Many Americans have achieved the America dream through the purchase of a franchise. However, there are also many risks associated with such a decision.
One of the hardest parts is finding a winning franchise. A lot of consumers don’t take the time to sit down and plan how they’ll start a franchise, so they end up spending their life savings on a business venture that turns out to be a complete flop.
Get the Documents
One of the first steps involves obtaining offering circulars. Also called UFOCs, these documents can provide you with a wealth of data.
The documents can reveal how much money each franchise location makes per year, what is expected of franchisees and even names of individuals who purchased but no longer own a franchise.
The documents will also contain a lot of legalese, which isn’t very helpful. It’s a good idea to pay close attention to the three-year percentage figures that describe the franchise turnover rate.
If the percentage is in the double digits, then you should be concerned. The litigation section is also useful because you can see how many lawsuits have been filed against the franchise.
The next potential step involves comparing prices. There should be an initial entry fee and royalties, but you’ll also need information on other pricing data. Find out how much you’ll have to pay for advertising and shared services.
There are also franchise costs associated with administrative services, audits, equipment maintenance, software rentals and other costs. Depending on the franchise, you might have to pay to have training at the company headquarters.
Find out how much initial inventory you’ll need and how much it will cost to build the store. A franchise will also require you to have a cash reserve in your bank.
When determining if a franchise is worth the money or not, all of these costs need to be considered. You can calculate potential returns with the expenses and revenue data from the UFOC documents.
Consider the Size
When considering a franchise system, it’s useful to consider the size of the system. A franchise system that has fewer than 50 units probably hasn’t worked all of the bugs out of their business model.
You should also research the customer base and territory being offered. For example, does a franchise provide area exclusivity?
See It in Action
Once you’ve finished all of the research and chosen some potential franchises, you’ll want to actually visit the locations and see everything in action. You want to get a sense of what occurs at the locations.
Get a feel for transaction size, customer traffic and other aspects of the business operation. These are some of the most important steps to take before purchasing a franchise.