Buying a franchise business is often a good choice for entrepreneurs looking to get into entrepreneurship. In addition to offering support from a proven brand and established system, franchises also come with advantages such as pre-packaged marketing materials and systems, ready access to financing and training programs, and other benefits that can save time and resources.
However, before deciding to buy a franchise, it is important to consider the downsides of buying a franchise. There are several things you should look at before purchasing any franchise deal, including the cost, working hours, location, management team, investment return, etc. When choosing a franchise, be sure to check out these critical elements of franchising before signing any contract.
One of the most common reasons why people purchase franchises is because they’re afraid they won’t have enough money in order to start their own business. However, if you use your savings or credit cards to finance your franchise, you could end up paying more than you would if you had started your business using some cash flow.
2. Working Hours
You may need to work long hours while owning a franchise business. Many businesses require workers to work shifts and weekends due to certain events taking place outside normal office hours. If you’re not comfortable with working very long hours, you may want to think twice about buying a franchise agreement.
When investing in a franchise, keep in mind where your customers live. It might sound obvious but many successful businesses were created by someone who went against conventional wisdom, and decided to take risks. Take a leap of faith and find something that’s out of the ordinary!
4. Management Team
Management teams play a key role in determining whether a company will succeed or fail. You’ll want to make sure the leadership team has experience successfully managing similar companies and franchises before making a decision about becoming a franchisee. A strong leader with a track record of success running multiple similar businesses is essential.
5. Investment Return
While investors do benefit from the tax breaks associated with buying a franchise, this doesn’t mean you shouldn’t expect a substantial return on investment. The majority of franchisees report returns between 35% and 60% over five years. However, if you pay too much for capital investments, like real estate, you risk losing out on future opportunities because you might never recover them.
6. Franchise Fees
The franchise fees charged by a company change based on the type of franchise you choose. Some fees include:
- Development/Protection Fee – This covers the legal expenses needed to protect the name of the parent company.
- Annual Recurring Revenue (ARR) Fees – If you are looking at purchasing a fast food chain such as McDonalds or KFC these fees range anywhere from 5% to 7%. Most banks offer financing through ARR funding within the first 6 months of purchase.
7. Financial Assistance
If you’re planning to buy a franchise, it’s important to know what types of resources are available to help new franchise owners fund their purchases. Depending on your situation, you might qualify for government grants, loan programs, tax benefits and/or real estate assistance. Before committing to any kind of debt, consult an attorney to ensure you are eligible for all possible options.
Whether you’re buying into the online gambling, goods retail, or electronics industries, working for yourself is always exciting. But, it also comes with a lot of challenges, including high starting costs and ongoing expenses. The good news is that most business loans allow entrepreneurs to start small and work towards larger budgets. There are other ways to finance your business franchise as well…