Franchises offer higher returns on investment than independent businesses. They also have brand awareness and a proven business model.
However, they don’t come without risk. You can reduce the risks of starting a franchise by following these tips. These include visiting franchised outlets, attending franchise expositions, and working with franchising brokers.
Start with a Purpose
Franchise opportunities offer several advantages, such as instant brand recognition, an existing business model, and a larger marketing plan. But you must weigh the pros and cons against your strengths, resources, goals, and financial requirements to decide.
Think about how involved you want to be in daily operations, too. Do you intend to draw a salary, or are you hoping to enjoy passive income from net profits?
Franchises operate in various industries, from health and wellness to technology services. Entrepreneurs seeking fast-growth opportunities should consider sectors that have unprecedented expansion trajectories. For example, fitness chains or tech repair shops have gained traction with customers by offering affordable classes and quality service. These businesses have proven business models that are easy to execute.
Do Your Research
While many people believe franchises are a good option for those who don’t want to build a business from the ground up, it is important to research before investing in any franchise opportunity. This is especially true if you’re seeking profitable opportunities.
The most profitable franchises have a strong sales track record and operate in growing markets. You should also pay attention to the earnings claims (financial performance representations) in a franchise’s disclosure document, Item 19. Contacting existing franchisees is an excellent way to gain insights into day-to-day operations and their overall satisfaction with a particular franchise. Also, take into account local competition. This will majorly affect a franchise’s profitability in your area.
Get a Preliminary Checklist
Sadly, the answer to the question of “Are franchises profitable?” isn’t a simple one. The best way to determine profitability when buying a franchise is to find out which franchises have been able to keep up with customer trends and maintain an overall positive reputation over time.
The best way to do this is by visiting and asking questions at franchised outlets in your area. This will help you learn more about the brand, its support system, and its management. Additionally, paying attention to any discussion on message boards, Facebook, or LinkedIn groups will be helpful as you evaluate different franchise opportunities. Also, please pay close attention to the FDD and how it outlines the startup costs, ongoing royalty fees, and any other legal requirements. All of these factors will play a role in your decision-making process.
Find a Franchise Broker
Researching and evaluating the many available franchise brands takes time and effort. To speed up the process, consider partnering with a franchise broker.
They are experts in the industry and help match potential franchisees with franchisors that fit their budget, skill set, and professional goals. They also assist with interpreting franchise documents and negotiating terms and conditions.
When choosing a broker, ask for referrals from other franchisees and review their website to learn about their services. Please find out how they select franchisors to represent and how they validate earnings claims. Beware of commission-hungry brokers who may steer you toward a higher-priced franchise to boost their profits. Ask about their fee structure and how they are incentivized to provide a quality service.
Make the Offer
After narrowing your field, it’s time to research specific franchise opportunities. Look at the FDD for that franchise, especially Item 19, which lists earnings claims — also called financial performance representations (FPRs).
These claims don’t necessarily predict your future business profits and should be analyzed with the help of an accountant or lawyer. Still, they should give you a clearer picture of what to expect and can help you decide whether the franchise is worth the initial investment and the potential debt you’ll incur.
Ask the franchisor for a list of current franchisees and interview them. Ask about their experiences with the franchise and what they’ve learned from operating the business. This helps you understand what it’s like to be part of that business and whether it fits your career goals.