Many people already have a business or two, but want to expand. Some are new to entrepreneurial life and figure a franchise will give them the best shot at success. Either way, they’re weighing their options.
Is a franchise the right business model? Benefits include more structure than owners typically have when starting an enterprise — they don’t have to invent their plan from scratch. However, as in all things, this model has drawbacks, such as requiring franchisees to follow preestablished rules with which they may or may not agree.
Nevertheless, the United States has nearly 800,000 franchises spanning 300 different industries, so experts know the idea is a money-maker for some. Is it the right choice in every situation? Here are six points entrepreneurs should know about managing a franchise.
Is a Franchise the Right Choice?
Who does best with a franchise? They’re people from all walks of life who share one thing in common: the desire to be their own boss while providing a meaningful product or service to their local community.
They may not look like the stereotypical white-collar entrepreneur. For example, many veterans are uniquely suited to franchise ownership, although they comprise just 7% of the population. Their military training imparts the requisite discipline to get a new business up and running, while the structure and support are reassuring and reminiscent of their enlisted days.
Other people who do well include those who have worked in the industry with a dream of someday owning an establishment of their own — the restaurant sector immediately springs to mind. Likewise, established entrepreneurs with a knack for sensing community needs may branch into franchise life for the ease of setting up their new enterprise.
Ask the following questions to determine if franchise ownership is right for the current situation:
- Does the owner enjoy following a system? Unlike traditional entrepreneurship, franchisees will be following someone else’s model for success.
- Does the owner understand the financial and legal ramifications? The buck stops with the business owner. Are they ready for that responsibility?
- Is the franchisee passionate about the industry? Why open a restaurant if the owner’s only dream is to get out of the kitchen?
- How many past franchise owners have failed? Savvy entrepreneurs want to choose an organization with a high success rate that can tell them what pitfalls to avoid. Ask this question of the franchisor.
- Has turnover and profitability been in line with what the franchisor claims? Ask this question of other franchisees who entered the same business in a different location.
Evaluate Community Need
There’s a bit of a running joke in America about a McDonald’s occupying every corner. Of course, this statement isn’t true — there are plenty of rural hamlets that might welcome this fast-food establishment. However, entrepreneurs should evaluate community needs before they open a franchise. For example, why open a fourth Thai restaurant in a small town of only 10,000 people?
Make like the TV restaurant rescue shows and do a walking tour of the proposed location. What’s the competition like? Use social media like Nextdoor to determine the community’s attitude toward the proposed project, creating a poll to inquire what the public would like to see. Attend city council meetings and other neighborhood gatherings, asking people what they want most through networking opportunities.
Fund Operations With Plenty of Capital
Any way people slice it, opening a business costs a lot. Fully 50% of all U.S. franchises require a minimum $250,000 initial investment to get off the ground. That’s more cash than most people have in their savings.
How can an entrepreneur finance their new business? Here are some options:
- Small business administration: The SBA offers small-business loans at attractive interest rates. It also supplies limited grants if the proposal fits an area of severe need.
- Investors: Here’s where a franchise comes in handy. Entrepreneurs don’t have to start from scratch with their business plan — their franchisor will provide the requisite template. They still have to find angels to approach, however.
- Crowdfunding: Sites like Kickstarter and Indiegogo can help them fund their dream.
- Family and friends: Loved ones might be willing and able to help fund this dream.
- Credit cards and personal loans: Tread lightly here, as savvy owners don’t want to drown in debt. However, it is an option.
Entrepreneurs can also look for ways to cut expenses. For example, those interested in driving big rigs for a living can lease a vehicle for their truck-driving business. Doing so costs less than buying and can help until they get their first delivery contracts.
Understand Franchise Rules
Owning a franchise means buying into an existing business model. That means the franchisor must approve of three facets of the operation while the franchisee remains responsible for others. Here’s where the franchisor will exert greater control of operating practices:
- Infrastructure: Generally, owners must choose from preselected sites. They must build per their regulations — no McDonald’s with lime green arches — and perform periodic updates when the general business changes with the seasons or does a complete remodel.
- Operations: Franchisees need to stay consistent with the chain. They can’t open a KFC that serves nothing but hamburgers, for example.
- Territories: Let’s say the franchise takes off and the franchisee wants to expand. They can’t simply erect another location in a different part of town. Instead, the franchisor may restrict them to avoid undue competition with other enterprises in the same family.
Despite the strict rules entrepreneurs must follow, they ultimately remain responsible for any loans to fund the business. In that respect, owning a franchise is similar to any other entrepreneurial venture — it entails risk.
Build Reputation in the Community
When people look at discussions of franchised establishments on social media and Yelp, they’ll find mixed reviews. The same restaurant chain might receive nothing but raves at one location but get only bad reviews in another. The difference often lies with the individual franchisee.
Like any business, a franchise must build a reputation in the community. Although the franchise provides name recognition, only the owner’s actions determine whether it gets a positive or negative connotation in the region.
Maintain Accurate Records
Maintaining accurate records is crucial as a franchisee, especially if a business has employees. The IRS requires franchisees to collect income taxes and hold them in trust. Many business owners get in trouble when they use that money for other expenses, then find it unavailable when it’s time to make their federal tax deposits. They can be held personally liable for the trust fund recovery penalty, even if their designation as an LLC guards their home and car against consumer lawsuits.
Avoid trouble with the authorities by hiring someone to do the books. Ensure they have the right skills to avoid problems — remember, the buck ultimately stops with the owner.
Making a Franchise Work
Managing a franchise has multiple advantages. However, it has its drawbacks, like any business model. It’s vital to understand the ins and outs before investing money. That way, franchisees are more likely to succeed in their business goals.
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