Is a franchise the best way to start your business?

Almost every summer when I was a child, we threw a backyard carnival to raise money for Muscular Dystrophy. We did this because a) Jerry Lewis asked us to and b) Ronald McDonald not only provided a kit with all of the tickets and helpful hints you could ask for, but an orange drink dispenser (free!) to get your concession stand off to a good start. But there was one summer we didn’t have the kit. I don’t remember why – perhaps we were slow out of the gate, or maybe we thought we could do it better ourselves – but that carnival was much tougher to pull off. We lacked the lines in which to color.

This is how I’ve always thought of franchising. If you’re looking to start a business, having a franchise to back you up, gives you a framework. Amy and her husband found that helpful. But it also gives you rules and comes with costs you don’t have to bear if you go it alone. Here, some things to do and consider before you go down the franchising road.

  • Check out the costs. When you buy a franchise, you’ll pay both an upfront entry fee and royalties (a cut of your sales that go back to the franchiser). But that’s not all. You may be asked to pony up for advertising, equipment and staff training. And there are often requirements for how much inventory you need to maintain and how much cash you must have in reserve (it’s not good for the franchisor if you can’t afford to stay in business).
  • Look at competitors. Frozen yogurt couldn’t be hotter. But how are you supposed to know which of the dozen different franchises you should buy. Narrow your options based on those that appeal to you – perhaps you like the look of Red Mango or Menchie’s – then dig into the offering circulars. Officially called Uniform Franchise Offering Circulars these are like annual reports for franchise owners. Make sure to note franchise turnover and litigation. You don’t want to see a lot of activity in either of these categories.
  • Pay several visits – in several locations. You want to get a sense of how the business runs, but also how it impacts the life of its owner. Try to make appointments with a few franchisees then ask them direct questions about the success of their business, the schedules they keep, and how they view their experiences. Note: The circulars may also contain names of former franchisees. Debriefing them can be highly educational.
  • Consider maintaining your edge. I’ve written before about the Italian restaurants in my town. There are so many I don’t know how they all stay in business. If you buy a franchise, you should be looking for a guarantee that the franchisor will provide you with at least some area of geographic exclusivity. You won’t be able to prevent similar businesses from going in nearby, but you should be able to ban replicas.
  • Ask what if. Finally, you should always consider what happens if…if the business turns out to be wrong for you, if you turn out to be wrong for the business? What if someday you want to retire and sell? Asking questions (of yourself, former franchise owners and the franchisor) about an exit plan isn’t something to be shy about. In fact, it’s just the opposite.
Jean Chatzky

About Jean Chatzky

Jean Chatzky, the financial editor for NBC’s TODAY show, is an award-winning personal finance journalist, AARP’s personal finance ambassador, and a contributing editor for Fortune magazine. Jean is a best-selling author; her eighth and most recent book is Money Rules: The Simple Path to Lifelong Security. She believes knowing how to manage our money is one of the most important life skills for people at every age and has made it her mission to help simplify money matters, increasing financial literacy both now and for the future. In April 2013 Jean launched Jean Chatzky's Money School , a series of college-style, interactive online personal finance courses that give men and women across the country the opportunity to learn from and interact directly with her. Jean lives with her family in Westchester County, New York.
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2 Responses to Is a franchise the best way to start your business?

  1. Jonah says:

    Buying a franchise is always a risk as there are many things that you should ponder on before buying it. However, buying a franchise would eventually turn out to be the best option for earning handsome amounts as the only thing to consider is perfect planning and implementation. So buckle up and get started.

  2. ray says:

    That’s good advice. Franchising is a proven way to reduce some of your risks when starting a new business. However, all buyers should conduct serious due diligence before moving forward as all franchises are not created equal and there is no way to eliminate risk completely. If you find a particular franchise brans you feel might be a good fit for you I would advise contacting existing franchisees and ask them to share their experiences with you and if they would do it all over again. If you are seeking to research top rated franchise for sale in the USA and beyond visit: http://www.topfranchisesusa.com

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