Thinking of Buying a Franchise? Here are 5 Key Things to Consider!
If you have always wanted to be your own boss, you may be considering purchasing a franchise. Buying a franchise has a number of potential advantages for would-be business owners, including a proven sales model, initial training and ongoing support, marketing prowess and name recognition.
Even so, buying into a franchise opportunity is not always what it is cracked up to be, and the landscape is littered with failed franchise outlets. Some franchise-based companies have even gone out of business, leaving their investors, and their current franchise owners, out of luck. That being said we have many clients that have purchased new and existing franchises and turned them into very profitable success stories.
Here are some key things to think about when considering a franchise purchase.
#1. Is the Franchisor Company Financially Stable?
The financial stability and future prospects of the franchise operator will be key, but it is not always easy to get the information you need. While some franchise operators are publicly traded, with transparent sales figures and quarterly earnings reports, others are private and much more secretive.
Before you buy into any franchise, you need to seek out hard numbers, not only on their current sales and profits but their past experience as well. Without these basic numbers, it will be impossible to truly evaluate the franchise opportunity or determine your level of risk. Altius helps a lot of clients interpret and translate the financial data so that they can understand what they are reading and potentially buying.
#2. Will Your Territory Be Protected?
Some franchise-based retailers grow so fast that a new outlet is popping up on every corner. That level of growth is often unsustainable, leading to widespread closures and the loss of investor cash.
The best franchise operators work hard to protect their brand, their reputations and their franchise owners, and those are the ones you want to work with. Before you buy into any franchise, ask about territory protection and the steps the company takes to support its franchise owners. Without some level of territory protection, you could quickly be overwhelmed by new competitors and out of control growth.
#3. Is the Business Model Trendy or Timeless?
Fads come and go - just ask the owner of a pet rock or your neighbor who collected Beanie Babies. Basing a franchise opportunity on the latest hot product or food trend can be dangerous, yet many companies have done just that.
Before you jump into any franchise, you need to ask yourself if the business model is built on the continuation of a hot trend, or if it is truly timeless. What if tastes change and people lose their appetite for frozen yogurt? Is there a backup plan in place if the top-selling product starts losing sales? Learning to distinguish between a hot trend and a product with staying power is an essential part of franchising success.
#4. Can You Afford the Initial Investment?
The amount of cash needed to start a new franchise varies widely, from less than $10,000 to more than $500,000. That wide variance can make finding the perfect franchise difficult, but no matter what the dollar amount, you need to ask yourself if you can really afford it.
Even the best franchises may not be profitable for several years, so you need to think long-term and look beyond the initial investment. Can you afford to make the payroll and keep the lights on for a year or two while sales are building and profits are growing?
Where will you get the cash? Can you get a low-interest loan, or will you need to use your high-interest credit cards? Do you plan to raid your personal savings or invade your 401(k)? If you cannot finance your franchise without doing serious damage to your finances, you might want to rethink your decision.
#5. Are You Ready to Be a Boss?
Very few franchises are one-person operations. If you buy a franchise, you will probably need to hire people, possibly a lot of people. If you already have supervisory experience or HR expertise, this may not be a big deal, but for others, the move from employee to boss can be a jarring one.
Before you buy that franchise and start building your business, ask yourself if you are really ready to be a boss. If you feel uncomfortable with hiring and firing decisions, you might want to get some real-world experience first by taking a managerial job or seeking a promotion at your current employer.
For many former 9-to-5 workers, the move from employee to small business owner is the best decision they ever made. Those happy business owners relish the flexibility and freedom of their new lives, and the money they are making. For others, however, the transition is not as smooth. If you want to be one of the success stories, you need to ask yourself some hard questions, especially if you are thinking of investing tens or hundreds of thousands of dollars to buy a franchise.
Reach out to Altius CPA today if you are thinking about buying a franchise in the future. Many franchisees across the country rely on our services to take the headache out of the accounting and tax for them so they can focus on making their business profitable.