Research sets you up for franchise start up and future success
Buying a franchise is a decision that should never be taken lightly. There are many questions to ask and decisions to make before “taking the plunge”.
After you’ve chosen the industry and type of franchise business you want to get into, your next step is likely going to focus on evaluating specific franchise brand options. Here, we’ll discuss five critical things you need to research before buying a franchise. Franchisors can give you much of this information, but this research needs to be done by you</em> so you gain your own full understanding of what you are about to commit to.
1. Industry, TAM & SOM
You likely already have at least some idea of the industry you want to buy into. Take the time to research the industry and understand it intimately. Your research should uncover the industry size, growth trends, history, competitors, etc. Buying a franchise is much like buying any other business, and your full understanding of the market is critical to your success.
Once you have an understanding of the industry as a whole, you’ll have a good understanding of your total addressable market (TAM). Next, you will want to calculate your approximate share of market (SOM). At this point in your research, these calculations are likely going to be a bit of an educated guess. Good resources to get a more accurate calculation include the franchisor’s FDD and interviews with other franchisees.
2. Your Local Market
Along with your industry research, you’re going to want to focus in on researching your local market. This is particularly true if any of the franchises you’re looking into use an exclusive territory model.
Researching your local market not only gives you a better idea of what your local TAM and SOM are. It also will be helpful in negotiating the size of your exclusive territory if and when you get to that point with a franchise brand.
For example, if you’re looking to buy a B2B franchise business, you will need to research how many businesses are in your area. You’ll also want to filter that down to the target market you intend to pursue. If you know that companies with 30 – 5,000 employees are the most likely to buy the product or service, you need to get an idea of how many companies of that size are in your area. Purchasing a monthly subscription to a data service like Dun & Bradstreet, ZoomInfo, or similar may be worth it to you to do this research. The relatively low cost will likely pay dividends in the long run.
You will also need to research competitors in your local market. While the franchise brand may have several competitors, maybe only a couple are doing business in your area. Or maybe they all are. Knowing what your local competitive landscape looks like, as well as global competition, is critical. Using that information, you will have a better idea of how much cash you will need to invest in sales and marketing, what your ramp time might look like, and perhaps negotiate for a bigger or different territory.
Keep in mind, competition in your local area isn’t just a bad thing. It also means that there’s likely a market for that product or service. It also means that your competitors have done the heavy-lifting of establishing the baseline need in the marketplace. Your focus then needs to be on differentiation and brand awareness, rather than problem awareness.
3. Franchisor Reputation
There are thousands of franchise brands registered in the United States alone. Some of them have been around for decades and have years of experience. Others are newer and are still working out processes and growth strategies. Neither of these are inherently good or bad, it’s simply another data point for you to consider as you research the franchisor that you are about to enter into a contract with.
When researching franchisor reputation some things to look for and consider are:
- Tenure: How long the franchise has been in business
- Online reviews: From customers, employees, and other franchisees
- Litigation history: Has the franchisor ever been involved in a lawsuit, either from a franchisee or vendor? What was it over, etc.
- Financial Performance: Franchisors are required to file a FDD in most states, and any reputable one will provide the FDD at some point in the sales process whether you are in a FDD-required state or not
4. The Franchise Disclosure Document (FDD)
Speaking of the FDD, you need to spend time with this document if/when you get to this point in the buying process. The FDD gives you all the important information about the franchise in granular detail. It includes audited financial information, and is reviewed in many states that requires an FDD to be filed. It provides perhaps the most detailed, unbiased information you can possibly attain about the franchisor.
Most franchisors will do an FDD review call with you as part of their sales process. This might be with the sales rep you’re working with, the franchisor’s general counsel, or (most likely) both.
It is highly recommended that you also work with your own attorney to review the document with you. You will want to work with someone who is familiar with FDDs and the franchising industry. This person can provide an unbiased review, pointing out information that is particularly promising or concerning, and likely providing you with valuable insights and questions to ask the franchisor.
5. Start Up Costs
One common thing that many new business owners forget to research (or don’t put enough time into researching) is their start up costs. When it comes to purchasing a franchise, some of these costs are fixed and well documented. Others are more difficult to determine and aren’t part of the initial franchise fees.
- Franchise Fees: Common start up costs related to franchise fees can include your initial franchise fee, training fee, technology fee, and initial inventory fee. The type and amount of cost varies greatly by franchise type and brand. If you’re looking into a brand that includes a brick-and-mortar store or restaurant, for example, these fees are going to be very different (and likely much higher) than a home-based franchise business.
You will also have on-going franchise fees, such as your monthly royalty fee and marketing development fund fee. Most franchise systems will provide a “ramp up” period for on-going monthly fees, which start at a lower cost for the initial 6 to 12 months or so of opening your business.
It is very important to pay attention to the FDD to understand what fees are assessed by the franchise you’re researching, as well as the fee schedule. Are they monthly, quarterly, or annual? What do these fees cover—and what isn’t covered?
- Office Supplies: Costs that are often overlooked by new business owners are office supplies. These are often smaller costs that add up. You may need to completely outfit a home office or lease office space and furniture. Perhaps your computer, laptop, and/or cell phone need an upgrade.
You also may need to purchase software or other productivity services, such as a G Suite or Office 365 license (something that we take for granted when working for an employer and forget they don’t come free!)
Then there are the small costs that can add up over time. These might include things like paper, Post It notes, pens, printer ink, business cards and letterhead, etc.
- Sales & Marketing: Yes, even though you’re purchasing a franchise, you will still need to plan for local sales and marketing costs. This is particularly true for smaller and/or professional services brands that don’t reach the economies of scale of, say, a McDonald’s.
Costs associated with sales and marketing activities might include purchasing lead lists, purchasing an email marketing service (such as Constant Contact or MailChimp), brochures and fliers, advertising and sponsorships, trade shows, give-aways or leave-behinds, and fuel costs (if you’re traveling for sales meetings).
- Operations / Running Your Business: There are usually some office management costs that pop up, whether you’re working from a home office or not. For example, you may need a virtual assistant service or a time/project tracking tool. You will likely also use some sort of accounting and tax preparation service or tool, such as Quickbooks.
You’ll also need to think about the costs associated with providing the product or service to your customers once you get them. Are there materials you need to order? Do you need to provide a user license to the customer that is paid on a per user or per account basis?
Investing in a franchise business is a big decision that should never be taken lightly. Researching and understanding critical information such as industry trends, market size, franchisor reputation, the FDD, and costs of starting and running your business will help you better prepare to make an informed decision. This research, understanding, and planning will also help set you up for early (and future) success if and when you decide to invest in a specific franchise.
If you would like to learn more about the important things to know about researching a franchise, or if you would like to learn more about the Crestcom franchise opportunity specifically, contact us! We’d love to chat.