The franchise industry remains a popular and successful path to small business ownership. The number of franchises is set to grow by 1.7 percent to 795,932 establishments in 2016, according to a report by the International Franchise Association. And the overall economic output of the franchise industry is expected to jump 5.8 percent to $944 billion. This yearly outlook follows a stronger-than-expected 2015, which experienced an estimated 1.7 percent growth, according to the association's Franchise Business Economic Outlook for 2016. Clearly, franchises are a vital part of our national and local economies.
There are many benefits to owning a franchise including brand recognition, a proven business model, support and training. However, purchasing a franchise does not guarantee success. It's still crucial for buyers to do their due diligence when researching the various franchise opportunities available to them. Buying a franchise also carries several unique considerations, compared to purchasing an independently owned business, that buyers must keep in mind.
Five unique considerations of buying a franchise:
- Determine if the ownership model is in-line with your goals and work style. In most scenarios, when you buy into a franchise you're legally obligated to uphold most, if not all, of the corporate brand's rules and processes. This can include everything from accounting workflow and hiring practices to marketing and customer service. The parent company is also generally the one to make decisions about product lines and offerings. All these elements provide a level of security and stability that comes from belonging to a much larger organization with a proven track record. However, it's still important that your vision and passion aligns with the parent company. If you're the type of person who likes to call all the shots and hates relinquishing control, then a franchise, or at least one with rigid rules, may not be the right business model for you.
- Assess the franchise fees. Like buying an independently owned small business, running a franchise unit requires a healthy upfront investment. The entry fee of franchises varies greatly by brand, so buyers should be prepared to do some research. If you're interested in a specific brand, ask about financing support. Some corporate brands offer it or can help you secure it elsewhere. After you determine the initial entry cost, find out all the other ongoing fees you would be responsible for such as royalties, advertising fees, property leases and any inventory or equipment expenses.
- Understand the legal factors. There are many legal issues to consider before buying a franchise, starting with the franchise agreement. This document outlines any fees, territorial restrictions and obligations you would have as a franchisee. Before buying, carefully review the agreement and determine what the repercussions are for a breach of contract or misrepresentation of the franchise. Before committing, it may also be wise to consult with an attorney.
- Evaluate the success rate of that franchise. In most cases, franchises have an advantage over independent businesses when it comes to brand recognition. However, smaller and regional chains may still be in the early days of formalizing their franchise programs, and may not have all the kinks worked out of the business model. In these cases, buyers looking for lower risk may want to hold off. All buyers should carefully evaluate the brand's business plan. A robust franchise program will include not only general operations training and an introduction to the brand, but also primers on advertising, employee development and supply chain management. Buyers should ask for the franchise's Uniform Franchise Offering Circulars (UFOCs), which all franchises must have and includes useful data for analyzing the success of the franchise including annual revenues per location. If you're still hesitant about the franchise, seek out both current and former franchise owners, which are listed in the UFOCs, to ask more about their experience and if they would recommend the business.
- Consider the business and local market potential. There are thousands of different kinds of franchises available in nearly every industry. Before you decide on a brand, consider your local market and demographics. Research what competition is already in the area and if any one brand has multiple franchises. Think about what local customers have a need for and how that demand might change in the next few years. Once you have a franchise in mind, talk with them about your local market. Some franchisors will even help buyers when it comes to selecting the best location for the franchise, and assist with lease negotiations on your behalf.
Even when a franchise is well known, it's still critical for buyers to do their homework and thoroughly research the business before investing. By determining what kind of business model and support you want, and then using that information to narrow the field, buyers better position themselves for success.