Investing in a franchise is an appealing idea for aspiring entrepreneurs; after all, it seems to be an easy way to become one’s own boss. While franchises are a logical way to ease into the world of business ownership, there are many factors to consider before taking the leap.
How Franchises Work
One person has imagined a creative business idea, and now the business is doing well. Excellent! Now the owner is interested in replicating the business in more locations, but investors are necessary to grow the business. In the case of franchises, not only will the investors provide money, but they will run the new locations as well. These investors are the franchisees, and the original business owner is the franchisor. The franchisor has a great deal of say in how the business is operated.
Even though a franchisee is technically a business owner, the franchisee cannot make unilateral decisions about the business. Before buying a franchise, the prospective franchisee should become familiar with the franchise’s rules concerning consistency of brand, the product, employee training, etc. No new franchisee wants to be surprised by franchisor demands. The benefit of these guidelines is that they provide a roadmap for inexperienced business owners.
While the franchisor can make demands of the franchisee and keep a hand firmly in the business, there is still much work left to the franchisee; for example, the corporate office may handle national or statewide marketing, but franchisees frequently have to spend substantial time and resources on promoting the business locally. A franchisor may negotiate rent for the new franchisee, but the franchisee may be expected to arrange for utilities. The national office may train the franchisee, but the franchisee may be responsible for training the local staff. The responsibilities of owning a franchise are often similar to those of owning any other business.
Even the most successful franchises take time to see a profit. Potential franchisees must understand that cash flow and profit are two different things, and profits will not come right away. Due diligence and a strong business plan will help a franchisee set realistic profit expectations.
Most potential franchisees will need to apply for small business loans, and all lenders will require a formal business plan before providing a loan. Luckily for inexperienced entrepreneurs, there are many business plan software programs available.
In Part 2 of this series, we will discuss how to find the franchise that is best suited for you. At George & Company, our Franchise Group is highly trained to guide you through all of the steps to becoming a franchise business owner. Whether you have general questions about become a franchise owner, or you are interested buying a specific franchise in your area, contact us and let us guide you on the path to business ownership.