The Best Strategies for Purchasing a Franchise

Steve Barry - Assistant Vice President, Commercial BankingBy: Steve Barry ~ Assistant Vice President, Commercial Banking
 

Whether you’re buying a brand new franchise, or purchasing an existing one, you need to carefully weigh your options and be diligent in knowing every aspect of your franchise agreement to ensure it is the best business strategy for you.  In today’s economy, new small businesses can be swallowed whole when competing with popular chains, regardless of the industry.  On the upside however, franchising one of those successful chains still allows you to be your own boss, but helps to level the playing field by taking advantage of operational efficiencies, buying power and economies of scale.

 

Franchise Facts

Statistics show that 40% of US retail sales are through franchised establishments.  According to Buxton analytics firm, franchised businesses are forecasted to represent 4.5% of US GDP ($493 billion) in 2014, not to mention, they account for 10% of new US jobs.  Aside from these encouraging statistics, franchises tend to prove quicker, more profitable results as opposed to starting a business from the ground up.  You are opening a business with instantaneous name recognition, marketing, sales and training strategies already in place.  Your job is to execute them and make your franchise a success.

 

The Start-Up Process

The first steps to purchasing a franchise include due diligence in carefully selecting the right franchise option for you.  Evaluate the demand and competition in your area for the goods or services you’d like to offer and be sure that your franchise makes sense in your market.  Also evaluate the franchise’s history, membership, benefits and goals.

 

Build a Team

Be prepared to negotiate franchise fees, operating licenses, insurance and building costs, royalties and advertising fees. It is best to build a team of professionals who can offer unbiased advice before investing your time, talent and financial resources into an opportunity. This team should include, at a minimum, an attorney, commercial banker, accountant, and insurance agent.  Let them closely review your franchise contract and the franchisor’s disclosure document before making any concrete decisions.

 

Know the Rules

When reviewing your contract, be sure to note how much control you will actually be granted as a business owner.  Some franchises have a very particular set of guidelines regarding site location, consistency in design and appearance, selection and price of goods and services offered, and operating standards.  Also be aware that your franchise contract is not permanent.  They do expire, and you may not always be guaranteed the opportunity to renew.

 

Have a Plan

Next, prepare a written business plan and outline what you are able to put toward your franchise investment. Where will you acquire financing and what terms and structure will work for your business? Do you have the skills needed to manage and operate a business and are you willing to put in the time and energy to succeed? Detailed financial projections are an important part of your business plan as well as stress testing those projections to see how different levels of sales and expenses affect your bottom line.

 

Franchising can be an extremely lucrative business venture if done strategically and responsibly.  Take your time with due diligence before making any decisions and build a team of professionals to give qualified opinions before signing a contract.  If you are considering starting a franchise, or have questions regarding small businesses, contact your FNB Fox Valley Commercial Banker today by calling 920.729.6900!