Franchise ownership is on the rise. The franchise industry is expected to expand by 1.6% in 2017 and franchise employment is expected to increase by 3.3% to 7.8 million workers. Because of the opportunity in the industry, many executives in corporate america see it as an opportunity to be their own boss and put their executive skills to work for their own business. Investing in a franchise can be very appealing versus starting your own business from scratch. A set and proven business model along with already developed internal processes and procedures can make the transition from corporate life to entrepreneur that much easier.
If you are considering making the switch, we have here listed 7 things you should consider when making your move.
1. Go where your passion lies
When selecting a franchise to purchase, it can be easy to dive into the financials, business model and all the little details. But there is so much more that has to be the foundation of your desire to own a franchise. “You must have a passion for the franchise.” says Jeremy Hodess, owner of Capstone Franchise Consulting, LLC. Jeremy assists potential franchisees in selecting a franchise that is a good match and helps them make an informed decision on the purchase. “It’s easy to get caught up in the amount of potential net income a franchise can make but the entrepreneur must have a passion in the business, which is a key factor to success.”
2. A lean and mean attitude
Cash flow is difficult when starting a business. Even if you are coming into the business with a significant stockpile of resources, developing a stingy attitude around expenses will be important to your success. It’s natural to want the best and brightest for your franchise but you need to be prepared if it takes longer for your franchise to develop than you anticipate. When you are considering a purchase, ask yourself, “Is this purchase absolutely necessary for my business and how will I see an immediate cash flow impact from the purchase?” Also, because cash flow is limited, what am I NOT going to be able to purchase later if I make this purchase now.?
3. Expect the best, prepare for the worst
No one should have a negative mindset when starting a business. However, you should prepare if the business doesn’t develop as you had hoped. Unforeseen circumstances can make even the most modest forecasts look unattainable. Circumstances can include:
- Changes in your franchise industry (for instance, fast-food)
- Unforeseen difficulties in operations (lease problems, equipment failures)
- Changes in demographics
While you can’t prepare for every risk of starting a new business, you can setup a safety net in place. Creating an exit plan can help think through the risks and put actions into place to mitigate the risks. The plan is NOT a plan to fail, it’s a plan to help you sleep at night and to ensure your well being if everything doesn’t go as intended. Your plan should include a method of saving your personal financial resources such as what money you will invest into the business and what money you won’t. Setting up an exit plan will help you think through and resolve any anxieties you have and let you do what you desire most…Start a successful franchise!
4. Do your homework
The FTC has a great starting guide to assist you in your planning here. This is also an area where a franchise broker can be a great help. It’s important to choose a broker that you can trust and don’t be afraid to ask for references when choosing a franchise broker. A good franchise broker will help talk through your goals and personal situation so that you can make the best decision.
5. Talk to other franchisees
As part of the franchise purchase, the franchisor will likely give you references of other franchisees so that you can discuss with them their experience. Don’t be afraid to check with other franchisees not on their list. Ask them what their experience has been with the franchisor and what challenges they have had. You cannot ask too many questions! Also, be wary of any financial information that is verbally shared. No one wants to admit they are struggling so take any claims of fantastic sales with a grain of salt.
6. Be careful about using IRA money or 401(k) money to start your business
For those executives that are retirement plan rich and cash poor, using IRA or 401(k) money to start a business can be very appealing. The Wall Street Journal wrote an article summarizing the concept here. While this method allows you the financial resources to get your dream started, you must be aware of the pitfalls and risks associated with the strategy. By using retirement money to fund your franchise, you are tapping into the very pool of money you have saved for your retirement years. Also, this strategy is fraught with significant tax and legal restrictions and the costs of setup, which is opposite of a lean and mean strategy that breeds success in start-up companies. If you are choosing this method of funding your franchise, make sure that you understand all the risks that are associated with it.
7. Develop a strong team of advisors
It is important to have a strong team of advisors looking out for your best interests and assisting you in their specialty along the way. Consider hiring an attorney to review your franchise agreement and legal documents. An attorney can also assist you with reviewing lease agreements. A CPA can assist you with tax planning, even if you have losses and also setup your accounting system with the Franchisor’s chart of accounts to make it easier for you to compare your financials to associated Franchisor benchmarks. A banker can assist you with financing for much needed equipment and determine if you are eligible for SBA loans.
Purchasing a franchise can be one of the most exhilarating and stressful experiences all at once! Hopefully, these seven tips will help propel you on your way to success.