Buying a franchise can be a great investment, however, choosing the right franchise for you can be a challenge. With more than 3,000 franchise opportunities available, a prospective franchise buyer needs to be ready to weed through the clutter. Franchise attorney Lane Fisher, offers up some advice to franchise buyers in the article below. For more on this, continue reading the following article from TheStreet.
Pursuing the franchise model can make a business owner a small fortune, especially since it remains a growing part of an otherwise struggling economy, but deciding among brands and industries in the franchise universe is a make-or-break decision, says franchise attorney Lane Fisher of Fisher Zucker.
Fisher sits on the board of directors for the International Franchise Association, the industry’s main trade association. This weekend, the IFA’s International Franchise Expo will take place for the first time at the Jacob Javits Convention Center in New York City. In previous years, the Expo was held in Washington, D.C.
More than 300 franchises looking to expand in the New York region will be exhibiting. The event is open to the public. Up to 10,000 attendees are expected to come to the convention.
But before signing on the dotted line, there are several key points any franchisee should understand about buying into a system. Fisher lays out a few of the most important details to consider:
What are the first steps to take after you make that decision to buy a franchise?
Fisher: It’s important to understand what your skill set is so you can look at opportunities that complement your skill set. You also need to consider the amount you have to invest in the business. That’s incredibly important. In addition to what you might have in cash, often folks look to financing. While the financing market has been gloomier, we are seeing that loosen up — there does appear to be companies that have financing available. There is also a unique way to garner financing by using your IRA. You need to gather some intelligence to figure out what you have to spend.
Should a potential franchisee have all their financing in place before they approach a franchisor?
Fisher: Smart franchisors have garnered relationships with lenders who understand their business model. [Banks that are not familiar with the franchisor] would have to invest a lot of resources to get to know the franchisor. It’s hard to do that looking at a lot of disparate opportunities.
While you might want to pull your credit report and have an idea of what your home equity line of credit is, until you start to dial in to a particular opportunity it’s hard to get pre-approved. As part of the application process people make financial disclosures. Part of the approval process is [franchisors] will already be checking your assets and credit to approve you.
Should new franchisees only look at big, known brands to invest in? Is this where they can get the most bang for their bucks?
Fisher: I don’t think well-known and low-cost are mutually exclusive. Most people don’t have $1 million to invest. Many of them have been funded through 410(k) investments. If you look at [the IFA] members we have, many are home-based or mobile and have gigantic networks of business. If it’s $100,000 or $200,000, the amount needed to make the same return on your money is different than you if you invest $1 million. The return is faster.
What are the key factors of a good franchise?
Fisher: In a good business, strong trademarks is certainly up there; reasonable unit economics — we call it reasonable return on investment; one that has teachable skills with well-defined training systems and operating procedures; one that has a unique concept that is differentiated from competitors; and one that has seasoned management with both experience in franchising and in the underlying business that’s being franchised. Look for a company with a track record of growth.
What are some common misconceptions about franchising?
Fisher: I think people don’t recognize that it’s a restricted relationship. You’re often limited in geography and a particular channel distribution. You have to operate within standards and follow systems. You have to pay initial and ongoing fees to the franchisor. Often you have required purchases of things by the franchisor and you’re limited in what kind of advertising you can do. Also, there are terms. [The franchise agreement] is not forever; you have rights to renew it.
What should new franchisees have prepared besides financials?
Fisher: I think you should know timing for when you’re prepared to make an investment. You should have a process and procedure for looking at these investments. Identify a professional accountant to help you prepare well-thought-out projections of what your business will do and of course a franchise attorney — not the person who wrote your will — who is experienced in these kinds of matters. It’s probably the most expensive investment that a person will make. A good place to start is [the IFA’s website].
I always say to folks, don’t fall in love with the yogurt. Make a business analysis. Even brands you never heard of might be an ideal opportunity for you. It’s not that easy to pick them. We have so many people calling about yogurt today. There are yogurt stores on every corner, so you really have to make a competitive [decision].
This article was republished with permission from TheStreet.