A franchise is a type of business where one party, the franchisor, owns a business model, processes, and branding and allows a second party, the franchisee, to operate under the business’s name for a fee. It’s a fairly common method of establishing a business — there were nearly 750,000 franchise establishments in the United States in 2017.
For those looking to build a career in the franchise market, Rockland Trust’s First Vice President and Senior Market Manager for Franchise Lending Mark McGwin has experience helping franchisees navigate the process. We asked Mark about the basic broad strokes— the fundamental information that someone looking to start a franchise business would need to know.
What Do I Need to Know About Franchise Businesses?
Your first step is researching franchise opportunities. It’s important to take location and market into consideration. For example, there may be an abundance of coffee franchises in the Northeast; however other types of businesses may have less saturation.
It’s a common perception that fast food and quick service restaurants are the only types of franchise opportunities. While these types of franchises are plentiful, anything that is delivered to customers can be a franchise. Personal services, like chain hair salons for example, are becoming more of a franchise industry. Other areas that are growing in terms of franchising include medical delivery options and home services.
PRO TIP: While direct relevant experience is not mandatory, Mark explained that having some familiarity with customer service and hospitality can be really beneficial for a franchisee. If you are a pioneer for a brand or the brand is young in your market, this is especially vital. You are not only selling a product but introducing the brand itself. This means paying extra mind to the service your customers will get and where any related industry experience will help.
Study the Franchise Disclosure Document
After picking a franchise, locate the franchise disclosure document (FDD). It includes important information about the brand, like what the franchisor will expect of you and financial requirements in terms of personal net worth and liquidity.
“You will want to study the FDD and read it cover to cover,” says Mark. “That extensive document has everything you need to know, like how you can stay in the brand’s good graces and what requirements you need to satisfy.”
There are a number of factors to keep in mind when looking over the FDD and before getting started in the franchise process. Below are five questions to consider:
1) How Often Are You Expected to Reimage or Rebrand?
An important requirement to understand is your responsibility in terms of reimaging and rebranding. The FDD should tell you how often the franchisor may expect that investment from you and what the estimated costs may be. Some may require you to completely remodel your store every 10 years, and the process may be expensive and time-consuming. It’s important to remember that these reimaging and rebranding projects may not result in increased sales or profitability.
When thinking about this requirement, you’ll also want to consider the brand’s capital in your market. If the brand is not well recognized or well-known, it could impact your ability to finance any required remodels.
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2) Do You Understand Your Lease?
If the business requires you to operate as a tenant in a building, you will need to understand your lease really well. This includes knowing not only the cost to occupy the space, but also rent escalation and renewal terms. It also can impact your financing because lenders may want the term of your lease to equal or exceed the term of your loan.
3) How Does the Supply Chain Work?
Understanding the supply chain is also vital before becoming a franchisee. If you need goods to sell to consumers, where will you get those from? Are the franchisees an owner in the supply chain, or will you rely on unrelated third party suppliers?
Some franchises operate cooperatives that get bulk pricing on goods that stores then purchase individually. Any generated profits are shared among members of the cooperative. The franchisor will tell you if the franchisees own the distribution channel in some way.
4) How Will Changes in Labor Costs Affect You?
Labor costs are also an important factor to keep in mind. You may have hourly workers on your staff. You must keep changes in minimum wage, benefit and paid leave laws in mind when calculating labor costs. These costs are a big factor in your profitability and could impact the pricing of your goods or services.
5) Do You Have the Personal and Professional Support You’ll Need?
A strong professional and personal support system are integral for anyone considering opening a franchise, or any business. Family and close friends must be supportive because you likely will need to be actively involved, working long hours.
Similarly, you will need a solid group of professional advisors to help you. If possible, you will want to find advisors who have experience in the franchise space and with the specific franchisor you’re considering. A lawyer or accountant who has worked with the brand before will know the ins-and-outs of working with the franchisor, which will be really helpful to you as the franchisee.
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Starting any type of business is a big decision. At Rockland Trust, we have the right experts and knowledge to help you make a decision that is best for you and aligns with your personal and professional financial goals.
