How to Pick the Right Franchise

It only makes sense that when the economy is down more people begin to consider the option of becoming an entrepreneur, starting their own business and blazing their own path for their future. Running your own business can be fun and self-satisfying if you crave the freedom to make your own decisions.

Oftentimes, those who are considering entrepreneurship, look into purchasing a franchise as some consider it somewhat "safer" than going out and starting your own company and brand. However, becoming a franchisee is not completely devoid of risk.

Before getting into a checklist of what you should consider before purchasing, here's brief primer on how the franchise system works. First, understand the language. If you are the one buying the franchise, you are the franchisee. You are buying your business from a franchisor. You are essentially buying the right to operate that company's business at a location. Thus, they've already established a product and a brand for you to sell. You just have to go out and sell it. If you become a franchisee, you are then obviously required to follow rules as determined by the franchisor. Additionally, you will be required to pay royalties to the franchisor on a regular schedule (because, remember, you're selling someone else's product and they are giving you the right to do so). You will also probably have to pay a one-time fee in order to acquire the franchise.

To determine if buying a franchise is right for you, here are some questions and actions you should take prior to signing any paperwork.

What is the Cost?
Find out what the initial cost will be to purchase a franchise and then also ask what the ongoing fee (royalties) is to continue to operate the franchise. In some cases, you may not have to pay the upfront one-time fee all in cash. You may have the option of financing a portion of it, but then you will be paying interest on that loan. So, you have to then ask yourself if you will be able to pay back that loan plus the interest accrued.

Owning a franchise is not cheap, and in some cases the startup costs are much higher than starting up your own business.

What Do these Fees Pay For?
Ask the franchisor what your one-time fee covers. In most cases, it allows you the right to use the company's brand and other types of marketing or training guidelines already established by the company. Make sure you ask! Like anything else, there are always exclusions or possible hidden fees.

With respect to the ongoing royalty fees, you will have to pay, those fees also cover certain services that the franchisor is supposed to provide you. The problem is that the Federal Trade Commission has said that even if the franchisor does not provide you with what is promised, you may still have to cough up the royalty fees for the length of the agreement you sign. So, you may want to ask other franchise operators about their experience with the company and whether they are satisfied with the support services. Within the disclosure document (I discuss later on) that you receive from the franchisor, you will receive a list of contact information of all franchisees. Call around. Are they happy?

Are There Any Other Costs to Consider?
Well, frankly, yes. Upon discussing with the franchisor what exactly your fees will cover, you may find that advertising is not included. Think about your local Subway or the like where you see handwritten signs advertising a special deal. Then you go two cities over, and that same deal is nowhere to be found.
You will have to pay costs to keep your business running and to also pay for things like advertising or to pay to take the cut on discounts if you need to get more customer foot traffic into your operation.

Personal Checklist
So, do you think you have what it takes to be a business owner rather than the one taking orders from a boss? You have to carefully consider this, because most people just jump into the business without thinking and two years later, they are floundering. Can you afford all the costs listed above? What skills do you have that you think will be an asset to your business? These seem like overly simplistic questions, but they are practical things to consider before forking down $20,000 or more to start something you may not have the stomach to finish.

You need to be willing to put in the time and effort. Just because you are buying something pre-established, it doesn't mean that you can get away working a 9 to 5 Monday through Friday. Accept the fact that you may not get rich quick or ever and that you may not be able to take another vacation for a very long time.

Also, while some might find this surprising, ask yourself what you want to do after the franchise. Meaning, how are you going to get out of the business and how will you support yourself afterward. Having a good game plan that anticipates what could go wrong, is smart business.

I Don't Know What I Want
Well, let's say you've decided you want to be a franchisee; you just don't know what type of business to get into. Rather than saying a specific company, after looking at what the market is in demand for, decide what industry (rather than company) would have the most potential for success. Because the market has become saturated with generic chains, maybe niche restaurants or the like is the answer? Or, maybe it's not. You have to decide on a product that you think will sell and that you can stomach being a cheerleader for with a customer.

Know Thy Market
Just as in the case of starting your own business, you do market research to make sure whatever market you are entering has an appetite for the business. Likewise, you need to make sure whatever demographic you are pandering to, will be interested in your product.

Figure out what types of companies have saturated the market. You don't have to look too hard to figure that out either. Three years ago, everyone thought a coffeehouse was the hot commodity and you couldn't get away with seeing one at every other corner. But today, the market for that product is oversaturated, and now you see companies pulling back and stores closing. Don't get into a business just because the brand is exposed and well known. A brand won't determine how well you do on the streets.

The Recession
Like anyone wants to hear anymore about the recession - I know. But, when evaluating what franchise to go after, think about what will happen with the next downturn. The economy operates in cycles. You could open a franchise in a period of expansion, only to find a few years later that the economy is contracting. Selecting a business that you think can weather the inevitable ups and downs is crucial.

Business that do not offer necessities or cater to a more select or higher income bracket, can sometimes be dicey moves. While everyone says customers can be loyal to the right brand, that's not always the case. Look at something like the teen/twenty-something demographic. The minute the fast-fashion, discount retailers (such as a Forever 21 or an H&M) came in, the higher-priced stuff wasn't so easy to digest for a lot of shoppers.

Read the Contract
The Franchisor Disclosure Document is something every franchisor will give to you for you to study. If they don't give you one, run away. This document is something required by the FTC. Within this disclosure you will find all information about the franchise (executives information, litigation information), contacts (including the contact information of other franchisees) and a copy of the actual franchise contract. Read everything and don't let anyone rush you into signing anything. And if you don't understand something, ask or look it up yourself.

Visit the Operation
Hello, this is an obvious one. Before buying into a company, look at their web site. Do they present a brand and product that you can get behind? If you were a customer, would this advertising scheme be appealing to you? Additionally, what does the store look like?

And, when you visit the actual franchisor, look at it is a two-way job interview. They may be evaluating you on whether or not they want you to sell their product, but you are also evaluating them to make sure you want to work with these people.

I know this list of considerations sounds as though it may be outlining the negatives, but a true entrepreneur is thorough in his or her homework. Carefully consider what could go wrong to make the best investment decision and then plough forward believing in yourself. Sometimes, that's all it takes.