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The Most Underrated Advice for Entrepreneurs Who Want To Open A Franchise

Entrepreneurship can look like many different things. You may want to start a business from scratch, buy an existing business, or become a franchise owner! For the entrepreneurs who want to open a franchise, this blog post explores some of the most underrated advice we really think you need to hear before you embark on your journey. 

The Pros and Cons of Opening a Franchise

In comparison to founding a start-up, when you open a franchise, you have built-in support offered by the franchisor, and you are able to make use of established systems and processes. Furthermore, economies of scale work in favor of franchises because they are able to benefit from the purchasing power of the entire network (i.e. if you’re ordering 500 ovens, you’re going to pay less per oven than if you were only ordering one). 

On the other hand, the cons that entrepreneurs who want to open a franchise should be aware of include limited independence and autonomy, which can stifle innovation and adaptability, and franchise fees and royalties, which can negatively impact profitability.

What It Takes To Open A Franchise

Now that you have a better idea of the advantages and disadvantages of opening a franchise, let’s get into how to actually open one. 

Do Your Research! 

Business decisions require a lot of thought. When buying a franchise, you want to make sure the one you buy is the right fit for you. So, to properly evaluate a franchise opportunity, ensure that you have thought carefully about the following factors: 

  • The size and potential of the market in which the franchise exists
  • The potential to establish a memorable brand
  • The barriers to entry
  • The culture (or lack thereof) within the franchise network
  • The franchisor’s vision
  • The existing systems and procedures 

Figure Out Your Financing

Step one is deciding on the franchise you want to purchase. Then you’ll have to decide how you are going to pay for it! Luckily, your options are multifold. You can apply for a commercial bank loan, approach alternative lenders, raise money through crowdfunding or your immediate network, or acquire franchisor financing (this is where franchisors finance franchisees directly through the parent company). You can also learn more about your options in our hand-picked collection of the best finance books for entrepreneurs

When opening a franchise, ensure that you have enough money to pay for the following: 

  • Franchise fees: These are typically between $20 000 and $50 000 and are paid once
  • Royalty fees: These are based on a percentage of your revenues and are paid monthly
  • Working Capital: This is the amount needed to cover your daily operating costs (it is recommended that you have 6 months of working capital available prior to opening) 

Know The Franchise Rule

“The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees” (Federal Trade Commission)

If you haven’t received the Franchise Disclosure Document, ask for it! It contains essential information that will help you make an informed decision about whether or not to purchase the franchise. For example, it outlines the experience of the executive team, highlights whether the franchise has been involved in any bankruptcies, discloses all fees, and lays out the obligations of the franchisee. If the franchisor isn’t willing to give it to you, don’t take your discussions with them any further. 

Enlist Professional Help

Consider hiring a franchise lawyer as an additional pair of eyes to go through the legal documents involved in a franchise agreement. A franchise lawyer will ensure that you (as the franchisee) and the franchisor are compliant with franchise laws and regulations, that fully understand what you are entering into, and that you don’t sign anything that may make your life difficult in the future. 

You may also want to hire an accountant to offer advice on your financials and a franchise consultant to help you determine whether a particular franchise opportunity is or is not well suited to you. 

Talk To Other Franchisees

Entrepreneurs who want to open a franchise need to learn as much as they possibly can from the people who have already taken the leap. Make use of the list of franchisees in the Financial Disclosure Document of the business you intend to buy into and ask them the good, the bad, and the ugly questions! 

There are various franchise communities that you can join to connect with other people who are on a similar journey to yours. For example, the International Franchise Association, International Franchise Professionals Group, and The American Association of Franchisees and Dealers. 

Know Your Franchisor

“A good franchisor will have been in business for at least two or three years and be able to demonstrate the growth potential of its products and services” (Gary Occhiogrosso, Forbes Contributor). Look at their balance sheets, how long they have been in business, and the reputation of their brand to get a good idea of how strong their business is. But then, just as importantly, listen to your gut instinct when it comes to determining how strong their character is. You don’t want to enter a business arrangement with anyone who you don’t trust, like, and respect. 

Are You Ready To Open A Franchise?

After reading this blog post, we hope you have a clearer idea of what steps you need to be taking to get from where you are now to becoming a franchisee! There are no shortcuts to success, and although franchising is perceived as being less risky than start-up entrepreneurship, research has shown otherwise. So, embark on your franchisee journey armed with as much knowledge as possible, a clear head, and an insatiable passion!