Whether you’re interested in owning a top franchise such as Subway, Jackson Hewitt Tax Service, 7-Eleven or The UPS Store, or you’re more drawn to cars, pets, recreational activities or fashion, chances are there is a franchise opportunity out there for you.
There are nearly 90 different business sectors, with more than 5,000 distinct franchising opportunities in the U.S. market. A recent PricewaterhouseCoopers study found that franchising operations account for $1.53 trillion in economic output; in fact, 50 percent of all retail sales in the U.S. come from franchises. While exciting and enticing, buying into a franchise is a major investment, often exceeding $100,000, so before taking the plunge, BBB offers trustworthy advice for would-be franchise owners to consider.
From its new book, Better Business Bureau Buying a Franchise: Insider’s Guide to Success, BBB offers the following seven tips to help small-business owners set out on the right foot when opening a franchise:
- A seat at the table - A franchise fee is the initial payment you’ll make to use the franchise brand name and business systems. It does not cover the start-up and operational costs, which can be several times the franchise fee. Expect your initial cash outlay to be 5-10 times more than the franchise fees.
- Time is on your side - Slick, 4-color brochures, polished sales pitches, and promises of easy money all conspire to make any opportunity look great, but finding the right franchise takes time. Expect to spend 3-6 months researching every aspect of the business – from financial returns, to the viability of the location, to how other franchisees like working for the company.
- Local motion - Well-established franchisors provide national and regional ad campaigns. But you are generally responsible for creating and paying for the local advertising that will drive customers to your business. Ask the franchisor exactly what marketing and advertising they pay for and remember to include your own advertising costs in your business plan.
- Red flag – A high number of franchise failures or rapid turnover of franchise outlets may signal a problem. If more than 5-10 percent of the franchises have failed or changed hands over a three-year period, investigate the reasons for the failure or turnover carefully.
- Buy used and save - Depending on the type of franchise you’re acquiring, you may not need brand-new equipment to run a successful business. You can save substantially by buying used equipment. For example, if you have a restaurant franchise; you can buy pre-owned commercial ovens and sinks for a fraction of the cost of new ones. Check with the franchisor to make certain you are allowed to purchase used equipment.
- Temp work - There’s no better way to determine whether you and franchising are a good fit than to work at the franchise you’re interested in, even if this is not mandated by the franchisor. Even if you work at a location for only a week or two, being part of their everyday routines can be a very quick and effective way to find out if you like the business.
- Working capital - The single biggest cause of franchise failure is undercapitalization – not having enough money to get the business off the ground and operating. You’ll need enough capital to open your doors, keep your franchise going during the start-up phase until you’re profitable (which could be a number of years), and cover your personal expenses. Any loan you get should include working capital, plus money to pay business bills and expenses until sales start covering expenses. It’s common to include $30,000 to $50,000 in working capital.
For more valuable advice and trustworthy tips, check out BBB’s new book, Better Business Bureau Buying a Franchise: Insider’s Guide to Success, to help steer you through the complicated process of starting up your own franchise. BBB Insider’s Guides are sold at major book retailers including Barnes and Noble, Borders Books and Music, and Books-A-Million.