By Charles Dean Smith, Jr. CPA
For those interested in starting their own business, buying a franchise can be an attractive option. However, with so many options to choose from, this is a decision that requires careful consideration.
In this article, the franchise team at PBMares draws upon experience working with franchise clients to break down five key considerations to keep in mind when contemplating buying a franchise.
1. Compare Franchise Ownership vs. Independent Business Ownership
Starting an independent business from scratch often comes with a lot of unknowns. The same is true even when purchasing an already-established business.
A franchise, on the other hand, comes with proof of a successful business model that’s already in motion, structured processes, training methodologies, and support systems across all facets of the business. These benefits can help franchise owners start up quickly and hit the ground running.
“Franchising is a great option for those wishing to leave the corporate world and start their own business as they are used to following operating procedures and guidelines. I tell many of my clients and prospects that — if they appreciate the benefits of a solid structure and working within established procedures — franchising may be a good choice for them. Many also appreciate the work-life flexibility that a franchise offers after working many years chained to their desks in a traditional office.”
Take the time to compare several independent business options and franchise opportunities so you make a decision that is right for your unique situation.
2. Perform Extensive Due Diligence
Once you’ve decided that franchising is right for you, performing due diligence is the next step.
Of course, you’ll review the franchise disclosure document (FDD), which provides details about the franchisor’s financial health, fees, and initial investment requirements.
Financial considerations are a significant part of the decision-making process. The upfront franchise fee is just the beginning.
Consistent royalties, marketing fees, and other expenses certainly require careful review, preferably with the help of an expert.
Although a large chunk of the document may be boilerplate information, it makes sense to have a professional look it over — especially considering that the FDD can be more than 300 pages long.
Part of the due diligence should focus on factors outside of the financials in the FDD. Take the time to find and analyze more gritty details like:
- What drives one entrepreneur might not motivate another. Therefore, assess whether the business model suits your particular skills, interests, and financial resources.
- Franchisee perspective. What is life like for owners of this particular franchise? Reach out to current franchisees and ask about firsthand experiences.
- Degree of autonomy. As a franchisee, you’ll have some autonomy in how the business operates. But for the most part, you’ll need to follow the directives of the franchisor.
- Quality of support services. Because they can significantly impact the success and growth of the franchise, be sure to assess the quality and accessibility of support services like training, marketing, and operational guidance.
“Some entrepreneurs do not have the personality or management style that will work well in a franchise setting. If you haven’t previously worked in a corporate setting, it’s possible you may dislike following established standard operating procedures and having outside oversight. Make sure you fully understand the FDD and all contractual obligations that are disclosed, including required construction costs/contractor selection, inventory purchase requirements, pricing flexibility, and product/service offerings.”
3. Analyze the Financial Viability of Your Unique Situation
The cost of buying into a franchise can be staggering. The franchise fee alone can put a significant dent in your liquidity position.
Once you’ve gotten a handle on the total costs involved, including franchise fees, royalties, marketing expenses, and operational costs, it’s time to objectively assess the financial feasibility of the venture in light of your personal financial statements:
- Does financing make sense?
- How will that impact future profitability?
These are questions that can be answered by working closely with accounting experts with franchise experience to develop realistic budget projections and assess financial readiness.
4. Find Out How High-Performing Franchisees Are Treated
Does the franchisor recognize and reward high-performing franchisees?
Are best practices and learnings consistently gathered and shared?
A franchise that recognizes and rewards high performance will build a strong talent pipeline and ensure the franchise’s long-term competitiveness and sustainability.
The rewards don’t necessarily need to be tangible. Find out if the franchise takes time to listen to franchisees. Franchisees who feel heard are more loyal and engaged, which benefits everyone involved in the franchise network.
5. Partner with a Trusted Advisor to Protect Your Interests
The decision to become a franchisee isn’t just a business endeavor — it’s a choice that has enormous personal and professional implications.
One thing is certain — owning a franchise will be complicated at times.
Whether it’s changes in tax policies, ever-rising minimum wages, or something like the changing joint employer rule, franchise owners benefit from partnering with a trusted advisor to manage their business finances, budgeting, and planning.
An experienced advisor will leverage a portfolio of tools, industry benchmarks, and a deep understanding of issues facing your unique franchise situation. For you, this means more time to focus on managing your new business.
Learn More
With many years of experience serving franchises in various industries, the Franchise Team at PBMares offers comprehensive accounting, management, and business advisory services that can change the trajectory for your business.
