Top 5 Buying Factors when Buying a Franchise - Part I
A question I hear often is, "If you were in my shoes, what franchise would you buy, or what is the hottest franchise right now?" I repeatedly come back to them with the statement that it does not matter what I think, it matters what you think, since you are the one that will be signing the franchise agreement and ultimately affected by the outcome of the business. Therefore, it only matters what you think. Here are the buying factors that you should think about when buying a franchise:
Those are the 5 buying factors of purchasing a franchise or any business of any kind. The secret is, every one of them must be met and answered in your satisfaction in order for to select the right franchise or business. Let's discuss each one.
SAFETY - Safety is the number one buying factor in anything and everything you purchase and is especially true in buying a franchise. Buying a franchise is a very serious decision and sometimes a life changing one. You need to feel safe about the decision that you are making, otherwise you should not and will not do it. How do you answer the question of feeling safe about the decision that you are making you ask? Simple, research, research, research.
Research is the key to safety. You need to use all the help you can find to help you with your decision. Many people use a free service such as FranNet to help them out but you should also consider using a franchise attorney and also an accountant. More importantly, you need to do a lot of the research yourself.
Another important step to safety is talking to those who recently purchased in the franchise (known as franchisees) that you are considering. Since they were recently in your situation and now run a franchise, they will tell you exactly what the process is like. Now, some will be more willing to talk to you than others, but usually they will sit down with you and answer most if not all of your questions. They were once in your shoes and they did their research at one time as well, if they did it right. You also need to talk to the franchisees that are doing very well and some that are not doing so well. We usually also find it helpful if you also talk to some franchisees that come from a similar background and demographics that you have. If they are succeeding, then you have a good chance as well, but if they are not, then stay away from that particular franchise. While not everything is a given, it will certainly help out in your decision process. You need to talk to as many franchisees as necessary for you to feel that you have answered all your questions and concerns. Keep in mind, the answer to safety is in the research.
AFFORDABILITY - Having affordability listed as the second most import factor usually surprises people. Unfortunately, some people feel safe about the decision that they are making, but sadly they end up not being able to afford it. This is where your CPA comes in very handy. We usually use the typical rule of thumb that you should have 1/3 in liquid capital of the total amount of the franchise. You should also have some extra reserves just in case.
Here is an example. The average franchise according to the International Franchise Association costs approximately $150,000. Therefore the average person should have about $50,000 in liquid assets that they are willing to invest. Most people can get the financing for the remaining two-thirds from a SBA approved bank or other financing sources. There are many services available to roll over money from 401k's and IRA's to help with the expenses.
The number one reason that franchisees and business owners go out of business is lack of funds. Whether it is a Fortune 500 company or a brand new business, if you cannot pay your bills, then you are done. Do not over extend yourself financially. It is unfair to you and your family. If you take the rule of thumb into account above, you should be all right. But please, consult with your CPA or financial advisor so you can make an educated decision.
The other nice thing about purchasing a franchise is that there is no correlation between the cost of the franchise and how much you can make. Franchises range from approximately $20,000 to over $3 million. The ones that have the large price tags, have large price tags because they have a lot of build out expenses, needed working capital, equipment, etc. Just because they have the large upfront fees, does not mean that it is going to be more successful compared to one that does not. Some of the most successful franchises that I know of are in the $75,000 range or less.
Remember, do not overextend yourself financially and you do not have to spend a lot to make a lot.
About the Author
FranNet provides no-cost guidance, information and support to individuals who are interested in purchasing a franchised business. FranNet consultants specialize in helping their clients find the right franchise through their exclusive matchmaking process. For over 20 years, FranNet has helped entrepreneurs understand and explore franchise opportunities that may help them achieve their personal goals and lifestyle. To learn more about franchise opportunities with FranNet call 1-800-FRANNET or visit www.frannet.com.