Buying into a franchise
"Make sure that your skill set lines up with the franchise’s industry."
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Hi. I’m Tegan Jones for the Wells Fargo Business Insight Series. Today we’re talking about the basics of franchise ownership and how to know if it’s right for you. Joining me is Anita Campbell, founder and CEO of smallbiztrends.com. Thanks for joining me, Anita.
My pleasure, Tegan.
For a lot of people opening a franchise might seem like an easy way to start your own business, but I know it’s important to understand the ins and outs of this type of endeavor before you jump right in. So what are some things to consider before you decide to open a franchise business?
Buying into a franchise requires you to make a large initial investment, so it’s important to ensure that your current and future finances are in order. So ask yourself how much money can you afford to lose? How much can you afford to invest? And how can you get financing if you need it? And also look at how much savings or additional income you have to live on while you get that franchise business off the ground. Also, assess your experience and your personality. Make sure you’ve got the right skill set, and you have to be really honest with yourself about this. For example, if you’re opening a store in the retail industry are you really cut out for retail? Do you like interacting with customers day in and day out? Do you have the managerial skills needed to run a retail business? And do you have the necessary technical experience? You know, some businesses look like they’re easy from the outside, but usually once you get involved in them you realize there’s certain expertise that you really do need to have to run that business.
Right, that makes sense. So once you’ve asked yourself these questions what are the next steps?
Start by researching the industry and also evaluate the franchisor. So to get started look at materials from associations or groups such as the International Franchise Association, the American Franchisee Association, the American Association of Franchisees and Dealers. These groups will help you with general information to understand the franchise process, and also information about individual franchises in some cases. Make sure you understand the products and services that you’ll be distributing as part of your new business. So you want to make sure that you know how well is that particular product when you perform in your region, in your community. Also, examine the competitors of that franchise and make sure that you understand how many competitors there are in your neighborhood, in your community, or wherever you’re going to be competing.
It’s also important to carefully research and evaluate a potential franchisor so work with an accountant or a business advisor. Review their past financial situation as well as their present financial situation. Also, review their franchise discloser document which is referred to as the FDD. It’s an overview of the company’s financial history, and it’s something that’s required by the Federal Trade Commission. This document will tell you if the franchisor is in bankruptcy or has been involved in recent litigation disputes, and other important information that you need to know.
And finally, you want to perform basic market research to find out how many branches of the franchise have closed in your area. You really want to know, what’s the experience been of these other franchisees? Try to find out how long the franchise has been in operation, as well. You want to make sure there’s a good track record.
Doing your own research is always really smart. So with this information about yourself, the industry, and the franchisor you’re considering, what else can you do to ensure you’re investing your time, your money, and your energy wisely?
You have to do due diligence and I can’t emphasize this enough. What due diligence means is that you call and set up a time to visit owners, and that means both current owners and former owners of several branches of that franchise that you’re looking into in your area or near your area. Also, try to arrange a time to speak with operations, employees, or executives of the franchise headquarters. You’re going to want to ask questions of them to gauge the effectiveness of their internal support team.
Those are really great tips, Anita. Thanks so much for your time today. I think this will help our listeners think strategically about whether becoming a franchise owner is the right choice for them.
Happy to help, Tegan.
And thank you for joining us for this segment of the Wells Fargo Business Insight Series. To learn more about how Wells Fargo Business Banking can help you visit wellsfargo.com/biz. In the meantime we wish you continued success.