Deciding between a franchise and an independent business
Making the decision between going the route of franchise or independent business can be difficult. While franchising is a top strategy that a company can use to capture market share, it also comes with many benefits that the independent business design does not.
- For one, a franchise provides a certain level of security, considering product lines or business models of the company have already been tested and optimized for the market place. Since a franchise is like a big group alliance, it brings its pre-existing stability. With an independent business, however, comes the roller coaster of testing and trying products or services in the marketplace.
- Investment costs are lower! While one does need to follow the rules and obligations of the franchisor, investment and operational costs of a franchise are lower than that of an independent business.
- Name recognition, name recognition, name recognition. The 21st century revolves around media, both social and press. Building brand recognition is a costly and time-consuming effort and frequently requires outside professionals. With a franchise, however, that job is already done. The millions of followers and glowing press pieces are already in place!
Finding the right franchise
While searching through franchisors websites is one way to get information, there are other, more transparent options out there. Attending a franchise expo, like the International Franchise Association Franchise Expo, can give a franchisee a good perspective on all the options out there. Looking through franchise handbooks and manuals is another way franchisees can familiarize themselves with franchise opportunities.
Search online for a “franchise opportunities handbook.” These books list available franchises and provide general information about each business. This can help a franchisee narrow their search by their industry of interest.
As mentioned above, a franchise exposition allows a franchisee to compare many franchise opportunities at once. It’s helpful to do some background research before the expo, narrowing down which industry is most preferable. However, from there, ask the franchisor any relevant questions. Ask how many outlets the franchise has or what their initial franchise fee is. Does the franchise have continuing royalty payments and what controls does the franchisor impose? Often, at expositions, franchisors will give you an additional opportunity to attend a promotional meeting. This can be another helpful source of information.
If you don’t feel comfortable finding the right franchise by yourself, look into a franchise broker. Typically, these brokers can be found on the internet or in magazines. The broker will review the amount of money you seek to invest and guide you in the right direction. Brokers can also help you fill out the necessary paperwork.
If you’re not comfortable finding a franchise by yourself, consider a franchise broker.
Purchasing your franchise
Once you have selected the industry and informed yourself of the franchising options out there, think about the demand for the products your desired franchise provides. Is the product or service a fad or a seasonal thing? Does the service encourage customers to return or is it a one-time product? If the general demand for the product is low, the franchise investment may not be a good idea.
Also, consider the level of competition that you would face at the national and local levels. Are there other similar companies in the area? How successful or well-known are they? If the market for the product or service is oversaturated, again, the investment may not pay off in your benefit.
Unfortunately, franchises don’t always succeed. Consider the implications on your part if the franchise goes under and the franchisor decides to stop franchising? Would you be capable of running the business solo?
Other factors, such as the franchisor’s training services and support systems are also important to consider before making an investment. All of these factors can give you a realistic idea of future success (or lack thereof) of your franchise investment.
As far as the actual transaction is concerned, there are many financing options that you should consider.
This option essentially allows you to fund your franchise with your retirement savings. A ROBS gets its funding from eligible retirement accounts, such as a 401(k) or individual retirement account. These funds are rolled over and used to buy the franchise. A retirement account must have at least $50K or more in order to qualify for ROBS financing.
This form of financing is a unique alternative way to finance your franchise purchase. Considering a ROBS is not a loan, there are no monthly payments or interest fees. This option is also free of taxes or penalties.
On the other hand, moving forward with this option does put your retirement at risk, as there is no guarantee the business will succeed. You also lose out on any retirement-savings gains. Not to mention, the risk of an IRS audit may increase.
An SBA loan is another option for financing your franchise purchase. This type of loan alleviates the risk associated with lending money for business owners or entrepreneurs who don’t qualify for traditional loans.
There are various different types of SBA loan programs, including the export-assistance loan program, the 7(a) loan program or the Microlean program, among others. Each loan program is a little different and can suit a wide array of prospective and interested franchisees.
A HELOC is a line of credit secured by your home. This financing option gives you a revolving credit to use for large expenses, such as a franchise purchase. Unlike other options, a HELOC comes with a lower interest rate, which is usually tax-deductible.
In order to qualify for a HELOC, the franchisee needs to have available equity in their home. A lender usually also considers your credit score, employment history, and income to gauge the value of the loan.
In recent years, crowdfunding has become a popular option for new businesses and can also be considered by a franchisee. Crowdfunding is a form of financing wherein many interested investors contribute small amounts of money to compile a large sum. Basically, anyone that’s interested in contributing has the opportunity to invest.