The triumphs and pitfalls of franchising

Business ownership can be one of the most rewarding career endeavors you pursue, both financially and personally. But establishing, growing and maintaining a business from the ground up can be challenging, and it can prove to be a considerable undertaking.

Franchises offer a strategic solution, bridging the gap between starting a business from scratch and purchasing one that’s fully established. Many companies provide franchise plans that include training, staffing and location support, significantly lowering barriers to entry.

From turnkey franchises requiring only a financial commitment to those requiring hands-on leadership and day-to-day involvement, the right choice depends on your investment goals and desired level of involvement.

Here are some things to consider when deciding if a franchise is right for you, and which of the countless options might be your best fit.

The dynamics of a franchise

Think of a franchise as a strategic business partnership. You pay a franchise fee and ongoing royalties, which gives you the right to leverage the company’s established brand, marketing, operational processes and service models for a period of time. When the term ends, you have the option to renew the agreement. As a franchisee, you're responsible for managing the business and benefiting from the revenue it generates.

Depending on the franchise model, you could run the business hands-on or delegate the day-to-day operations to a trusted manager. Some franchisees choose to be heavily involved in the management of the business and treat it as their full-time job, while others prefer to use it as a source of income while spending their time elsewhere. Which style you prefer should be top of mind when picking a business to franchise.

You can even invest in a “fractional” franchise, wherein multiple investors pool their money to share overhead costs while also sharing the responsibilities of running the business. This approach is great for newer investors who may not have a lot of capital to invest or those who want to run part of a business without having the burden of sole responsibility.

Hit the ground running

Part of the beauty of franchising is that you don’t need prior experience in the industry you choose. From the start, you’ll have the support you need to get your business up and running, avoiding the usual trial and error, market research, product testing and other typical challenges of a new startup.

On the flip side of support is restriction. If you want to get into business because you’re an innovator and you see yourself breaking some rules to achieve a better result, a franchise might not be for you. Part of what makes franchises successful is their brand, and with brand comes the need for consistency. By borrowing that brand, you agree to play by the book.

Money in and money out

As a franchisee, you’ll be entitled to revenue generated by your franchise. And just as with your own business, the better the franchise does, the better you do. By working hard to ensure that sales are strong and overhead is manageable, you can ensure that the potential for your success is limited only by your ability to grow the business. Picking a strong brand in a strong market can lead to significant profits under the right circumstances.

But alongside profits, the expenses associated with your franchise can also add up. Costs owed to the franchisor are ongoing even after you’ve paid the upfront franchise fee. Typically, these payments are taken as a percentage of sales and not revenue. Before you invest a large chunk of your savings in a franchise, it’s imperative that you factor in your cashflow after expenses.

Key benefits of franchising for the savvy investor

Choosing a business

With hundreds of potential franchises in which to invest, it’s important to pick one that is suited to your goals, from management style to industry type. Depending on your location, personal interests and many other factors, there will be some opportunities that are appealing and others you’d be wise to stay away from. It’s a highly personal decision, and it should be made with utmost care and consideration.

But in addition to the personal side of running a business, it’s crucial that the numbers add up in your favor. After all, franchising is an investment. At the end of the day, you’ll need to make money doing it. And the best way to make sure that happens is to learn as much as you can about the businesses you target, the markets they operate in, their competition, their profitability and how much of it translates into earning potential for you as a franchisee.

Consider interviewing franchisees to gain valuable insights. Reach out to those who aren’t in direct competition, as they’ll likely be more open to sharing their experiences. Ask them what they enjoy about the business, the challenges they’ve faced and their sales performance. These insights can help you make an informed decision and form a better understanding of what you’re buying into.

Where to start

Franchises offer a proven business model, thorough training, ongoing support and brand recognition. But conducting thorough research and due diligence is essential to ensure that your investment of time and money in a franchise pays off. You’ll want to consider the financial implications and help align the franchise opportunity with your long-term goals.

Sources: entrepreneur.com; franchiseclues; FTC; IFA; score

Diversification does not guarantee a profit nor protect against loss.