Posted on Jul 3rd 2018
For many, owning a business equals freedom to be your own boss, do something you’re passionate about, and having limitless earning potential.
Yet, for some, the uncertainty and risk of building a business from the ground up is intimidating. Therefore, the prospect of buying a franchise seems to offer these folks a clearer path to successful business ownership.
Franchise ownership offers support, a proven business model/brand, training, mentorship, and networking power.
Still, there are many things to deliberate before buying a franchise.
What is the demand for the product or service? Is the industry growing? How much competition does the brand face? Do you have the right personality for this business?
Of course, there are also many monetary considerations that a trusted financial advisor can help sort out. In the meantime, here are five things you should know about business before purchasing a franchise.
#1: What Makes Buying a Franchise a Good Investment
I am often asked the question, “Is buying a franchise a good investment?” Of course, I strongly believe that investing time and money in the right franchise is.
First of all, it’s important to determine ROI on traditional investments (stocks, bonds, etc.) and franchise investments differently.
Simply stated, for traditional investments, any dividends, earnings or appreciation on your capital investment can be considered ROI.
However, determining ROI for your franchise is more complex. Franchisees are much more actively involved, and there is non-monetary compensation to consider. This is referred to as soft benefits.
First, let’s look at your costs. You’ve got the hard costs of your capital investment. That’s the easy part. Next, if you are actively running the franchise, you need to assign a cost for your time and expertise.
Measuring those costs against profits isn’t limited merely to financial gains, however. Unlike cut-and-dry traditional investments, you need to factor in things that are hard to quantify.
For instance, what is the value of pursuing a life-long dream of entrepreneurship? Can you monetize personal and professional development? What is the dollar equivalency of using your passion and talents on things that are important to you? Can you put a price tag on spending extra time with family once your business is up and running successfully?
The right franchise will turn profits, while providing its owner priceless wealth of a life lived on their own terms.
#2: The Franchise Registry
Many franchisees need to finance their purchase. The best franchisors will be able to help make the process easier and less stressful on their potential franchisees.
It starts by being listed with the Franchise Registry. This organization “validates that a franchise is an existing and thriving company.”
It also connects lending institutions to validated franchises and their franchisees, providing support and services.
Finally, many franchises listed with the SBA Franchise Registry also have a pre-approved business concept. This means that potential franchisees will get expedited processing on loan applications.
#3: Starting Up Debt-Free
Did you know that many people use retirement funds to start a business or buy a franchise?
401(k) Business Financing, or Rollovers for Business Startups (ROBS) offers an alternative to loans, with no risk to home equity.
ROBS also allows you to use all or part of your IRA or 401(k) funds without taking a taxable distribution.
This option works for many franchisees that want to leverage their retirement funds to start out debt free. It eliminates any loan interest payments and offers the potential to make money faster.
While this option has been available to many entrepreneurs since the ERISA Act of 1974, not everyone is aware of it.
However, some franchisors have alliances with financial institutions that advise and help facilitate this process for potential franchisees. For instance, Romp n’ Roll has partnered with Guidant Financial. These financing experts have helped many in the Romp n’ Roll network fund their franchise purchase with retirement savings.
The best part is, with no early withdrawal fee or tax penalties, entrepreneurs can continue to save for retirement.
#4: A Word About Fees
Although all franchises are structured differently, here are a few standard fees potential franchisees should know about:
- Franchise Fee. This is the one-time charge to join the franchise system and use the brand
- Royalties. Franchisees pay either a fixed amount or a small percentage on gross sales. This royalty is paid to the franchisor on a routine basis. It allows you to continue using the brand and stay in the franchise system. It also helps franchisors fund their staff and provide support services for its franchisees.
- Advertising Contribution. The franchisor usually charges a nominal percentage for advertising. This money is used to promote the brand, create marketing material, place advertisements, and more.
All terms should be clearly specified in the franchising contract.
#5: No One-Size-Fits-All
Opening a business under any circumstances can be difficult.
While there are no guarantees, some sources cite franchises as being more successful and less risky than independent startups.
To be sure, becoming a franchisee can cut down or eliminate many start-up headaches and risks.
And yet, franchise ownership is not for everyone. It’s a very individual decision.
It’s important to do some soul searching and a lot of research. Put yourself mentally in different scenarios to see where you will feel most comfortable and perform your best.
If you are leaning towards a franchise, thoroughly examine their Financial Disclosure Document. It is in both the franchisee’s and the franchisor’s best interest to find a great match.
Bringing It All Together
Buying a franchise is more than a business decision. It’s a life decision which requires passion, dedication, and the right combination of skills and personality to match the brand.
Michael Barnett is the Co-Founder and CEO of Romp n' Roll. In addition to leading the Romp n' Roll management team, Michael is an active member of the International Franchise Association, the National Association for the Education of Young Children, and serves on the Board of Directors for Connor's Heroes and Juniata College Center for Entrepreneurial Leadership. He and his wife, Babz, were featured on the first season of ABC-TV's Shark Tank.