather as much information on this as possible and verify it with several franchisees during validation calls. You want to know how much it is going to cost and be prepared.

Depending on the type of franchise business you are buying will depend on the total cost to start your business. The franchise business could be 50k for a home-based and into the millions for a brick and mortar.

Understanding your financing options early on in the process is important. You don’t want to get all excited about a franchise then find out you cant fund the business. Depending on your situation will largely depend on how you choose to fund your franchise. There are franchise lending companies, your local bank, credit union or small business development center. All of these sources should have SBA loan products, be able to help you understand using retirement funds to start a business without tax penalties and can help you determine the best program for your situation. The franchisor, an adviser, a franchise consultant, the IFA (International Franchise Association) and sometimes a book or magazine can lead you to good franchise lending companies.

Most good franchise companies will have net worth requirements and that can vary greatly from one to the next. The reason they have net worth requirements is most businesses fail due to lack of capital. Generally you can see a range from 50k for a home-based franchise to a few million dollars net worth for a brick and mortar type franchise.

This is a difficult topic. Most people believe the only way to be successful is to have a business they are passionate about. The best way to look at this is to understand your strong skills and what you like doing most in a days work. Let me use myself as an example. I have a passion for bicycles, I can talk about bicycles of any type all day, and I am very good at tuning, repairing, and overhauling bicycles. I have worked in a few bicycle shops and enjoyed myself very much. Many of my friends have suggested I open a bicycle shop because I am so passionate about them.

I live in a state that is very seasonal for this sport, so it is busy for a few months and slow for several months. I would need to incorporate some winter sports and possibly exercise equipment to stay busy and profitable. This is not a problem because I have a passion for winter sports and fitness of any kind. The problem is this. I love interacting with people, finding out about them, educating them, and helping them find what makes sense to them. A bicycle/sports shop owner would be best served as a manager of people, inventory, profits and losses. The owner’s role in a retail environment would not match my daily activities passion or my skill sets. So I would not be a very good bicycle/sports shop owner.

Any business that would have me networking with people and providing solutions as the owner is going to work well for me. The knowledge and passion for the product or service will come if I believe the product or service is good and is wanted and needed by my customers. Having a home based business educating people about entrepreneurship and helping them find and evaluate opportunities is not something I would have ever dreamed of until I had someone help me understand my skills and interests. 

Understanding the owner’s role when looking at a franchise should be considered more than passion or knowledge of the product or service. If you have a passion for the product or service but your role as the owner is not what you are great at or like doing, chances are you will not be very happy and vise versa.

Not all franchises are created equally, so don’t assume because it is a franchise that it is a good company. I encourage people to read a book or two about franchises and consult with a franchise attorney or accountant. The quickest way to navigate through them is to work with a franchise consultant. Working with a consultant will take out much of the guess work and save you a lot of time.

Franchises will charge you the same if you use a consultant or not. Legally they must charge every new franchisee the same, so even though they will end up paying the consultant for bringing them a qualified candidate that becomes a franchise owner, they cannot charge you more or less. If a consultant is charging you for their services, find a new one, this should be a free service to you.

The franchise companies you are looking at should be evaluating you just as much as you are evaluating them. Be leery if they are eager to sell you a franchise right out of the gate. Many but not all new franchise companies try to sell as many franchises as they can quickly to make money off the franchise fee. Good franchise companies typically are not concerned with selling a franchise for the franchise fee, they look at the franchise fee as their budget to find good qualified candidates. Reputable franchises make money from helping their franchisees become successful because the more they make, the more the franchisor makes from royalties and this is where both parties win.

A franchise consultant is much like a real estate agent. Franchise consultants help you find a few franchises to look at that meet your wants, needs and budget, just like a real estate agent would help you find a few homes to look at that meet your wants, needs and budget.

Like looking for homes, you do not need to use an agent, however most people use one because it is free for the buyer to use the agent and it greatly reduces the time spent looking to find homes that are a match. Same when looking for a franchise.

OK so wouldn’t a franchise prefer someone to come straight to them so they do not have to pay the consultant. Look at it this way. Every business has a budget for finding new partners. A franchise will have to pay some source to find a new franchisee. They place ads in franchise handbook, franchise times, on fliers in airplanes, fliers in hotel resorts, radio, newspaper, google, Facebook, LinkedIn, and of course consultants.

franchisors like working with candidates referred by consultants because they have proven they are serious about engaging in the discovery process by having some initial discussions with the consultant, and filling out the general franchise registration questionnaire. Franchisor’s have many new inquiries daily, they have no way of knowing if the person that left a message requesting more information is serious or qualified so they will go right to working with the consultants candidates and get to general inquiries when they have time.

First look at the consultant’s bio and see if they have a background in business ownership. If they do, chances are they understand what it takes to be successful in business. You may feel skeptical about someone other than a franchise contacting you about an online inquiry you made regarding a specific franchise and you should be. You do not want to share your information with just anyone.

So, you are wondering how this person acquired your information. Most of the top results when searching for a franchise is not the franchise company website, it is a franchise lead website and is a legitimate source of information and connects franchise seekers with consultants that can help them find a franchise.

Franchise brokerage is not a very well-known profession so it is not likely that a scam artist is calling you pretending to be a franchise consultant, so they are likely legitimate. However, It is easy to find out if a person is legitimately working as a consultant. Ask them if they belong to a broker network and if so which one, then do a quick google search of the brokerage to see if it exists and if they are listed as an affiliate, if this checks out they are likely OK to work with.

A good consultant will not be in a hurry to start talking about specific franchises. They should have a process that starts with getting to know as much about you as they can, like what your professional background is, what you enjoy about your work and what you do not like so much about your work, lifestyle wants and needs, hobbies, current financial position and financial goals.

Find a consultant who is willing to teach you how to evaluate any franchise company and is willing to be a mentor to you through the process. Some consultants boast about having several hundred franchises in their portfolio. How many they work with should not be as important as how many top awarded brands they work closely with. A good consultant has a reputation to uphold so they likely work only with reputable franchises and will only present franchises that make sense. You don’t want a consultant that will just present a few companies then never give you any good advice.

It is always a good idea to involve an accountant when considering any business. Also, not a bad idea to consult with a franchise attorney, not just any attorney or business attorney, but a franchise attorney. An attorney with no franchise experience could cost you a lot of money, so be sure they are a franchise attorney and have been at it a while or are under the supervision of an experienced franchise attorney. A good franchise attorney knows the FDD, where to look, and can explain the good or bad in a few minutes. A non-franchise attorney could take hours to research and form an opinion. Most good accountants can help you put together a proforma relevant to most any franchise business. A proforma is a spread sheet with the cost to do business and potential revenues. A good accountant can also evaluate and explain the financial statements in the FDD.

This question cannot be safely answered by the franchisor, consultant or any adviser. Every franchise is required by the FTC (Federal Trade Commission) to have a current FDD (Franchise Disclosure Document). The FDD is a 23 item document that contains everything about the franchise you need to know.

A franchisor is not required to provide an item 19, however many do and item 19 is where you can find information related to the financial opportunity of that franchise. Other than the information included there, you will have to get your questions answered by talking with the franchisee’s of the company. Obtain a blank proforma from the franchisor, franchisee’s or your accountant and then as you talk with the franchise owner’s fill in the blanks.

A good consultant can help coach you in questions to ask that will help you get the financial information you need. It is important to know what the low performers, average performers and top performers have to say so you understand at what point most franchisee’s hit their breakeven, make 50k, 100k and beyond. Talking with many franchisee’s and asking the right questions should give you a good idea of what to expect.

This is one of the many reasons you may consider a franchise over starting your own business from scratch. Most franchise companies are set up to help their new owner’s with little or no experience be successful if they follow the system. This does not mean that anyone can be successful with their model. One franchise may call for an outgoing sales driven personality so if you are more of an introvert it will not be a good fit. Working with a good consultant to help you find a franchise will save you a great deal of time and frustration here. Largely because the consultant works with these franchises on a regular basis and knows the personality profile, skill sets, and budget each franchise is looking for so they will only present franchises that are a match and available.

Every franchise is unique when it comes to the way they operate and the owner’s role. One painting business might be looking for a painter as an owner and want the owner to paint full time, while the next painting franchise is looking for an owner that will hire and manage a GM that will do all the daily operations, allowing the owner to be semi absentee. There are some franchises that allow investors to be absentee owner’s. Most franchises are looking for a full time owner because they believe a hands on owner will better maintain the overall integrity of the business. Regardless of what the franchisor says about time commitment and owner’s role, you want to validate this with successful franchisees during validation calls.

Most of the time it is more expensive to buy an existing franchise, especially if there is consistent profit and growth. The asking price may seem too high so you think starting new would cost less. Sometimes initial cost to open may be less, but the time to actually break even and scale the business may end up costing more in the long run. So it depends on your financial position and your goals.

Generally a business can sell for 2 to 4 times the net income plus assets and if it has been open for a long time it could sell for many more times the annual net. Should you find a business that has been losing money you may be able to buy it below the cost or asset value. Buying a business in distress can be a good deal or a bad deal.

Evaluating the business closely will help to determine if it is being poorly managed and if so you believe you can turn it around by good management, it could be a good deal. Possibly it is a bad location or some other factor that can or cannot be changed. Buying an existing franchise business can be good, or it can be bad. Understand your options and make the best for decision based your circumstances. Have a good franchise attorney and accountant involved.

Most of the time you should be able to sell your franchise. If you are selling because it is not working out, it may be more difficult to sell because interested buyers will be concerned that it is the wrong business to be in or the area can’t support the franchise. It does not mean you won’t be able to sell, it may just take a little longer and you may experience a loss to sell it.

Being in business for a few years and showing consistent growth and profits makes it more attractive to interested buyers, easier to sell and make a nice profit. The general rule when selling a business is 2 to 4 times annual net income plus assets. Before making the final decision to invest it is best to get as much information as possible, write a business plan, and include an exit strategy. When you are ready to sell your franchise it is usually a good idea to get a business broker, the franchisor, your attorney and accountant involved.

The type of franchise you invest in will make a big difference in how soon you can be open for business. If you are building a new standalone brick and mortar, it could take several months to over a year and sometimes years before opening.

Class A retail can take up to a year or more to find the right location, negotiate lease and build out, before you open.

Starting a home based, warehouse or office franchise business can be sometimes open as soon as a month from the time a franchise agreement is signed. This is a great question to ask the franchises you are evaluating and some franchisees during validation.

I’m interested, what do I do next?

First: read about the process on “How to find and evaluate a franchise” >>>HERE<<<

Second: complete the general franchise registration questionnaire found on that page.

Finally: After completing the questionnaire schedule a consultation using the “Schedule a Consultation Link” also at the bottom of that page

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