Tips for Opening a Franchise Business | Fora Financial Blog
6 Questions To Ask Before Opening a Franchise Business
November 29, 2017

6 Questions To Ask Before Opening a Franchise Business

733,297 franchise businesses opened in the United States during 2016. Over the past 10 years, the number of franchise businesses established in the U.S. hit a high of 774,016 in 2008 and a low of 697,943 in 2013. The consistent numbers over the past 10 years confirms the benefits of opening a franchise business.

What are the benefits of running a business franchise? Let us count the ways:

  • Rich pool of instant, loyal customers
  • Some degree of operating independence
  • Widespread recognition of the brand
  • Franchiser offers financial support and franchise business ideas
  • Franchisor establishes quality and consistency standards
  • Business location determined by franchisor

While homework may not have been a favorite pastime for many, it is imperative that you do some research prior to opening a franchise business. First, you should receive the comprehensive list of franchisees in the Franchise Disclosure Document (FDD) provided to you by the franchisor. Take the time to contact 10 of the operating franchisees to discover whether the brand you have interest in is the right fit for you.

Once you have completed that step, ask yourself these six questions prior to opening a franchise business:

How Much Experience Does the Franchisor Have?

Although it is important to partner with a franchisor that has experience operating a network of franchises, it is more important to work with a franchisor that has experience operating businesses in the same niche. For example, if you want to run a TGI Friday’s franchise, you do not want to sign a deal with a franchisor that has a background in running carpet cleaning businesses. You should collaborate with a business partner that possesses the personality and qualifications that will benefit you in growing the specific franchise that you’re interested in.

What is the Franchisor’s Success Rate?

The number of franchisor units does not determine financial success. You need to discover the success rate among franchises, especially the franchises that operate in or near your target market. You can find the most recent financial statements issued by the franchisor in item 21 of the FDD. Another measuring stick for franchisor success is the average number of years franchises of the brand have operated in the black.

When Will I Break Even?

You never want to pour additional money into a business to tread financial water. The FDD and meetings you have with the franchisor should provide you with enough information to determine when you can expect to break even. Remember that the break even point for a franchise depends on the niche in which you operate the franchise. For example, the length of time for an automotive franchise business to break even differs from the break even point for a floral business.

What are the financial options for operating a Franchise Business

The financing options you have available will determine the feasibility of operating a franchise business. Many franchisors offer financing options that range from full equity partnerships to loans that franchises pay off under more favorable terms than what you would receive from a private financial institution. If you must search for funding outside of the resources offered by the franchisor, you can review options from alternative lenders, banks and commercial leasing providers.

What is the Profit Potential?

You not only have to know when the franchise business will break even, but you should also predict when the business will start earning a profit. To determine this, you should ask current franchisees how much profit the businesses average per year. In addition, you should try to discover the cyclical swings that generate more profit during certain times of the year.

How Much Operating Experience Do You Have?

As we previously mentioned, it is important to find a franchisor that has a team of experienced professionals who work in your chosen business niche. However, it is just as important for you to have acquired years of experience in the industry. You not only need to understand the operational concepts that define your franchise; you also must be aware of upcoming trends and technological advancements. Many franchisees delegate some control to on-site managers who handle the daily operations. Make sure whoever you hire possesses the knowledge and skills to get the job done right.

Although running a franchise business offers several advantages that you won’t receive by going solo, you still must understand how to collaborate with the best franchisor for your business. The FDD offers a solid starting point for research by presenting information about franchisors. However, you must interact with current franchises of the brand to understand important financial metrics such as when you can expect to break even and how much profit you can expect to generate.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].