Franchise Depot

By Nic Clark

Franchising is often underestimated as a form of entrepreneurship, since franchisees are licensing the name and intellectual property of another company. Modern-day business owners frequently tout the benefits and glamour of owning and operating your own business, but what often goes unsaid is just how difficult it can be to start a new business. Those who
don’t want to (or don’t know how to) build their own supply chains, create their own management policies, build a customer base, and design their own products, should consider whether a franchise is right for them.

The appealing part of owning a franchise is that it represents the closest alternative to owning your own business, with the added benefits of built-in brand name recognition and the support of an established organization. Franchise ownership is where most budding entrepreneurs begin successful careers in business ownership.

When considering whether to go down the path of franchise ownership, there are a few things to keep in mind in order to be prepared to meet the challenges that come with franchise ownership. Asking yourself the following questions will help you make the right set of decisions when determining which franchise is right for you.

1) Can I Meet the Financial Requirements?

Each company sets different financial requirements for their franchisees. It is up to you to ensure that you make the financial cutoff for the business that you want to own. The “cutoff” is the amount of money a franchise requires a potential franchisee to possess in liquid assets and overall net worth before awarding a franchise. This amount varies dramatically between different franchises and in different industries. For example, a restaurant requires a franchisee have a vastly higher net worth (in the low millions) than, say, a home-based janitorial service.

Liquid assets are especially important when considering a franchise, because most businesses will require initial payment for the cost of licensing, leasing, inventory, and sometimes labor.

Furthermore, franchisees are required to pay a royalty, either on a monthly or annual basis, to the franchisor, regardless of the profitability of their individual franchise units. This could prove costly if the franchisee hasn’t done the necessary work on building the business and growing the clientele. Furthermore, many franchisees are required to sign a contract
mandating that they own the franchise for a certain period of time (e.g. five years), and exiting before it terminates can carry a hefty fine.

These financial caveats shouldn’t deter interested potential franchisees, but instead inspire them to do their research and be sure they can easily fulfill the financial requirements of the franchise in the long-term.

2 ) Do I have the skills and knowledge necessary to make a franchise work?

Not all industries require the same set of skills and experience. Working “on the business,” and “working in the business” require different skill sets, but many times franchise owners are required to solve customer problems or even cover an absent employee’s shift. For example, if you own a Jiffy Lube franchise but you don’t know the first thing about working with cars,
then you’ll have a hard time making decisions that are beneficial to the specific nature of your business. Imagine working for a boss who never allocated the right amount of money to purchase certain parts and machinery. This would reduce the overall quality of service,
harming the franchise’s ability to turn a profit.

Keep in mind, however, that you also don’t necessarily want to acquire a franchise in an industry that is too close to your area of expertise or interest. For instance, someone with amazing culinary skills and a fond interest in cooking might not be the best person to become a restaurant franchisee. Why? Chances are, a chef with a true love and talent for cooking might find it difficult to maintain the strict policies and procedures set forth by the franchise.

Also, once you purchase a franchise in any industry, you aren’t in the business of the industry itself; you are in the franchise industry.

3) What is my end goal?

Owning a franchise means you own your own business, yet you are still under the auspices of a larger corporation that guides and directs what you do in your own store. For some people this is very appealing. Essentially, franchisees are in business for themselves, but not by
themselves. They receive a kind of stability and predictability that reduces the risks associated with owning a business. This same quality can also be a huge deterrent to people who crave independence and autonomy, so it is important to be sure you can operate under the franchisor’s rules and regulations. Some franchises allow the franchisee more discretion in this
area than others.

In other words, in owning a franchise, you trade a portion of potential earnings and independence for structure, predictability, and a built-in customer base. What you want out of owning a business will determine the best route for you. If you desire more or less freedom in how you run your store, it makes sense to do exhaustive research into their culture and
approach before you sign that contract.