How to start a franchise: What to know before becoming a franchisee

What is a franchise business?

As any middle child knows, there’s a certain magic to walking the line between two extremes. The same holds true in business. Somewhere between the passion for entrepreneurship and the rewards of working for a corporation lies the world of franchises — and it’s a world University of Phoenix alumnus Ricardo R. Matos, SCET, MBA, knows well.

Types of franchise businesses

The term franchise may call to mind fast-food chains, but, as Saiter Real Solutions’ brand portfolio proves, restaurants are only one opportunity.

Additional franchise opportunities include:

• Alternative healthcare providers (think IV boutiques and cryotherapy)
• Automotive services
• Fashion
• Fitness centers
• Home services (repairs, landscaping and so on)
• Real estate
• Tutoring and child care

Advantages of a franchise

Owning a franchise can yield many of the same benefits of entrepreneurship but with mitigated risks. Instead of building something from scratch, franchisees can take an established service or product, invest in it, cultivate it and, if all goes well, watch it flourish.

Franchising can also be a way to expand for the franchisee, Matos points out. A franchise will operate according to an existing business plan, but the franchisee may have his or her own plans for growth. What starts as one outlet can grow to multiple outlets within a region, for example, as long as the franchisee is willing to invest the necessary time and capital.

When Matos works with clients, he looks for people with a strong work ethic, an entrepreneurial mindset and some knowledge of the sector in which they’d like to franchise. The startup process for Matos and his clients can take anywhere from a month to a year.

Starting a franchise will look different for everyone, but here is a general guide.

1.   Get clear on what you’re signing up for

“As the franchisee, you need to know what the franchisor is willing to do for you,” Matos says. “And you need to understand what you are doing for the franchisor to grow the brand. … You really need to breathe, eat and sleep the brand before you jump onto the bandwagon of owning that brand.”

Another word for this? Research.

Consider the following:

• Explore which opportunities are available.
• Learn what kinds of franchise fees are inherent to each industry or organization that interests you. (Some franchises operate on a set fee structure while others take royalties based on revenue.)
• Understand the terms and conditions of the agreement should you wish to change direction or invoke some autonomy. (Some franchises don’t account for multiple franchisees in a geographical area competing against each other.)
• Dig into the market. (How much competition will you face? Is there a need for this particular franchise? Are there opportunities to expand beyond one location?)

2.   Pick an industry you know something about

Authors are often advised to write about what they know. The same goes for franchisees. When you look at starting a franchise, choose an industry you have some experience in.

3.   Check your motivation

Matos encourages franchisees to be honest with themselves about what they hope to gain and what they plan to invest in their business. Spoiler alert: He thinks they should expect to sow more than they reap.

“After you learn how to give good customer service, after you learn how to provide something good to society, after you learn how build your company reputation … then people [may] buy into your brand,” Matos explains.

4.   Get your finances in order

Before a franchise can be purchased, a franchise disclosure document must be signed. So it’s important to understand the investment you’re about to make and the level of support and return to expect from the franchisor. Every franchise agreement is different, but Matos says the franchise fee (what you pay) is usually around 20% of the total investment. That can translate to anything from $10,000 to $100,000 to obtain the franchise license agreement.

When necessary, Matos’ firm also works with clients to clean up their credit and figure out financing.

In addition to coughing up the franchise fee, franchisees need to plan on paying annual royalties or fees to the franchisor. These can range from 5% to 50%, according to FranchiseDirect.com. Some franchises will also incorporate additional fees into the franchise agreement to help cover marketing campaigns and other advertising costs.

5.   Create your own business identity

Whether you choose to open a franchise as an individual or a corporation, you’ll need to operate as a business owner. This doesn’t mean following the practices and conditions outlined by the franchisor. (Although you do have to do that.) It means creating a business plan for yourself.

“You’ve got to create your personal plan or business model,” Matos explains.

What do you want to accomplish with this franchise? Do you want to hit a certain level of revenue? Expand to nearby metro areas? How do you want to market the franchise?

6.   Plan for the future

Once you sign your franchise disclosure document, secure a business space, hire employees and open for business, it may seem like everything should fall into place. And it might if you plan ahead.

As your small business grows, so too should your residual income — the revenue that accumulates as you gradually invest less effort. Matos cautions against spending this freely. Rather, investing it back into the business through employee salaries and retirement plans, marketing campaigns, expansion or even just a savings account to help weather a market downturn are all ways to ensure the health of your business.

Owning a franchise isn’t all rainbows and unicorns. Here, Matos offers words of wisdom on what to avoid.

1.   The wrong reasons

“Owning a business is not about making money. It’s [about] emphasizing your desire, your ambition and your passion for doing what you love. … If you’re doing this for money, owning a business is not for you.”

2.   Thinking a 40-hour workweek is enough

“When you’re working for yourself, you’re not only working 40 hours. Really, you’ll be working maybe 90 hours [a week] those first two to five years. [But doing so creates] such a massive synergy that your hard work will [hopefully] pay off down the road.”

3.   Living beyond your means

“One of the biggest downfalls of some [small business owners] is, the moment they see profitability, they don’t put money aside for bad years. They buy expensive houses, cars and clothing. They go on lavish vacations, because they think that [upward] cycle is going to continue, and then they lose big. … They need to put money aside for the future.”

4.   Believing the franchisor will do most of the work

“The reason a lot of people fail in franchise is they think the franchisor has to do everything for them, but you still have to do marketing, you still have to do advertising, you still have to work and hustle along the way to get your brand recognized.”

Buyer beware: Details to pay attention to as a franchisee

There are other risks to understand as well. Two of the big ones are:

1.   Make sure you understand and manage changes in regulations

Many people start businesses unaware that constant changes in federal and state policies may impact the way they have to run their day-to-day business. For example, recent changes to privacy laws in both Colorado and California over the past four years have directly impacted the storage and marketing of consumer data. Businesses must shift their practices to adhere to these and other requirements even if their store location is outside those states.

2.   Know you might get cannibalized by other franchisees

Franchisors may prioritize market penetration over supporting individual franchisees, which can lead to multiple locations of a franchise within a relatively small geographic market. With additional restrictions on personalization and branding, both the performance and (by extension) the profitability of investors’ stores can suffer.

3.   Choose your franchise well

One other important drawback is also one that franchisees can’t control. Namely, when a franchisor makes a catastrophic mistake, causing the brand’s reputation to suffer and the franchisee’s individual success to founder.

We return to an early emphasis in this article: research. Franchisees should research potential businesses to find the right fit. They should also be clear on the ins and outs (including how to get out) of the franchise agreement. But the purpose of relying on a brand name is a core feature of investing in a franchise. When franchisors drop the ball on their operational branding, it could be the franchisees who pay the ultimate price.

Keep all this in mind, and maybe, just maybe, your franchise will reward you and those around you with an experience (and a bottom-line) worth repeating.