Many people already have a business or two but want to expand. Some are new to entrepreneurship and believe that a franchise offers them the best chance of success. Either way, they’re weighing their options.
Is franchise the right business model? Benefits include more structure than owners typically have when starting a business — they don’t have to reinvent their plan from scratch. However, as with all things, this model has disadvantages, e.g. B. That franchisees must follow pre-established rules to which they may or may not agree.
Still, the United States has nearly 800,000 franchises in 300 different industries, so experts know the idea is a moneymaker 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 Copes Best With a Franchise? They are people from all walks of life who have one thing in common: a desire to be their own boss while providing a meaningful product or service to their local community.
You may not look like the stereotypical office entrepreneur. For example, many veterans are uniquely suited to franchise owners despite making up only 7% of the population. Her military training provides the discipline needed to get a new venture off the ground, while the structure and support are reassuring and reminiscent of her days as a soldier.
Other people who do well are those who have worked in the industry and dream of one day owning their own business – the hospitality industry immediately springs to mind. Likewise, established entrepreneurs with a knack for recognizing community needs can jump into franchise life to make starting their new business easier.
To determine if franchise ownership is right for the current situation, ask the following questions:
- Does the owner like to follow a system? Unlike traditional entrepreneurship, franchisees follow someone else’s model of success.
- Does the owner understand the financial and legal consequences? The money stays with the business owner. Are you ready for this responsibility?
- Does the franchisee have a passion for the industry? Why open a restaurant when the owner only dreams of getting out of the kitchen?
- How many previous franchisees have failed? Smart entrepreneurs want to choose an organization with a high success rate that can tell them what pitfalls to avoid. Ask the franchisor this question.
- Did the sales and profitability match what the franchisor reported? Ask this question to other franchisees who have entered the same business in a different location.
Assess community needs
There’s a little joke in America about a McDonald’s occupying every corner. Of course, that statement isn’t true – there are plenty of rural hamlets that could welcome this fast-food establishment. However, entrepreneurs should assess the needs of the community before opening a franchise. For example, why open a fourth Thai restaurant in a small town of just 10,000 people?
Do like the rescue shows in the TV restaurant and take a tour of the proposed location. What is the competition like? Use social media like Nextdoor to get community sentiment on the proposed project and create a poll to ask what the public would like to see. Attend city council meetings and other neighborhood gatherings and ask people what they want most by using networking opportunities.
Fund transactions with a lot of capital
However people cut it, starting a business costs a lot. A full 50% of all US franchises require an initial investment of at least $250,000 to get off the ground. That’s more money than most people have in their savings.
How can an entrepreneur finance his new business? Here are some options:
- Small business administration: The SBA offers small business loans at attractive interest rates. It also offers limited grants if the proposal fits into an area of urgent need.
- Investors: This is where a franchise comes in. Entrepreneurs don’t have to start from scratch with their business plan – their franchisor provides the necessary template. However, they still need to find angels to approach.
- Crowdfunding: Sites like Kickstarter and Indiegogo can help them fund their dream.
- Family and friends: Loved ones might be willing and able to sponsor this dream.
- Credit cards and personal loans: Proceed with caution 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 who want to make a living driving big rigs can lease a vehicle for their truck ride. This costs less than a purchase and can help until they get their first supply contracts.
Understand franchise rules
Owning a franchise means buying into an existing business model. This means that the franchisor must approve three facets of the process, while the franchisee remains responsible for others. This is where the franchisor will exercise greater control over operating practices:
- Infrastructure: In general, owners must choose from preselected locations. You’ll have to build to their codes – no McDonald’s with bright green arches – and make regular updates as the general business changes with the seasons or a full remodel is made.
- Operation: Franchisees must remain consistent with the chain. For example, you can’t open a KFC that only serves hamburgers.
- Territories: Let’s say the franchise is starting and the franchisee wants to expand. You can’t just build a different location in a different part of the city. Instead, the franchisor may restrict them to avoid undue competition from other businesses in the same family.
Despite the strict rules that entrepreneurs must follow, they remain ultimately responsible for all loans used to fund the business. In this respect, owning a franchise is like any other business venture – it involves risk.
Build a good reputation in the community
If people look at discussions about franchises on social media and on Yelp, they’ll find mixed reviews. The same restaurant chain can get nothing but praise in one place but bad reviews in another. The difference often lies with the individual franchisee.
Like any business, a franchise business needs to build a good reputation in the community. Although the franchise offers recognition, only the actions of the owner determine whether it receives a positive or negative connotation in the region.
Maintain accurate records
As a franchisee, keeping accurate records is crucial, especially when a business has employees. The IRS requires franchisees to collect income taxes and hold them in trust. Many business owners get into trouble when they use that money for other expenses and then find it won’t be available when it comes time to make their federal tax payments. You can be held personally liable for the trust fund recovery penalty even if your LLC designation protects your home and car from consumer lawsuits.
Avoid trouble with the authorities by hiring someone to do the books. Make sure they have the right skills to avoid problems – remember, the money ultimately stays with the owner.
Making a franchise work
Managing a franchise has several benefits. However, like any business model, it has its downsides. It is important to understand the pros and cons before investing any money. This way, franchisees are more likely to achieve their business goals.