Investing in franchises is an increasingly popular way to become an entrepreneur and join a larger business network. According to a 2020 survey conducted by the International Franchise Professional Group (IFPG), 64.3% of those who purchased a franchise business were satisfied with their decision.
However, no matter how promising the initial incentives for purchasing a franchise may be, potential investors need to do their due diligence before signing any documents. To make sure that you’re selecting the best franchise for you, here are some of the most frequently asked questions about franchise investing.
What is a Franchise?
A franchise is a business partnership between two parties. The franchisor is the company that owns the trademarked product or service, and the franchisee is the investor who pays an upfront or ongoing fee in order to operate a branch of the franchiser’s business.
The main benefits of franchise ownership include owning and managing your own business, while having access to the franchiser’s brand, products, services and expertise. Franchises can also provide an additional source of income if you are already self-employed or have an established business.
What Are the Advantages of Investing in a Franchise?
When you purchase a franchise, you can tap into the preexisting infrastructure of a successful business. This allows you to focus your energy on developing the business, rather than starting from scratch.
You will also be plugged into a network of leading professionals in the field who can help you develop your business plan and provide valuable insights into best practices. Franchise providers may also offer training and support programs to make the transition into franchise ownership smoother.
Finally, franchises often have an established system for building and managing customer relationships, marketing products and services, and setting up distribution networks. They can also reduce the risk of failure for investors.
What Are the Different Franchise Investment Models?
The two most popular models of franchise investment are:
• Traditional franchise: This model involves the franchisee paying an upfront cost for the license and/or right to use the franchiser’s concept, name, and/or set of products and services. This is often followed by on-going royalties and fees.
• Franchise partner/investor: This model requires a larger upfront investment, such as for an equity stake, and is ideal for those interested in becoming more involved in the business’ development.
What Are the Risks of Investing in a Franchise?
While franchising can be a profitable business model, like any investment, it’s important to consider the risks of investing in a franchise.
Franchises may carry higher liabilities than other businesses, and any legal disputes are typically resolved in the courts. In addition, franchise agreements may require the franchisee to meet certain goals and standards, and failure to do so could result in termination. Additionally, there is always the potential to mismanage cash flow or run into financial difficulties.
Finally, franchisees should also consider the potential to deviate from the franchisor’s business philosophies. If you don’t have a strong connection or understanding of the franchiser’s business operations and methods, you run the risk of not following the franchiser’s preferences, which could lead to disputes.
Who Is the Right Franchise Investor?
The type of investor suited to a particular franchise depends on several factors, such as the size and type of franchise, the region in which it will be located, and whether the investor is experienced in the particular industry or already owns multiple business units.
However, there are some general attributes that all potential franchisees should possess. These include the financial commitment to invest in a franchise, knowledge of the franchisor’s business process, excellent customer service skills, and the desire to stay on top of industry trends and build a successful business.
What Is the Best Way to Evaluate a Franchise?
In order to evaluate a franchise, potential investors should thoroughly research the franchiser and analyse their current market trends. Prospective franchisees should also assess the potential costs and returns of investing in the franchise, evaluate the available resources, and consider the support offered by the franchiser.
When considering a franchise investment, it is important to obtain as much information as possible to make an informed decision. It is also vital to speak to existing franchisees to get a better understanding of the pros and cons of franchise ownership.