Why take a risk with a franchise? Franchises are a great option, it is the idea that you are buying a business that will run easily once you open the doors that makes us value it as an interesting business option. It’s not that easy, of course, but companies and individuals buy franchises to acquire a brand that already has a proven track record and business model.
Franchisees usually have to pay a monthly royalty (the average royalty is often between 4 and 12 percent of revenue) and a marketing fee of around 2 percent of monthly revenue. The franchisee pays quite a bit of money up front for the mere fact of acquiring the rights to purchase a franchise.
Companies decide to start franchising when they feel their business is at a point of steady growth and want to expand the business while being able to spread that financial risk that comes with expansion.
Those who pay the price to buy a franchise pay a significant amount of money to do so.
Let’s look at some important points to keep in mind if you are going to go for a franchise.
Before you start looking for a franchise or data on a company to buy a franchise from, you should be aware of your level of education and experience in that market. It is important to be able to apply your experience in a company that is already in operation, rather than something you have never done before, even if it is very attractive.
Working in a new project is different than working in a completely foreign market, the difference is so important that it can make the difference between the success or failure of your franchise.
If the question is how to set up a franchise, then we must think about and determine the type of franchise to buy. There are many franchise websites to make a first search and investigate what is on the market as well as franchise brokers, franchise coaches and companies that also manage franchises in a personalized way. The options are almost endless and there is sure to be a model that really fits the franchise project you have in mind.
You may feel you have the experience to run a franchise, but ideally you are also interested in what that business produces, a franchise has to be a really good fit for your financial and professional project.
The first few months the start-up of the business will consume all your time, you must enjoy it to make it a success. It is essential that you like it before you start because you will have to dedicate a lot more time to it than you used to dedicate to your work.
This is not necessarily the second step, but many franchisors prefer to work with a corporation, limited liability company or LLC.
There are other reasons, too: remember that you’re forming a company so that it’s your business that buys the franchise. It may seem like semantics, but from a legal standpoint, you are separating your personal assets from the liabilities of your business.
Perhaps it’s even a good time to look for a management company that has experience with franchising so you can approach any issues with absolute peace of mind.
Just like when we are going to buy a property, when it comes to financing, it is always important to get pre-qualified. Most people don’t seek that pre-qualification before they start researching because they are still exploring the franchise idea and then find that the possibility of getting the money for that transaction may not be possible because they don’t have the necessary amount.
Still, before jumping right in and possibly being disappointed by the types of loans that can be obtained, it is worth looking at financing.
It is recommended to first look at the minimum liquidity requirements needed by the franchise to make sure you meet the requirements. This liquidity is 20-30 percent of the entire investment and the rest will come from a loan.
It is recommended to talk to a lender that specializes in franchising when you are 100 percent with the idea of opening a franchise to get safe and in-market options.
There are also many franchises that specialize in people who don’t have great access to funds, so you may also be able to find a franchise that you can handle financing in another way, which would help you reduce start-up costs.
There are many ways to find funding for your franchise, from commercial loans to lines of credit. Take advice from your regular bank, with whom you will have a credit history and also in your local community because there are usually specific grants or state lines of credit suitable for this business model.
Many franchisors even hold discovery days, where prospective franchisees come to the company’s headquarters to talk to company executives and learn what it takes to buy the franchise. It is an important opportunity to ask all the necessary questions, find out in detail about the requirements but also about the type of support in case of any conflict, drop in results, etc.
In many of these events the future franchisees have the opportunity to meet the executives of operations, marketing, real estate, product management, training, logistics and other departments that will support them as their franchisor.
No franchise system is perfect, some are excellently managed and some are not. Contacting several franchisees and explaining that you are considering opening a franchise is key to learning about their direct experience. If franchisees are fairly forthcoming, you should be able to quickly get a sense of whether this is a franchise you want to be a part of or one you are better off walking away from.
If you have little business experience, you may prefer to hire a franchise lawyer, ideally one who has not been recommended by the franchisor and who will work for you to ensure that your interests are served as well as those of the franchisor.
If you’re buying a franchise, you don’t want to improvise. Make sure you have a good understanding of your contractual obligations, rights and freedoms because once you sign the franchise agreement, you will be contractually and legally bound.
When you hire a company to help you with this, you can be assured that they will also be looking out for your best interests and you will not be bound by a contract where only the parent company benefits.
Would you like more information on how to create your own franchise and start expanding your company locally or internationally? Write to us! We will make an initial assessment without obligation so that you can start growing internationally at the same pace as your profits grow.