When I think back to my first franchise investment, I remember the emotional high of deciding to invest was soon followed by a period of time where I wondered if I made the right decision. Luckily for me this period of investors remorse waned rather quickly. When I talk to other franchisees, I realized that I wasn’t alone in having these concerns. The good news is, this is a common issue, so we put together a quick guide to help you understand and navigate those feelings.
Selecting the right franchise can be a complicated process. With over 4,000 franchise concepts to choose from across various industries and investment levels, a savvy potential investor must do their homework. Here is a list of things to consider during your search.
HAVE A REALISTIC BUDGET
We’ve researched franchise brands that range in investment levels from around $5,000 to well over $1M. While there are many franchise opportunities that will catch your eye for one reason or another, it’s important to really focus on and research opportunities that are in your investment range, net worth, and liquidity requirements. Let’s start with the investment cost portion of the discussion. The investment cost is simply how much it will cost to start the business. This will include the franchise fee, construction, signage, furniture, fixtures, equipment, training, licenses/permits, etc. While no brand will be able to tell you exactly what it will cost because of many variables (location, size of facility, etc.), they will give you an investment range.
In addition to the investment costs, most brands will also have net worth and liquidity requirements. Net worth is determined by subtracting your debts from your assets. Put another way, what you own minus what you owe. The net worth requirement is calculated so that an investor can have enough money to fund the project and successfully see it through should there be any hurdles that arise. Keep in mind that if the franchise you select requires retail space, you will also have to convince a landlord that you are well funded well enough to cover the expenses. Similarly healthy liquidity will help you overcome financial challenges and secure loans if necessary.
REVIEW INVESTMENT OPTIONS OUTSIDE OF LIQUID CAPITAL
Finding the right plan to help ensure the success of your business can be a challenge. Lean on leading funding companies who understand the many aspects of the franchise industry and use their expertise to help you find the best customized option for you. There are several methods, each having their own list of pros and cons. It’s important to select funding options based on your unique situation. Some of the funding types include SBA loans, unsecured loans, 401k Rollovers, Home Equity Lines of Credit, Securities based lending. Quite often the funding solution is a hybrid approach where the investor selects one or more of the available funding options.
HAVE CLEARLY DEFINED GOALS
Sometimes investors get too caught up in the product or service and don’t spend enough time thinking about what the business is designed to do for them. If you are looking to replace a salary with this investment, then you need a firm financial goaland a projection for how long it will take to get there. If you have certain scheduling requirements that could be a deal breaker for you, it’s important to take those into consideration. Other non-negotiable items could include business hours of operation, seasonality, employee head count, inventory requirements, recurring revenue etc.
WRITE DOWN your goals! This is key – and when I say “write” I don’t mean take mental notes or type them on your laptop or smart phone. Put the paper and pen to use. When setting your goals I suggest using the S.M.A.R.T. system. Here’s an explanation…
S for Specific
You have a better chance of hitting your goals when they are specific. “Make a lot of money” or “have some more free time” are not clear-cut enough and won’t help you take action. Some examples of specific goals are “Make $300,000 this year” and “attend 10 of my child’s soccer games this season”.
M for Measurable
A goal is only as good as your ability to measure it. If your goal is to make $300,000 in 2023 then you know that by July 1 you should have made $150,000 or you could be behind and need to take it to the next level. If you can’t measure your progress with your goals, then success or failure may be open to speculation. We either hit or miss our goals – there is no in between.
A for Attainable
Your goals need to be worthwhile and possible otherwise you won’t be motivated to pursue them. I’d love to make a billion dollars a year but despite being a fairly confident and optimistic person, I know that’s hardly an attainable goal. Set ambitious goals but always remember it’s a whole lot more motivating and gratifying to over perform on your goals than it is to fall short.
R T for Realistic Timetable
Goals have to have a deadline otherwise they won’t motivate or inspire commitment. It’s hard to really be motivated to take action on something we want to achieve someday. It’s much easier to take action on something we want to achieve by the end of the month or year.
WORK WITH A TRUSTED FRANCHISE CONSULTANT
A trusted franchise consultant can offer candidates a wealth of general and inside information about the franchise industry as well as about specific franchise industries and opportunities. Franchise Consultants will help save you time and money by assisting with much of the initial legwork required in identifying rock solid opportunities that meet your criteria and are available in your desired market. The best franchise consultants will listen intently to your criteria and match you with an opportunity in an industry sometimes outside your initial search parameters. Franchise consultants are paid like a recruiter – by the Franchises and not by you.
ENGAGE A FRANCHISE ATTORNEY
While general business attorneys will be able to provide counsel on business law, franchise specific lawyers will offer specialized advice based on experience with other franchisees and franchisors. Franchise Attorneys also have specific experience in reading Franchise Disclosure Documents (FDD) and Franchise Agreements. They can assist with negotiating the terms of the agreement and offer guidance on which contents in the agreement are vague or require an explanation from the franchisor. He or she will also ensure that you understand the terms of the agreement so you can decide whether they are in line with your needs and goals.
Following these frustration avoiding tips will make the research of a franchise opportunity more efficient.