The most important thing an aspiring entrepreneur should know before investing in a franchise is that doing so means not really being an entrepreneur.
That’s the advice of Joel Libava, a franchise ownership consultant who is also known as The Franchise King. He says not everyone is suited for franchise ownership because it requires a certain type of personality and a willingness to follow the rules.
“Another translation would be ‘folks who are not too entrepreneurial,'” he says. “While there are a couple entrepreneurial things you can do as a franchise owner, it’s really the franchisor that’s the entrepreneur. They’re the one who came up with the model—they thought of the idea. The franchisees are the ones who are implementing while at the same time owning their own business.”
This is just one of many tips some franchisees don’t pick up on until it’s too late—only after they’ve started their new business do they realize it’s not going to live up to their expectations. By knowing what you’re getting into—and being realistic about what’s in store—you can avoid disappointment and make a smart decision over whether a franchise makes sense for your next move.
What to Know Before Taking On a Franchise
Pat Swisher, the CEO of Enviro-Master, which was named one of 2016’s top 10 new franchises by Entrepreneur magazine, says it’s a critical mistake when people think that a franchise is like a menu from which they can order “a little of this and a little of that” and still be successful.
“You have to be willing the follow the model,” he says. “The model is key to success.”
That model is also one of the biggest pros when it comes to buying a franchise. It should offer a proven brand and business plan, as well as support to the owner.
“For the right person,” Libava says, “who has enough money in the bank to sustain them for that first year or two—and who chooses an opportunity that’s a good fit for them and for their local area—can tend to have a little better chance of success than if someone started an independent business the same way.”
Here are other important tips from franchise experts to keep in mind as you consider franchising.
Accept that it’s not a get-rich-quick scheme
After buying a franchise, many business owners find out it’ll take much longer to make money than they initially thought. And they quickly realize it requires a lot of work.
“Coming from employee to employer is a pretty rude awakening,” Libava says. “There’s no such thing as a steady paycheck, at least for a long, long time. That’s really important to know. It’s a gradual thing, and it has to be a long-term solution to career pain.”
It’s also not guaranteed that the business will succeed—and it might not be possible to simply cut your loses and close the store if the term of the contract isn’t up.
Libava says he sees a lot of people in their late 50s who’ve been downsized from the corporate world turn to franchising.
“If you’re looking for income replacement quickly, this is not what you should be doing,” he says. “But if you can work really hard for a few years, then you have a shot.”
Know that marketing talk is cheap
“A business in a box.”
“A turn-key opportunity.”
“All I have to do is follow the operations manual.”
The marketing statements that surround many franchises often give people the wrong impression, Libava says, and it’s a big mistake to fall for them.
“People absorb too much of this and aren’t prepared for the 15- and 16-hour days that are required to get your business up and running,” he says. “It’s kind of a false sense of the work that’s needed. It’s so much more than that.”
Hire a franchise attorney
Most franchise agreements don’t have much room for negotiation, but Libava says a franchise attorney could be able to protect you in ways that you might not have considered.
“It’s important to spend the money on one,” he says. “It’s silly not to.”
Be sure to ask about a territorial protection clause, too. The attorney general’s office of New York reports that encroachment “is one of the most litigated issues in franchising. Whether you find another unit opening a few blocks away, see your product in the corner store, or discover that your franchisor is taking orders over the internet—it all adds up to lost profits for a franchisee.”
Get ready for fees—they add up quickly
It takes a lot of money to buy a franchise, including startup fees that vary greatly depending on which franchise you choose, as well as advertising and royalty fees that can continue for as long as you own the business.
“Depending on what you are looking for, do you have the money and resources to invest?” Swisher says. “Buying a McDonald’s requires one type of investment and Enviro-Master is another. So, every franchise has its qualifications, and should.”
Prepare for culture shock
Running a small business is not the same thing as working for a Fortune 500 company. But some franchisors help ease the transition.
Swisher says that Enviro-Master has a due diligence process “that includes a Discovery Day, and then we make them ride along with a franchisee in their area so they know what the job requires and entails. You have to feel good about what you are going to be doing, and a good franchisor will minimize the surprises.
“I never want to have someone buy into our company and then be surprised by something they were unaware of. It’s not fair to them, and it’s not good for us.”
Talk to your family
Have a meeting to let them know what you’re thinking of doing. Listen to what they have to say and be prepared to have some convincing to do.
“I’m a firm believer of no surprises,” Libava says. “You want them behind you. If you have a spouse, he or she can certainly get on the phone with the franchisors to see what it’s going to take.”
Ultimately, It’s Still Buyer Beware
Franchising isn’t without its horror stories. The New York attorney general’s office details a real case of people losing their life savings in a franchise scam for routes selling snacks and drinks.
There are also big-name operations that try to expand too quickly, often at the expense of the people who jumped on board too late.
“Some franchisors get hot, and people start buying like crazy,” Libava says. “The franchisors can’t keep up with it, and locations can’t be opened because they don’t have enough people to scout a location, waiting up to a year-and-a-half to get one. It’s rare and it can happen—and it happened to Quiznos. Their reputation hasn’t been the same since.”
Swisher says people thinking about a franchise should thoroughly investigate the opportunity. The North American Securities Administrators Association agrees and offers 10 things investors should consider before diving in.
“Interview franchisees, ride along with them,” Swisher says. “Spend a day doing what they do. Do not make an emotional decision—make a business decision.”
Swisher also suggests following these five fundamentals:
- Make sure you have the capital to launch and sustain.
- Is your business recession-resistant?
- Will it ever be outpaced by technology?
- Is it a business that has little or no competition?
- Is there residual income?
“If the opportunity does not pass this test,” he says, “I would recommend that you move on to one that does.”
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from Fundera Ledger https://www.fundera.com/blog/franchise-shop