Question: What are the things to consider before becoming a franchisee?
A: Much like past economic downturns, the pandemic has created a new wave of entrepreneurship. The desire to be in control of one’s own destiny has led to an increase in franchise sales. If you decide to take the plunge, here are a few things to consider:
To know itself. Are you looking to replace your job? Then you might want to look for an opportunity as an owner-operator, where you would be actively involved in the day-to-day running of the business. If you want a more passive investment, look for franchises, such as restaurants, where you hire other people to do the actual work, and your role is oversight and investment. Franchises are, for the most part, full time businesses; however, systems such as home or van businesses may operate on a part-time basis.
Exercise due diligence. Look for a profitable concept that will provide a reasonable return on your investment.
Read. Do not scan the Franchise Disclosure Document (FDD). The FDD indicates what the franchisor will do for you, what your requirements are and, in most cases, the economics of the unit. Since these are legal documents prepared by lawyers, it can be difficult to understand some of these disclosures. Therefore, contact other franchisees in the system to find out if they are making any money and if they are happy with the franchisor and their support.
Have adequate funding. The FDD will indicate the capital requirements required for a particular franchise, but you should have a cushion for start-up costs. You don’t want to run out of money before you start making it.
Speak. Finding the right franchise involves both talking to your friends and coworkers and searching the internet for concepts that match your skills and / or services that are lacking in your area. There are many franchise sales organizations (most of which have names that begin with “fran”) that will serve as “matchmakers”. But be aware that their job is to sell franchises who are, in some cases, their customers.
The value of franchising is adhering to a proven model, and while you won’t have full control over your destiny, you are the boss.
Dennis Monroe is a distinguished fellow of the Faculty of Law at the University of St. Thomas, and co-founder and president of Monroe Moxness Berg PA.