Franchise Anyone?

This post originally appeared on the SBA.

Dale Van Eckhout, Senior Area Manager, Bismarck Area Office - North Dakota District Office

Many people associate fast food businesses with franchising. In fact, there are over 120 different types of franchise businesses and hundreds of thousands of franchises available in the United States, including automotive, cleaning & maintenance, health & fitness, and pet-related franchises - just to name a few.

Franchising is the practice of selling the right to use a firm's successful business model. This involves two major players which are the franchisor who sells the business model, and the franchisee owning a direct stake in the business. The franchisor's success depends on the success of the franchisees.

There are many benefits in buying a franchise including the following:

• Saving time - the franchise company already has the business model in place so you can focus on running a successful business.

• Company image and branding - the image and brand of the company is already established. Consumers are always more comfortable purchasing items from a familiar name or company they trust.

• Training - the franchisor usually provides extensive training and support to the franchise owner.

Before delving into a franchise you can start with analyzing your situation including the following:

What are my goals?

• Do you need a specific annual income and is this franchise business primary or supplemental to your current income?

• Are you interested in retail sales or performing a service?

• Do you get bored easily? Are you in this for the long-term?

• How many hours can you work? How many hours are you willing to work?

It is crucial that you involve others including your family in this discussion.

What are my abilities?

• Does the franchise require technical experience or special training or education?

• What skills do you have in running this business?

• What experience do you have as a business owner or manager?

What investment is needed?

• How much money do you have to invest and how much money can you afford to lose?

• Do you need financing? Where is the money coming from for the investment?

• Do you have savings or additional income to live on while you start your business?

Every situation is unique; however, a general rule is to limit an investment to no more than 15% of your personal assets. Most lenders will ask for 20-40% equity, therefore you can estimate how much you can afford (i.e. $400,000 personal asset value x 0.15 = $60,000; $60,000 equity is 30% of $200,000, therefore $200,000 is an estimate of the maximum start-up cost your equity can support).

Many lenders offer financing to purchase a franchise. SBA guaranteed loans for a franchise are more common than SBA loans for any other type of business.

Confidential assistance, at no cost, in preparing a business plan is available at your local SCORE office, Small Business Development Center,  Woman’s Business Center and MBDA Business Centers.

There are many organizations that can assist in buying a franchise. Some examples include www.frannet.com and www.franchoice.com.

Once you find a franchise, it is critical that you take your time and find out as much as possible before writing out a check. 

1. How does this business add to the products and services offered to create value for the customer?

2. Who are the customers targeted?

3. What are the three most important contractual requirements required of the franchisee?

4. Who are my competitors and what differentiates this franchise from their business for market share?

5. How long does it take to break even?

6. What is the net income expected?

7. Ask for an ex-franchisee for a reference.

Perhaps the most important document in the purchase of a franchise is the disclosure statement. Read and understand all of it before signing.

A publication from the Federal Trade Commission offers additional information regarding buying a franchise: FTC Franchise.