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Should I Buy a Franchise?
Should I Buy a Franchise?
For a lot of people, starting a business is an unappealing idea, given that most startups fail within a year of launch. Franchising provides a better alternative to business ownership, but it is a decision that should never be taken lightly. There’s a lot to consider when purchasing a franchise, and you must do your due diligence on a franchise opportunity before taking the plunge. Here is the best research to do before buying a franchise. We hope that this Should I Buy a Franchise post inspires you.
Should I Buy a Franchise?
Industry, TAM, SAM, and SOM
By the time you are considering buying a franchise, you already have some idea of the industry you want to venture into. Take time to research that industry and understand it intimately. Your research should cover issues like growth trends, competitors, industry size, etc. Also, ensure that you conduct market analysis to understand your TAM, SAM, and SOM. TAM (Total Available Market) is the total market demand for a product or service. The Serviceable Available Market (SAM) is the segment of the TAM within your geographical reach and the Serviceable Obtainable Market (SOM) is the portion of SAM you can capture.
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Local market
As you conduct industry research, focus on researching your local market. This will give you a better understanding of your local TAM and SOM and help you negotiate the size of your exclusive territory later on. For example, if you want to invest in home service franchises for sale, think about which geographical areas you’re most likely to get clients from and research competitors in those areas. Knowing what your competitive landscape looks like is critical because it will determine how much you invest in marketing and advertising and what your ramp time will look like. Lastly, watch out for any overlaps in territories in your local market, as these could cause serious issues with other franchisees.
The Franchise Disclosure Document
If you are serious about a particular franchise opportunity, ask to receive the Franchise Disclosure Document [FDD]. This document gives you all the essential information about the franchise in granular detail, so take your time and read through it. Most franchisors will do an FDD review with you, but ensure that you review it with your attorney as well. Hire a franchise solicitor or someone familiar with FDDs and the franchising industry to provide you with an unbiased review, pointing out anything particularly promising or concerning.
Startup costs
Most of the costs involved in purchasing a franchise are fixed and well documented in the franchise disclosure document [FDD], but some aren’t. Beyond the minimum requirements, which are usually the franchise fee and the cost of equipment, getting a franchise up and running can involve many other costs, including:
- Sales and marketing: Although the parent company will help advertise your business through nationwide marketing campaigns, you will need to plan for local sales and marketing costs. Sales and marketing costs can run high, especially in the first few months, as you try to raise awareness. These marketing activities include giveaways, sponsorships and advertisements, purchasing lead lists, trade shows, etc.
- Recurrent fees: After setting up your franchise, you will be required to pay a royalty fee to the franchisor on a weekly, monthly, or yearly basis, as well as a marketing development fund fee. Find out whether the royalties are a flat fee or a percentage of your sales and how soon you’re expected to pay after opening your franchise.
Franchisor reputation
Searching for the right franchise, you'll find companies with decades of experience and newer ones with evolving strategies. This diversity is essential to consider when choosing a franchisor. In evaluating their reputation, pay attention to the advantages of affordable franchises. They offer a lower financial entry point, making starting your business venture easier. These franchises typically provide strong support and a tested business model, helping you grow by leveraging their expertise, regardless of industry tenure. When researching a franchisor's reputation, look into the following things:
- Tenure: How long has the company been in business?
- Litigation history: Check if the franchisor has ever been involved in a lawsuit from a vendor or franchisee. What was it over?
- Success rate: You can find a company’s financial information on item 19 of the FDD. Not all franchises agree to share their historical financial performance, but if they do, use it to analyze their success rate.
The support system
One of the benefits of buying a franchise is the initial and ongoing support franchisees receive from the franchisor. Therefore, finding a franchisor with a great support system should be a top priority when conducting research. Talk to other franchisees to determine what kind of support is offered and how often they receive the training needed to run their businesses. We hope that this Should I Buy a Franchise post inspires you. Good luck!
