How to start a franchise business as a franchisee
Starting a franchise will look different for everyone, but here is a general guide.
1. Get clear on what you’re signing up for
“As the franchisee, you need to know what the franchisor is willing to do for you,” Matos says. “And you need to understand what you are doing for the franchisor to grow the brand. … You really need to breathe, eat and sleep the brand before you jump onto the bandwagon of owning that brand.”
Another word for this? Research.
Consider the following:
- Explore which opportunities are available.
- Learn what kinds of franchise fees are inherent to each industry or organization that interests you. (Some franchises operate on a set fee structure while others take royalties based on revenue.)
- Understand the terms and conditions of the agreement should you wish to change direction or invoke some autonomy. (Some franchises don’t account for multiple franchisees in a geographical area competing against each other.)
- Dig into the market. (How much competition will you face? Is there a need for this particular franchise? Are there opportunities to expand beyond one location?)
2. Pick an industry you know something about
Authors are often advised to write about what they know. The same goes for franchisees. When you look at starting a franchise, choose an industry you have some experience in.
3. Check your motivation
Matos encourages franchisees to be honest with themselves about what they hope to gain and what they plan to invest in their business. Spoiler alert: He thinks they should expect to sow more than they reap.
“After you learn how to give good customer service, after you learn how to provide something good to society, after you learn how build your company reputation … then people [may] buy into your brand,” Matos explains.
4. Get your finances in order
Before a franchise can be purchased, a franchise disclosure document must be signed. So it’s important to understand the investment you’re about to make and the level of support and return to expect from the franchisor. Every franchise agreement is different, but Matos says the franchise fee (what you pay) is usually around 20% of the total investment. That can translate to anything from $10,000 to $100,000 to obtain the franchise license agreement.
When necessary, Matos’ firm also works with clients to clean up their credit and figure out financing.
In addition to coughing up the franchise fee, franchisees need to plan on paying annual royalties or fees to the franchisor. These can range from 5% to 50%, according to FranchiseDirect.com. Some franchises will also incorporate additional fees into the franchise agreement to help cover marketing campaigns and other advertising costs.
5. Create your own business identity
Whether you choose to open a franchise as an individual or a corporation, you’ll need to operate as a business owner. This doesn’t mean following the practices and conditions outlined by the franchisor. (Although you do have to do that.) It means creating a business plan for yourself.
“You’ve got to create your personal plan or business model,” Matos explains.
What do you want to accomplish with this franchise? Do you want to hit a certain level of revenue? Expand to nearby metro areas? How do you want to market the franchise?
6. Plan for the future
Once you sign your franchise disclosure document, secure a business space, hire employees and open for business, it may seem like everything should fall into place. And it might if you plan ahead.
As your small business grows, so too should your residual income — the revenue that accumulates as you gradually invest less effort. Matos cautions against spending this freely. Rather, investing it back into the business through employee salaries and retirement plans, marketing campaigns, expansion or even just a savings account to help weather a market downturn are all ways to ensure the health of your business.