Franchise Selection from Both Sides of the Table — part 1

July 30th, 2010

A successful franchise relationship requires commitments and dedication on both sides of the table. Ultimately, franchisors and franchisees alike benefit from the franchisee’s operations only when those operations are profitable. Success in franchising requires matching the right franchise prospect with the right opportunity.

This series of posts discuss steps to be taken by franchisees and franchisors to help guide them to matches with real possibilities for success.

Self- Evaluation Comes First for the Prospective Franchisee

When evaluating the purchase of franchise rights and ultimately selecting a particular opportunity to pursue, a prospective franchisee should use a deliberate process that examines your personal aspirations and capabilities, and then the value and benefits associated with particular franchise opportunities in your geographic market.

Preliminary Self-Evaluation

Many prospective franchisees get caught up in the dream of owing their own business or in the hype of a franchisor, and they may rush into an opportunity without truly evaluating their own capabilities and the long-term consequences of entering into a franchise relationship. Before diving into evaluation of individual franchise opportunities, you should ask yourself questions like: “Am I prepared to take on the risks and stresses of owning a business?” and, “Am I ready for the long-term time commitment of owning a business?” In addition, while many entrepreneurs may say that, from an ownership perspective, “a business is a business,” when selecting a franchise opportunity that will become and support your livelihood, you should carefully evaluate what industries match your skills and interests. While building toward an exit strategy may be your ultimate goal, you will have a much greater chance at success if you enjoy working in the business that you are growing.

Equally important with answering these basic questions is making sure that you have the funds necessary to finance the business’s development and to support you and your family through the initial stages of operations. There are several financing methods available to start a new business, and some franchisors offer financing of the initial franchise fee. You should investigate all of your financing options and choose the one that makes the most sense for you. In addition, determining how well your franchise needs to do for you to make a satisfactory living should involve a critical analysis of your unique circumstances and the historical performance of the franchise system: How much money do you need to be able to pull from the business? What have other franchisees told you? What information were you able to obtain from the franchisor? What have financing companies said? What have you figured out in your business plan? Analyzing the answers to all of these questions will be critical to determining whether you will be able to succeed as a franchisee.

If the initial investment will be over $100,000, you should seek an SBA-guaranteed bank loan, not only because it can be a good form of financing, but also because the loan officer will provide valuable feedback on whether the particular franchise under consideration is a path you should pursue. It is true that many large banks will not make loans for start up businesses, even those backed by a franchise. However, iIf a bank funds start-ups in the franchisor’s industry, but dismisses your application out of hand, then perhaps you should consider alternate opportunities.

Next week’s post will discuss investigation of specific opportuntites by a prospective franchisee who has complete his or her self-evaluation.

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