FREQUENTLY ASKED QUESTIONS
It is likely there is a compelling reason you are interested in franchise ownership. Something has pulled you to shift your thinking from your current situation, career or business and consider franchise ownership. Or you are just curious about franchising, which is everywhere around us but yet holds mystery for many people. Here are answers to some of the most frequently asked questions.
What Exactly is a Franchise?
What is a Franchise Consultant and What Do You Do?
This is a great question, as many people interested in franchising don’t know we exist.
I help people who want to own a franchise business to set their criteria for what type of business model fits their goals, match them to brands that fit those criteria, then guide them through the franchise investigation process.
Our network of consultants nationally work with hundreds of brands across all industries and categories, so we know all the newest brands coming to market, as well as long-established brands who are still growing. By knowing the market, we can help best match our candidates to franchise opportunities that help them reach their goals.
As an experienced franchise expert, franchise business owner, CEO, former CFO and CPA, I have a unique background and experience to help guide candidates successfully through the franchise investigation process. I’ve been there.
How Much Does it Cost to Use a Franchise Consultant?
My services are free to the candidate. It does not cost you any money nor does it increase the cost of starting a franchise if you use a consultant. We are compensated by the franchisor companies, although we are not a sales agent for any brand. It does, however, require a time commitment on your account to properly investigate franchise brands.
Franchise companies need to recruit a specific profile of candidate that is experienced, financially qualified and is a fit for their system and business model. Similar to many companies seeking executives with special skills who utilize executive recruiters, franchise companies find it very valuable to compensate consultants on contingency if and only if one of our candidates goes all the way through due diligence, they award the candidate a franchise, and a franchise agreement is signed.
Each new franchisee pays exactly the same franchise fee, there is no added cost to you to use a qualified franchise consultant.
Is now a Good Time to Start a Franchise Considering Covid-19?
The historic Covid-19 pandemic has forced much of the U.S. and global economy to shut down at least temporarily. There are winners and losers in the economy, with essential services being bigger winners, while non-essential services have had extended shutdowns depending on state and local regulations. There are always risks to starting a business, and certainly now is not the right timing for everyone. However, with every crisis comes opportunity, as many of the largest companies in the economy right now started during recessions or market disruptions.
For essential services, which is a large part of franchising, there is strong demand among new franchisees who want to leave unpredictable corporate America. These businesses are both surviving and also building pent up demand. Examples include residential services, senior care, cleaning services, restoration, just to name a few.
For non-essential services that are harder hit, including industries with customer-facing real estate, there is a logic for many candidates to pursue those industries now. Weaker independent owners in fragmented markets will be eliminated or mitigated, and stronger players will emerge with more market share. Retail real estate may have better economic lease terms than any time in recent history. These businesses are also likely to see the most pent up demand. Examples include fitness, hair care, salon suites, and automotive.
Completing a strong due diligence process and investigation into any franchise opportunity is always imperative. With proper due diligence and the right understanding of the market opportunities, many candidates are finding that now may be a perfect time to invest in starting a new business, while the market will be bottoming and concessions from franchisors, landlords and financing may be the best they have ever been.
Is Franchising Right for Me?
Are you frustrated in your current career or looking to build a sustainable and valuable future for you and your family? Do you love the thought of running your own business but have no idea what type of business you should consider?
Starting a franchise can be an ideal way to launch a business because of the benefit of building on a proven concept while much of the marketing and routine, operational and back office processes are already set up and streamlined. This reduces significant risk, research, and trial and error. In return, the franchisor receives a royalty, typically structured as a percentage of sales. All good franchises will offer a suite of services and support in return for the royalty. All good franchise systems have a partnership mindset.
You should feel comfortable with following someone else’s system before starting a franchise. One reason franchising is successful is consistency. The franchisee must follow established policies and processes to ensure a consistent product or service. If you want to be creative and make your own way, franchising might not be the solution for you.
What is the Franchisee Role in a Franchise?
- Owner-operator – Daily, Direct Involvement
- As an owner-operator, you are the heart and soul of the business. Everything that happens really revolves around you – if you have employees, they see you as their direct supervisor, customers call on you personally and all business activities are within your direct control. You may not have employees but rather rely on technology and the franchise corporate team to help deliver your product or service.
- Many owner-operator style businesses revolve around personal or home services as these businesses lend themselves to this style easily. This category is sometimes also called the self-employment option.
- Executive owner – Daily, Indirect Involvement
- Executive owners take a different approach. They are still involved in their businesses daily and are the primary decision maker, but are driving the activities of the business through a manager or team of employees. It is the managers who are on the front line of employee oversight and customer interaction.
- The executive owners focus their attention on monitoring Key Performance Indicators (KPIs), financial management, team building and strategic planning. Though involved every day, they have a more executive type of role and work day.
- Semi-absentee owner – Weekly, Indirect Involvement
- A completely different approach to franchise ownership takes the form of semi-absentee ownership. In these franchises, the model is setup so that the business owner is removed from the day to day operational details. Instead, all of the daily tasks are handled by a manager.
- The owner’s role is part-time and from a distance. The owner is physically present in the store on only a limited time basis each week – time for drop-ins and management meetings. The majority of the owner’s time is spent remotely on performance monitoring, telephone and email communication with managers and back office tasks.
What Kind of Franchise Businesses are Available?
How Much Does it Cost to Buy a Franchise?
This is a huge range and many items go into the cost of a franchise which can vary wildly depending on the industry and business. Item 7 in the Franchise Disclosure Document (FDD) outlines the estimated cost for every franchise and is your best source to answer this. However, there are some broad guidelines that can help understand the scope of typical franchising investment levels.
On the lowest end, self-employment franchises may allow you to get started with as little as $50,000. For the cost of the franchise fee, computer equipment, marketing collateral and software, you can get started. On the other end of the scale, a newly built hotel franchise may cost $20 million to get open and operating.
A large majority of service franchise brands fall into a few categories—amounts here are simply broad guidelines—check Item 7 of the FDD for a brand to understand estimate costs:
- Owner-Operator: $50,000 – $250,000 per unit or territory
- Executive: $100,000 – $350,000 per unit or territory
- Semi-Absentee: $250,000 – $1.0 million per unit or territory
The above ranges cover a wide swath of industries and brands, but exclude restaurants, hotels and other franchises that require standalone real estate, raising investor capital or generally are larger than $1.0 million for a single unit or territory.
What are my financing options for a franchise?
There are several ways entrepreneurs finance their franchise investments. You need to fully understand your capital position before you sign a franchise agreement, so carefully consider your risk profile, working capital needs and future expansion plans before making a financing decision. Most franchisees will combine two or more sources of capital when starting a franchise. Here are the most common methods:
- CASH ON HAND. This is the safest, lowest risk and most common way people finance their franchise investment. By using idle cash, they can avoid interest costs and debt service risks while putting their capital to work.
- SELLING LIQUID SECURITIES. Many long working corporate executives and business leaders find that their entire net worth is tied up in the stock market. Thus, diversifying by liquidating some securities and putting part of your portfolio into your own business can make a lot of sense.
- PORTFOLIO LOAN. For some franchisees with large securities portfolios, they find they can borrow against their portfolios without liquidating them and get very low-interest rates. Most banks or brokerages are pleased to provide portfolio loans at a low cost to investors. There are no restrictions on how you use the loan proceeds.
- HELOC. A home equity line of credit, or HELOC, is a popular way for potential franchisees to finance their investment. This is usually in the form of a second mortgage on your primary residence and can tap the unutilized equity in your home to put into your business. There are no restrictions on how you use the loan proceeds.
- 401k / IRA ROLLOVER. Also called ROBS (Rollover for Business Startups), this IRS-approved method will roll over all or a portion of your current IRA or 401k balance into a new plan that invests in your company’s stock instead of the broader market. This is a very common and popular way for franchisees to diversify their investments and start a franchise without debt. You will need to work with a specialized custodian to complete this method, but there are several quality national providers that work exclusively in franchising.
- SBA-GUARANTEED LOAN. Most banks have loan programs that will loan to small business entrepreneurs with a guaranty from the U.S. Small Business Administration (SBA). For beginning franchisees, they will typically be using what is called an SBA 7(a) program loan. Many franchises are already registered with the SBA, making loans easier and quicker to get approved. SBA loans are typically easy to get approved due to the government guaranty, although there is a lot of paperwork and meaningful fees involved. While the SBA has certain limits and requirements for the loans, there is plenty of variability in the terms you may receive from different banks, so it pays to shop around if you are seeking an SBA loan.
- PARTNERS. Many franchisees have friends, family or business acquaintances that are looking for business investment opportunities. There are many variables and important business terms to consider before taking on a partner in a business, and you will want to explore the legal ramifications before considering a partner. But if an appropriate partnership agreement outlining control, exit strategies, duties and obligations of each partner is completed, this can be another possible way to fund your growth.
- FRANCHISOR. Depending on the type of franchise and cost of buildout and/or equipment, the franchisor may have financing programs in-house or with a closely aligned program lender. This can often be the most attractive source of funding, especially if there is no personal collateral required.
- ALTERNATIVE LENDERS. There are several specialty lenders that have programs for equipment or other asset-backed or unsecured loans. While these are not ubiquitous, there are quality loan brokers who can source and identify financing to meet your specific needs.
Whether using any of the above strategies, some combination of providers or other sources, financing your franchise investment is a huge decision and should not be taken lightly. Many candidates find that the available financing options may help them decide between two finalist franchises in consideration. When in doubt, talk to experienced franchise lenders to understand your options. I can refer you to quality financing providers who are specialized in helping franchisees finance their new business investment.
How do I Choose a Location for my Business?
Where to locate your business will be one of the most important decisions you make. Some franchises are sensitive to location and some are not—many don’t even require real estate and are home based.
Most franchisors provide real estate expertise to franchises to help with this decision, including demographic analysis, psychographics, site selection criteria and real estate brokerage service and referrals. There may also be territory restrictions to protect franchises of the same business from internal competition.
WHAT IS A FRANCHOICE CONSULTANT?
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