Franchises are an attractive way to get into a new business. They come with brand recognition, advertising power, and vendor contracts already in place. Depending on if you buy an existing franchise location or start your own, it may even come with trained staff. But despite the benefits, franchises aren’t an automatic success. Before you decide to jump in, there’s some important research to do that will tell you if franchising is wise or even viable for you. With a few experts and a great broker on your side, you’ll significantly boost the outlook for your franchise.
Should You Buy or Launch a Franchise Business?
One of the first and most impactful decisions you’ll have to make is whether to buy an existing franchise location or launch a new location from the ground up. Both have their pros and cons and you’ll have to weigh them to determine your best course of action. If you opt for buying a franchise location that’s already in business, you’ll have the advantage of an established customer base, reliable cash flow and projection numbers, and some wiggle room when it comes to negotiating price. However, you’ll have to do some work to change the store’s reputation if it’s had past troubles in the neighborhood.
Starting from the ground up means you’ll need to build your reputation from scratch too. That clean slate can be just what a new owner wants, however. A new business means new equipment, which will put you in a favorable position over the long haul. Your equipment will most likely be more advanced and have a longer working life than if you simply took over what the previous owner was using. Plus, you don’t have the hassle of evaluating staff to decide who to replace and who to retain. You’ll be building a new team with the qualities you’re looking for. The downside of building a franchise from scratch is the risk. But with greater risk comes a greater potential reward. You may also encounter a rigid fee structure imposed by the franchiser.
We will look at some further considerations, but in general, the best answer for whether or not to buy or launch depends on your assessment of demand in your market, so there’s no right or wrong answer that works for everyone. Your level of experience and risk aversion, as well as the amount of time you have to put into the project, should influence your decision. A broker can also help you evaluate your options for financing a franchise purchase.
Buying an Existing Franchise
If you decide to take advantage of the benefits buying an existing franchise can offer, it’s important to do a thorough evaluation first. Not every coffee shop will be lucrative, just because it has the franchise’s name on it. It’s a good idea to engage the services of a legal professional at this stage as several documents and regulations come into play when buying a franchise. Take a look first at who the franchiser is and what type of support they offer. What kind of infrastructure do they have in place and what do existing vendor contracts look like?
Do some due diligence when it comes to the business’s reputation. You can check places like Yelp! and Next Door, as well as looking at Google reviews. Don’t forget to check with the Better Business Bureau and potentially the city’s health inspections office, if it’s a food service franchise. You can also get an inside opinion from the staff who work there. Be sure to ask the current owner why they’re selling their business. Is it because they’re looking to retire or because local vandals cause more damage than they can keep up with?
You’ll need the help of a franchise attorney, an appraiser, and a financial expert to tackle these next steps. The attorney will help you look over the contract known as the Franchise Disclosure Document, which is a legal contract between you and the franchisor. It outlines what your requirements will be as far as keeping branding and training consistent, fees, and other important details. While the owner will give you information about the business’s value, you’ll want an outside opinion that addresses the value of its inventory, equipment, assets, and goodwill. One worthwhile resource is the American Society of Appraisers, which can help you quickly locate an appraiser in your area.
The business owner should have at least three years of financial records on hand that they can share with you. This is where it can be helpful to have a financial expert evaluate alongside you. You’ll be looking for debts, a profit/loss statement, cash flow, income, and a balance sheet. A savvy negotiator might find some key points here to help nudge the purchase price of the business in your favor. Once you’ve agreed on a number, get with a broker to find out the best way to finance the deal.
Launching a New Franchise
If you’ve decided on the more ambitious path of launching a franchise from scratch, your journey will look a bit different. For one thing, you won’t need to consult with an owner or worry about which staff to retain. However, you’ll need to work harder on your financial projections, planned location, and launch marketing campaign. The best stepping-off point for this is with the franchisor’s model, which you shouldn’t have any trouble getting ahold of. It will need to be tweaked a bit to fit your location, competition, and preferences, but it will get you started.
Arm yourself against uncertainty with as much information as you can gather. You’ll want labor costs for your region, utility costs, franchise fees, rent (if applicable), taxes, inspection costs, and appraisal fees. Identify what will drive your cash flow and anticipate your growth rate month-by-month. Startup costs will play heavily into your calculations but should taper off as you become more established. Try to speak to other business owners in your area and contact fellow franchisees who are already operating in your city. They may have information that isn’t spelled out elsewhere.
You can find templates online to help with your forecasting, but unless you’re an expert at crunching the numbers, they won’t be enough. Don’t build your new empire based on amateur projections. You’ll also want a few different takes on the future of your business. What is the worst-case scenario? What will it look like if you reach your highest goals in the first year? How about if you hit the mark somewhere in the middle? It pays to dig in at this stage because it could mean the difference between the success and failure of your franchise.
Financing Your Franchise
When you’re looking through your franchisor’s information, you might start to think you have to use the financing they offer. That’s not true. The franchisor doesn’t even always offer the best deals. Without a doubt, the easiest and fastest way to finance your franchise – whether you want an SBA loan, a hard money loan, or a bank loan – is by partnering with a loan broker. It’s also the best way to finance at the lowest cost.
According to Franchising.com, the average cost to start a franchise is around $200,000. However, full-service restaurant and hotel franchises can cost in the millions. Then there’s the franchise fee, which can run an average of $20,000 to $30,000. It will take time to see profits from your new business, which is something that should be factored into your projections. That might mean avoiding short-term loans like a bridge or hard money loan in favor of long-term financing. However, if you’re interested in growing the business quickly to sell, short-term options could be suitable.
Your broker can take your short and long-term goals for the franchise into consideration when helping you pick the right loan. They’ll also help you factor in your credit, business experience, and net worth to find the most cost-effective way to finance your new business. Start a conversation with our team today.