1) Evaluate your tolerance for risk
Opening a new business is a scary prospect. There’s a lot of personal, professional and financial risk to consider. It’s natural when contemplating such a profound step in your career to look at ways to manage your risk and increase your chance of success.
The Small Business Administration conducted a survey that found 62% of non-franchised businesses failed within 6 years. A separate study by the United States Chamber of Commerce found that 97% of franchises were still open after 5 years.
The research conducted by these independent third party organizations clearly demonstrates that choosing a franchise business carries significantly less risk than starting a business on your own.
2) Work with what you’ve got
Making a list of your strengths is easy. But when launching a business, it’s also important to make an honest assessment of your weaknesses.
Before you get to work selecting a franchise, take the time to develop a list that honestly depicts your strengths and weaknesses as a potential business owner. Then use this profile as a tool to help with the decision making process.
Ask franchise owners questions about the duties they perform, and compare the job requirements to your profile. If the business has the potential to be a good fit, the skill sets required to run the business will either be skills you already have or skills you can learn quickly. If this is not the case, it’s best to keep looking.
If a certain aspect of a franchise has a steep learning curve but the business is otherwise a great fit, you may want to consider hiring someone experienced with that position. If this is the choice you make, be sure to include their salary and benefits in the financial business plan.
3) Remember to run the business
Many potential franchisees make the mistake of thinking they’re limited to buying a franchise in their current field. In fact, this might be the worst way to go.
Some franchises will not allow someone skilled in a particular industry to buy a franchise in that industry. For example, a mechanic may not be allowed to purchase an auto repair franchise. Skilled technicians sometimes find the transition from hands-on work to management work difficult to make, and are tempted back onto the floor to do the job they’re familiar with.
The problem with this is that you grow the business by running the business, and what a franchisor wants to see on the bottom line is growth. A business owner needs to be out networking, marketing and interacting with customers. If there’s too much work on the floor of an auto repair franchise, then the owner – even if he’s a highly skilled mechanic – needs to hire more mechanics.
Basic business skills are transferable to any franchise. If your current position involves universal roles like sales, marketing or accounting then your franchise options are practically unlimited.
4) No business is recession-proof
There’s no such thing as a business that can’t be impacted by a faltering economy.
There are, however, certain industries that are considered recession “resistant.” These are generally products and services people can’t do without no matter how much they’re cutting the budget.
The good news is there are hundreds of great franchise opportunities in recession resistant industries. The following are just a few examples:
Top recession resistant industries: Food · Automotive · Healthcare · Medical·Clothing · Education
Recession resistant franchise industries: Fast food restaurants· Automotive maintenance, parts and repair · Weight loss and fitness · Resale shops and discount (dollar) stores · Education (tutoring) and child care
5) Objectively evaluate professional advice from personal sources
Friends and family have your best interests at heart, and their advice comes from a place of love and concern for your well-being. No one would suggest making the personal, professional and financial commitment to launching a business without consulting your loved ones.
But friends and family are not subject matter experts and their advice can – intentionally or not – discourage a new business venture. The people who love you worry about what could happen if you fail, and their instinct will be to protect you from the risk.
When it comes to the final decision whether or not to proceed with purchasing a franchise, of course you will carefully weigh all the advice you’ve received. The key is to rely most heavily on the advice offered by industry professionals.
6) There’s no such thing as a free lunch
There are countless “free” franchise brokers and consultants out there claiming to offer unbiased information on franchise opportunities. They will work with you to assess your needs, and use your professional profile to help make recommendations on franchise opportunities that may suit you.
The problem with these services is that they get paid by the franchises for selling franchises. That means they are naturally only going to show you options they’ll get paid for. And in the case of high profile franchises that may offer them 2 to 4 times the average commission, there’s a real risk they may steer clients to those businesses whether they’re a good match or not.
These broker services may have access to detailed data on several hundred franchises and they can be a great source of information. Just be cautious about their recommendations, and get a second opinion before investing your money.
7) Tune out the hype
Never before was the adage “if it sounds too good to be true, it probably is” more applicable. You’re going to hear a lot of hype – good and bad – while assessing potential franchise opportunities.
Between marketing blitzes and human nature, it’s easy for success stories to spread like wildfire. Think about the guy who lost weight eating Subway – that story is so pervasive it’s become almost impossible to separate the allegory from the restaurant in the public’s perception. The hype surrounding that marketing campaign will have an impact on potential Subway franchisees for the foreseeable future.
It’s also natural for people to look for something to blame when things go wrong. Because of this there are also going to be negative, emotionally charged franchise stories in circulation. However, keep in mind the nuanced details that created such situations are never discussed; only the attention-grabbing outcomes.
No one is suggesting you completely ignore these stories, because hidden beneath the hype there are likely valuable lessons to learn. Learn from them what you can while keeping in mind what they are: unique situations with complex back stories that probably have no bearing on your success whether or not you choose the same franchise.
8) Look beyond the big brands
Sometimes it’s easy to forget there are thousands of franchise opportunities out there, because the big name brands get all the attention. When you’re in the early stages of your search, it’s a good idea to bypass the overblown marketing of the huge franchises and make an effort to learn about the “no-name” franchises in your industry of interest.
There are quite a few advantages to lesser known franchise brands. For instance, they are often cutting edge concepts that can get a lot of marketing attention. Lesser known franchises haven’t yet saturated your local market. And they’re usually less expensive to start up, which means less financial risk.
Of course, you may be looking for the security and benefits that come with a big name franchise. Criteria such as national marketing campaigns, standardized employee training, management support and strong purchasing power may be at the top of the checklist for what you’re looking for in a franchise, and there’s nothing wrong with that. But if you’re not interested in being another instantly recognizable box in another strip mall, then a ‘no-name’ franchise might be for you.
9) Look beyond the price tag
Just because a franchise is more expensive does not mean it will be more successful.
It’s important to evaluate every aspect of a franchise – financial projections, monthly franchise fees, franchiser support levels, issue response time, customer base and marketing, to name a few. The price tag is a factor to consider, but should not be the sole criterion for evaluating the quality of the business opportunity.
Once you narrow down your preference to a particular industry, conduct due diligence on 2 to 3 franchises in that industry. Gathering adequate information on several comparable franchises will allow you to make an informed decision.
10) Comparison shop
Once you decide a franchise is right for you, keep looking.
If you decide to purchase a franchise of Coffee House A, then it’s time to start looking for reasons not to buy it. Build a list of questions, and then go talk to owners of Coffee House B and Coffee House C.
Be blunt – ask the competing franchise owners why they feel their business is better than Coffee House A. Ask them what made them choose B over A and C. Ask them if they would recommend you buy the same franchise, and don’t stop digging until you’re clear on the why (or why not) of their response.
Build a spreadsheet comparing the details of the franchises. Include data such as the benefits offered, financial commitment required, estimated monthly expenses, commercial lease requirements and franchise fees.
If your franchise preference stands up to the scrutiny, then you’re on the right track.
11) Contact current and former franchisees
The best way to find out if a franchise is right for you is to go behind the scenes and ask a lot of questions.
Before making a buying decision, prepare a list of questions. Contact at least five current franchisees and make an appointment to discuss your interest in the business. Whatever else you discuss, be sure to ask the questions you prepared.
Try to arrange an all day job shadow session with at least two current franchisees. This will allow you to observe the daily operations of your potential future business without committing to personal financial risk.
Contact several separated franchisees to learn about their experience. Understanding their reasons for getting into – and out of – the franchise can impact your decision.
12) Do your due diligence
All franchises are not created equal, and it’s your job to sort them out. The information is out there – all you have to do is go get it.
Conducting due diligence on a franchise opportunity should include:
· Check with the Better Business Bureau for complaints
· Check with the State Attorney General for complaints
· Speak with the franchisor
· Request a Franchise Disclosure Document (FDD)
· Attend a discovery day with the franchisor
· Make at least 10 calls to current and separated franchisees
· Make appointments to meet franchisees and visit the operation
· Job shadow a franchise owner (or owners) for at least a day (longer, if you can)
· Repeat as necessary
The purpose of due diligence is to reduce your risk. All the steps are necessary, but the most important step is interviewing and job shadowing a current franchise owner.
Some franchise owners will allow potential franchisees to spend weeks at their business learning the ropes. They may be willing to share detailed financial data, and can confirm or refute claims made by the parent company. A franchise owner can answer questions the franchisor may be legally bound from discussing. You may be able to make assessments about your own management style or potential business location by observing theirs. Visiting operating franchises in the course of due diligence may be the single best method for evaluating your potential success with a franchise opportunity.
13) When the time is right, hire a legal and financial team
Getting expert advice on the legal and financial aspects of a potential franchise purchase is essential. Some buyers skip this step to save money, but this is not the place to cut corners. The relatively small fees a lawyer and accountant charge pale in comparison to the enormous financial loss you’ll incur if the business fails.
Bringing in the legal and financial experts too soon in the purchase process can also be a mistake. Their professional opinions are necessary and valuable, but their advice can be expensive and potentially counterproductive in the early stages of your search. It’s crucial to remember when seeking their input that they should not choose the franchise for you.
Bringing in an accountant too soon can mean paying for them to run Profit & Loss data on every franchise that catches your eye. This onslaught of numbers can cloud your judgment, particularly if they’re taken outside the context of in-depth, due diligence research on each business.
Bring in an attorney too soon can mean paying them to review the Franchise Disclosure Document (FDD) for every franchise that strikes your fancy. Studying detailed franchise information at such an early stage with a legal advisor who doesn’t understand your personality, lifestyle and professional preferences can be detrimental to your search. You could end up inadvertently being talked out of the perfect business.
Waiting to bring in legal and financial advisors until your franchise choices have been narrowed down dramatically is not just cost effective. It’s the logical way to use the team’s expert advice to your best advantage.
14) Feel the fear and do it anyway
The best way to manage your fear of buying a new business is to manage your risk. The best way to manage your risk is to learn everything you can, then proceed according to what you’ve learned.
Start the process with no intent to purchase. That removes the chance of getting so excited about business ownership that you take an irrevocable leap with the first prospect you research.
Above all, ask yourself “can I picture myself doing this all day?” If the answer is “no,” then be grateful for what you’ve learned and move on to researching a different industry.
The research and due diligence processes get easier with practice. It may take a few attempts to find the perfect franchise, but your efforts are not wasted. By actively engaging in the search, you’ve made yourself familiar with the process. And there’s no fear in the familiar.
15) Go it alone
Business partnerships are appealing on the surface because the idea of splitting costs, liability and workload is tempting. But it’s nearly impossible for any two individuals to work together as much as necessary to launch a new business without problems developing.
If it is a financial necessity to form a partnership in order to purchase your franchise, it’s crucial to define the roles each partner will play well in advance. If at all possible, try to structure the partnership so you own 51% and have the power to make binding decisions for the business.
Entering a partnership is not to be taken lightly, and should not be done without consulting your attorney.
16) Lease, lease, lease
Most franchises provide detailed specifications on the type of commercial real estate required to launch the business, and many will assist with the search for an appropriate property.
Leasing a commercial property is nearly always preferable to purchasing one. The capital required to purchase a property is better reserved to fund operating costs for the first few years. It’s also preferable to sign short lease terms with options to extend rather than committing to a long lease term.
Because many commercial leases include taxes and assessment fees buried in the fine print that can cause financial problems for your business, it is very important to have your attorney review any commercial lease before you sign it.
17) Don’t forget you’ve got to eat
One of the most common mistakes people make when working up a financial business plan is forgetting to pay themselves. This simple oversight is at the root of a lot of failed businesses.
In a perfect world we would all have enough in savings to go a year without a paycheck, and everything a new business makes could go right back into making it stronger.
The reality is we’ve all got bills to pay. It’s important to be honest and thorough when estimating the salary the business will need to pay you. Cutting yourself short will create enormous problems, especially if your fledgling business can’t afford to give you a raise yet.
This is one area where decisions you make for the business directly impact your personal life. The franchise isn’t going to do you much good if your heat’s turned off and the bank is foreclosing. Taking extra care with this critical detail could someday save more than just your business.
18) Consider alternate financing options
In the current economic climate, strict lending standards are making it harder than ever to get a commercial loan issued. When loan approval is a problem, it is worth considering your 401(k) or IRA as a resource for purchasing your business.
These self-directed retirement structures do permit individuals to actively invest their retirement funds into a business without taking a taxable distribution or incurring early withdrawal penalties. A successful use of this financing method offers the chance for a greater potential return on your money than the original investments.
Using your retirement funds to purchase a business is not to be taken lightly. But if done right, having your own business could be the best retirement plan of all.
19) Lead by example
If you’re not working hard for your business, neither will your employees.
At the end of the day, the only one who cares if your business succeeds is you. This is not the time to kick back and count the money. In fact, that attitude is the quickest way to ensure that soon there won’t be any left to count.
Even the most diligent business owners may forget that employees can’t see through the office door. They have no idea you’re calling customers, ordering supplies, writing a marketing plan, reviewing applications and trying to find a way to cover next week’s payroll. For all they know, you’re taking a nap.
When an employee sees a manager coming in late, leaving early and taking long lunch breaks they think the worst. They don’t understand that you came in late because you attended a 7 am referral group meeting. They have no idea that your lunch ran long because you were signing a deal with a big new client. It doesn’t occur to them that you left early so you could attend a Chamber of Commerce networking function.
Communication with your employees can help them see you’re working as hard as they are. Share your growth projections and help individuals set goals to meet them. Bring key employees to client meetings. Send high performing employees to networking functions in your place. By giving your employees a role in growing the business, they’ll take pride in supporting your success.
20) If you don’t love it, don’t buy it
Confucius said “Find a job you love and you’ll never work a day in your life.”
If you wake up in the morning and dread going to work, your franchise will not be successful. It’s as simple as that.
The beauty of franchising is the endless variety of options – there’s literally something for everyone. You just need to devote the time and effort to figuring out which one will make you hop out of bed every morning, happy to be doing what you love.
21) Use every resource at your disposal
Investing your personal, professional and financial future in a franchise opportunity is a big decision. Use every source of information you can find, and compare the data to make sure you’re getting the whole story.