Recently I sat down with 5-year franchise owner Shana Heath. I got her thoughts on the ins-and-outs of running a franchise and the 7 key areas to consider before purchasing one.
Shana owns two different franchise systems including an Allstate Insurance Agency that provides personal, home and vehicle insurance and a Liberty Tax Agency that provides professional income tax preparation.
Let’s dive right in!
Quick Definition: A franchise is a type of business that a person (franchisee) acquires to allow them to have access to a business’s (the franchiser) proprietary knowledge, processes, and trademarks in order to allow the person to sell a product or provide a service under the business’s name. Think McDonald’s, Dunkin Donuts or Pizza Hut!
Purchasing a business franchise is a great option for a business-minded person who would like to own and control a business without having to recreate the wheel. Much, if not all, of the groundwork, has already been established by the franchise system and several decisions regarding daily operations have already been made. In fact, a franchise owner can decide how involved he or she would like to be, and after you’ve owned a franchise for a few years you can branch out and start a competitor on your own!
But before skipping too far into the future, let’s look at the 7 areas you need to consider as you start the process of purchasing your first one.
1. Research your market
A key step in deciding which franchise is worth investing in is to simply research your market.
“Franchising can become saturated. Just like real estate became saturated at one point. When you’re looking at a franchise you definitely want to see what their market penetration is in the area you are considering”
For example, if you’re considering purchasing a McDonald franchise, ask yourself how many McDonald’s are there already on that street or in that neighborhood? Is the neighborhood over-saturated by McDonald’s already at this point?
If the answer is yes, then you can consider another location or a competitor like a Burger King or KFC.
2. Figure out how hands-on do you want to be
Do you want to be an Absentee Owner or Owner Operator?
Definition: Absentee Owners typical hire General Managers to manage the day to day of their business, whereas Owner Operators are on-site and act as the owner and operator.
If you are already working for another employer. For example, having a ‘nine-to-five’ job then perhaps purchasing a franchise where you can be an Absentee Owner may be a better fit for you.
“In my opinion, I don’t necessarily believe you have to stop working your nine-to-five to start the franchise. Just look at what at what your finances can support and then decide what kind of owner you will be.”
3. Figure out the money
Be hyper-aware of how you will be paid (your profits) and how the franchise system (parent company) will get paid. This includes understanding the franchising fees, royalties, advertising fees etc. What are you getting a chance to keep? For example, are you able to keep all new customer revenue but the franchise system gets paid old customer revenue? Being aware of every avenue you will get paid vs. how they will get paid is important information to know.
4. Determine how you’ll be able to market
How much freedom will you have in your marketing? Some franchise systems, like Liberty Tax, control the majority of the marketing dollars. They have a very specific aesthetic and require stores to look the same. However, other franchise systems leave the marketing decisions to you. You control how your marketing dollars are spent.
5. Figure out the direct expenses
You need to understand what you are required to pay for vs. what the parent company is giving you, keeping in mind that we use the term ‘giving’ loosely because technically, you are still paying franchise fees. However, you need to know what you will be required to pay for out of pocket to maintain the running of your daily business.
“In one of my franchises, it is completely on me to pay for 99% of my expenses.
I mean down to the envelope, business cards, every single thing, everything is on my business partner/husband and I.
In my other franchise there are things that I have to pay for but its the complete opposite because 90% is paid for by the Franchise System. All I have to do is order and restock.
It is automatically part of what is provided to me, so understanding this piece is important too.”
6. Levels and liaisons
Take a look at where franchises owners fall in terms of levels of success. Can you be successful with one location or do you need multiple?
Be aware of if the franchise allows you to meet with and speak to other owners at every level. For example, will you be allowed to speak to owners that are highly profitable vs. ones that are struggling in their market? It’s a great opportunity to be able to speak to owners that fall on every spectrum of the scale.
7. Determine your startup costs/investments
The startup costs not only include purchasing the building, and rent or setting up phone lines and painting the space. It also includes setting up payroll, hiring staff and a ton of miscellaneous costs that add up. You need to know what you’ll need and if the franchise systems provide a budget to help you prepare for these costs. Make sure that is something that they offer.
These 7 areas are key as you consider buying your first franchise.
However a few other noteworthy mentions are:
Asking if the franchise system will train and offer a support system. Having a network that is accessible to you is important. Always be aware of your local ordinances. Any new ‘brick and mortar’ business owner will need to be aware of the laws in their city.
Lastly, if you are planning to purchase a franchise business that comes with old clients be aware that there may be some hand-holding needed to get them used to the change in ownership.
Good luck navigating the franchise waters!
Be sure to consider these areas as you decide if purchasing a franchise is right for you and let us know in the comments what stood out or if you have any questions.