May 4, 2022.
Franchising is making a comeback after a dismal outlook at the beginning of the Covid-19 pandemic. The International Franchise Association forecasts that 17,000 franchise locations will be added throughout 2022.
Someone with an entrepreneurial spirit but an aversion to risk may think becoming a franchisee of an established chain is the way to go. This does, however, come with its own financial challenges some entrepreneurs may not think of. Below, 13 members of Forbes Finance Council discuss factors a budding business owner should consider before making the commitment to become a franchisee.
Members of Forbes Finance Council share important financial factors to consider before becoming a franchisee. PHOTOS COURTESY OF THE INDIVIDUAL MEMBERS.
Buying into a franchise comes with nuanced contracts, franchisor restrictions and a new business model to learn. Enlisting a business brokerage can ease the process. Brokerages understand due diligence and screen opportunities to help you avoid financial surprises. Having qualified pros in your corner will allow you to make educated and wise decisions, avoiding and preventing potential regret. - Brian Slipka, True North Equity Partners
Whether you go into a franchise or start something from nothing, you’ll have to work very hard in the beginning to get the business established. Either way, you have to come up with money and give up a percentage of sales. It all depends on the business you’re looking to open. A franchise can bring stability and proven processes to the table and be a great option for someone who’s new to running a business.- Joe Camberato, National Business Capital
Every franchise comes with built-in franchise fees, royalties and other expenses that are unavoidable for a franchisee. Put together, these costs might seem quite high. The only way to increase your profit margin and not feel the burden of such fees is through a phenomenal sales chart. Doing a market survey in the locality of the proposed franchise will give you a heads-up about anticipated sales. - Anil Grandhi, AG FinTax
You have to have the necessary capital. Your profit margins may be lower than expected due to paying the royalty to the franchisor. Also, paying into a national advertising fund relinquishes control to franchisors, which in many cases doesn’t help an individual franchisee as much as spending their own money on local marketing. Definitely consider this when committing to buying a franchise. - Letitia Berbaum, The Zandbergen Group
Read the fine print. Franchises do not come without risk! Regardless of the business model and established brand, you are still a new business. The upfront cost to operate a franchise can be the same as or more than starting your own business, and you have to share your profits. There may be unexpected cost or brand reputation issues that affect your business regardless of the success of your individual location. - Cynthia Dalagelis, Amalgamated Bank
Sales will always be a direct determinant of a franchise’s profitability. As such, a proven sales record should be your key focus before committing to a career as a franchisee. The likelihood of being able to capitalize on this venture greatly increases if the franchise has a proven record of sales. Your franchise can still succeed without proven success, but you’ll be facing an uphill battle. - Mara Garcia, Phonexa Holdings, LLC
Depending on the agreement, you may have less operational maneuverability than you think. Some franchises require you to use specific suppliers, regardless of the market price. You may end up being locked into long-term contracts at prices you have no control over. While the structure and scale of a franchise can be enticing, these very same factors can be your biggest headache.- Aaron Spool, Eventus Advisory Group, LLC
The upfront financial aspect is not for everyone. You have to be ready to be an owner-operator, just as you would with your own small business. Recognize that you will have some of the same challenges as other small-business owners. The positive is you do not have to push the marketing quite as hard, and you have an established brand. You just need to concentrate on working hard to keep that brand.- Will Tullos, Reliant Mortgage LLC
When you buy into a franchise, you’re paying a premium based on the brand equity, marketing and business/industry knowledge of the franchisor. If the franchise comes with an equipment package and construction or other requirements, weigh the benefits of paying a premium for a franchise versus starting a similar business on your own. What’s the ROI or risk-reduction value of that premium? - Glenn Hopper, Sandline Global
Every business, at some point, will transition to new ownership, either internally or externally. Therefore, before you purchase into a franchise, you need to understand all the nuances of exiting the franchise. They all seem to have different rules, and developing an exit strategy plan early on in the game can be of tremendous value, especially if unexpected events arise. - DeLynn Zell, Bridgeworth Wealth Management
Most franchises upgrade their brand standards every few years. This can set off a chain reaction of unplanned expenses that are not optional. Franchises with storefronts can even require you to upgrade commercial buildings, which can be huge money. So do your homework about what those expenses look like. Talk to current franchise owners who know the ropes. - Todd Sixt, Strait & Sound Wealth Management LLC
Becoming a franchisee may be a perfect option for a risk-averse entrepreneur if they keep in mind that a franchise name does not guarantee success from day one. Be prepared for it to take a few years to establish your new franchise location, and plan for these potential financial losses from the beginning. Save up and prepare properly. Pick the franchise that is best for you, not the cheapest! -Joseph Orseno, Tiltify
Plan carefully, and have the right professionals review the details prior to your commitment. Many people are successful with franchising, and some business models will work. Make sure you also do sufficient due diligence and think seriously about the decision. Plan ahead, look at markets, talk to other franchise owners and know yourself.- Dave Sackett, Visibility Corporation