Today there are many ways to start your own business and nearly endless options and new opportunities emerging each day. Whether a traditional brick and mortar business, creating your own online store, or even building your own professional service or consulting business, the effects of 2020 have driven many people to realize their dream of self-employment.

When entrepreneurs think about starting their own businesses, many think along traditional lines and creating something from the ground up. However, another approach can be buying into an already established business model called a franchise.

What is a franchise?

A franchise is essentially a pre-built business you can invest in and run. Rather than creating your business from scratch, franchises offer the opportunity to be up and running quickly, with all the operational and business systems already established.

Franchise opportunities have various pros- and cons and might not be right for everyone, so here are some important things to consider before looking into franchise ownership.

Rules are rules

Buying a franchise doesn’t just mean you’re buying a business model, you’re also buying into a set of rules and regulations already established. For some, this can be a relief because the roadmap is already established and eliminates the need for creating processes or procedures. However, this leaves little to no room for ‘innovation’ or modifying that playbook. So if you aren’t the type of person content with following rules, a franchise might not be right for you.

Is it a proven brand?

The franchise space is filled with nearly endless opportunities and business categories with new franchises seeming to pop up every week. But buying into a franchise is a serious financial and time commitment and should be thoroughly researched.

Important questions to consider might be:
How long has the franchise been around?
What is the history of the brand and founder before it became a franchise?
How do current franchisees feel about their business?

Investing any amount of money into a franchise is nothing to take lightly, and it’s important to conduct as much due-diligence ahead of time to make sure the company you’re associated with has a solid track record.

What competition will you face?

Are you opening your business in a profitable area or location? How much competition will you face and how will that affect your business?

Consider if the franchisor offers ‘territorial’ protections to guarantee another franchise doesn’t open up so close to your business that it affects your success. Also remember that competition can come from another franchise (brand) altogether. If you open a fast-food location, your territorial protections can’t protect you from a competing franchise opening up next door or across the street from you.

Remember, there’s a lot of competition in high-traffic locations which is why you will often see fast-food chains opening along the same street or in the same area of town.

Training and support

Does the franchisor offer comprehensive training as well as direct support after you open your business? Many people who decide to invest in franchises are first-time business owners and are experiencing entrepreneurship for the first time. With so many things to learn, from sales, to marketing, operations, staffing and more, it can feel overwhelming if there isn’t a support system in place to help get you through it.

Most franchisors provide a significant amount of training and support because it’s in their best interest that your franchise succeeds. But the best way to determine the value and extent of their training and support would be to speak with existing franchise owners who have gone through the program.

Can you really afford it?

In addition to the upfront costs to buy into a franchise (which can be significant), there are a lot of hidden costs to consider and can vary greatly franchise to franchise.

Closely read the franchisee agreement and examine all the costs and fees associated with ownership. You will likely be required to pay a monthly franchise fee in addition to a percentage of sales to cover marketing and other overhead expenses of the franchisor. However, there are often stipulations that require a franchisee to purchase all supplies and materials from the franchisor. If these terms exist, compare those costs to current market rates or retail pricing and judge whether those items are priced fairly, or include unreasonable markups that will affect your costs and profitability.

How much can you expect to earn?

This is probably the most important question and the one that ultimately influences an entrepreneurs decision, but it’s also the most elusive and intangible to answer.

Franchisors are required to provide certain disclosures in their FDD (Franchise Disclosure Document), but they don’t always provide any kind of earning projections because this information is legally required to be documented and verifiable. It’s also difficult to say with any certainty how successful any franchise location will be because there are so many factors that contribute to that success. Even within the same region, one franchise could significantly out-perform others simply based on their location and traffic volume. So creating a baseline earning projection can be hard to do.

The only way to get a clear picture of potential profitability is to talk with several current franchise owners who can provide realistic expectations from their own real-world experience.

Bottom line

Many franchise owners find great success and expand their businesses over time by opening additional locations, while fully investing themselves with their franchisor. While others may find the promise of ‘running their own’ business falls short after realizing the limitations, costs or restrictions of the franchise agreement. In my experience, I’ve met both.

Only you can determine if franchise ownership is right for you, but the key is doing the leg work upfront, researching as much as possible, and speaking with others who have already taken the journey.