Apr 03, 2017
By Mike Mesch, CPA/ABV, ASA, CFF Partner at Terry Lockridge & Dunn
Thousands of new businesses are created every day, and many are franchises. Buying a franchise involves risk, just like any other business acquisition, so do some research before you decide if it is the right move for you. Here are some initial thoughts as you explore this option:
Key benefits: A franchise gives the buyer the right to use a trademarked name in selling a product or service. The purchase of a franchise includes training, location assistance, inventory, business systems and advertising support. In addition, most franchises have a proven business model and a record of success. What would take you millions of dollars to accomplish from scratch, has been tested and proven by successful franchises.
Some concerns: Buying a franchise versus buying a business or starting one on your own can have its downsides. One of the biggest concerns is cost. First, you must pay an initial franchise fee ranging from thousands to hundreds of thousands of dollars. Second, you also pay an ongoing royalty to the franchiser, which is typically a percentage of sales. Third, there are often separate payments and fees you are required to pay for advertising campaigns and administrative projects. Finally, you lack operational freedom. You often must buy from specified vendors, despite the cost. You may think you have a better way of doing something, but are not given the freedom to do it.
Research is key: Before committing, research your chosen franchise opportunity. Start by looking over the franchise disclosure document. This is a legal agreement that includes extensive details about the franchise. Review the franchise territory size, training offered, competition, franchisee turnover, and termination rights. Interview as many current franchise operators as possible. Ask them if they are profitable, and if so, how long it took them to become profitable. Find out if they are satisfied with the support they receive from the franchiser.
Before making a franchise decision, ask yourself some critical questions. Are you really interested in the franchised product or service? Will you be able to devote the necessary time to the business? Do you have the financial resources to get the business up and running? Are the franchise name, training, and support worth the fees? Can you afford all the associated fees? If your answers are positive, a franchise opportunity may be the right route for starting your own business. Contact Mike Mesch at email@example.com to assist you through the process.