Owning a franchise can help you expand your business portfolio and earn passive income as an entrepreneur. While it is easier to get a business up and running when you franchise, there are still many strategic decisions to make before you decide if an opportunity is right for you. These five steps to take before investing in a franchise will help you protect your finances and plan for your future.
Investigate the Company’s History
Explore the entire history of the company you’re considering franchising through. Have they had any scandals or financial problems? Both are important because they can impact the longevity of your business.
You should also look into the company’s leadership, including the talent of its C-level executives. A high turnover of CEOs and CFOs can indicate poor management and internal problems. It’s ideal to invest in a franchise company that has a longstanding history of success and a positive brand reputation.
Explore the Company’s Financial Performance
You want to determine two things during your preliminary financial analyses:
- How much money does this company generate on average per year?
- What does the average franchise owner make on average per year?
The first figure tells you the overall health of the company and its potential for growth and profitability. The second figure helps you understand what your potential return on investment (ROI) might be and how long it could take you to break even on your initial funding costs.
See if you can find any forums or YouTube videos from franchise owners that reveal firsthand experiences. Having an inside look at the operations of a franchise can make a major difference in your perception of the company.
Determine Market Demand and Competition
Opening a franchise requires entering a market and meeting a demand. If there isn’t a large enough desire for the goods or services your business will offer, then you’ll spend thousands of dollars on what will likely become an insolvent business in a year or less.
To perform a market demand analysis, you can perform primary and secondary research. Primary research involves asking people directly through interviews and surveys about their interest in a business. Secondary research includes reviewing industry reports, evaluating new business openings in your region, and performing competitor analysis.
You can use tools like Google Trends and Statista to learn more about the industry you’re thinking of franchising in to see if it would be a good fit for your future.
Determine Your Operating Capital
Every business starts at a loss. The challenge as a franchise owner is being able to successfully operate and turn a profit as quickly as you can. This means figuring out exactly how much capital you’ll need to run your business. Aside from the initial franchising costs, what funds will you need to have to ensure the business runs smoothly as it works to attract customers?
If you find that the cost of operating may stop you from breaking even within the first three years, consider another opportunity.
Consult With Existing Franchisees
Social media, online forums, and the franchise disclosure document (FDD) will offer easy access to franchise owners. You can leverage these tools to reach out to current owners and ask them questions. Many franchises also have official associations or professional networks that allow you to speak with current owners and learn about their experiences.
Usual franchisees are willing to speak with you, but remember to be mindful of their time; speaking to you is a courtesy, not a requirement, so remember to respect their schedules.
With these steps, you’ll be ready to begin your exciting journey into franchising. Remember to stay open to multiple opportunities and avoid rushing into any particular venture. Taking the time to develop a strategic business model will ultimately help you become more successful and break even faster.
Published by: Holy Minoza
