A strong economy, favorable corporate tax breaks, and consumer confidence all contributed to positive franchise growth over the past two years. As of 2018, the franchise industry employed 21 million people and generated $2.3 trillion of economic activity, according to a U.S. government report.
While it may sound appealing to invest in today’s franchise-friendly economy, investors do need to need to consider several factors before they take the leap. While franchises have plenty to offer over startups—brand recognition, loyal customer bases, marketing support, and proven processes—they do come with their own set of risks.
It’s also important to note that franchises also perform well during recessions.
“Franchising has historically done well under most economic conditions,” said Eric Stites, CEO of Franchise Business Review. “During boom periods, the fear of missing out on a great opportunity fuels strong franchise growth. During a downturn, on the other hand, the fear of job loss and financial security drives many people to take control of their own futures by investing in a franchise business.
If you are looking to invest a franchise, it’s important to understand the big picture to avoid any potential investment pitfalls—no matter what the economic forecast might be.
There is an obvious appeal to starting a business by investing in a franchise. While getting a start-up off the group often comes with a lot of unknowns, a franchise comes with a successful model and brand recognition right from the start.
A franchise is a business you invest in, with the hopes of making a good return on your money by offering a product or service your market wants. Although you may own the rights to your own franchise, you will still have a set of rules to follow. Here are some key points to help you better understand how franchising works:
For some, owning a franchise offers a great way to break into small business ownership. After all, you might know your territory and your customer base well already. Franchises come with plenty of perks: the ability to work for yourself, tried-and-true business models to follow, and guidance from experts who’ve run the business before you.
But it’s not all glory—franchisees should expect to work long hours, wait patiently for several months or sometimes years before they realize a profit, and adhere to specific business requirements set by the home office. Whether or not owning a franchise is a good idea depends on how well you know yourself, how much financial risk you are willing to take, and how dedicated you are to making your business successful.
Before you decide on any one franchise, you first need to determine if franchise ownership is right for you. Here are some questions to ask:
Do you understand the full financial and legal obligations you’ll take on as a franchisee? Enthusiastic investors should also consider their financial obligations both in the near- and long-term. Some things to ask:
Buying a franchise requires shopping around for the best fit, based on several factors.
Once you’ve decided that you might want to pursue franchising, it’s important to do the research to find the company that best matches your interests, budget, and business expertise. Take the Franchise Selection Quiz to help narrow down the possibilities.
Looking for Ideas? Check out these franchise lists:
Next, you should look at what other franchisees have to say about their own experiences. Franchise Business Review surveys franchisees regularly to create lists that give potential buyers a transparent view into franchisee satisfaction. If you need guidance about what you should be looking for, an FBR franchise consultant can look at factors such as geography, experience, budget, and personality to customize a list of options for you before putting you in touch with a brand directly.
Finally, once you’ve narrowed down the field, you should compare brands and directly ask both franchisors and franchisees questions that can give you a better idea of what owning a business will be like.
Here are a few questions you might consider asking.
10 Questions to Ask the Franchise Brand Before You Buy
7 Questions to Ask Franchisees Before You Buy
Asking both franchisors and franchisees questions related to profitability, growth, and culture will help you compare brands and uncover any advantages one investment might have over another.
Not all franchises are created equal when it comes to profitability. While it’s important to enjoy the brand, the people you work with, and the products and services you provide customers—you need to make sure your new venture will ultimately make money.
A statistic to be aware of is the 80/20 rule – the rule that says the top 20% of all franchisees are high performers. For example, FBR research shows that 37% of food franchise owners earn less than $50,000 per year, and just 16% – the “top performers” – earn more than $200,000 per year. The average annual income reported by all food and beverage operators that we surveyed is $120,000 for businesses open at least two years.
You should also keep in mind that as a business owner, your take-home income will ultimately come out of your business's net profit or "bottom line." While the gross sales/gross revenue of any business (commonly referred to as "top line revenue") may seem impressive, it is critical to understand the profit margin of the business, the percentage of money left over after all business expenses are paid, Eric Stites, CEO of Franchise Business Review told CNBC.
There are some ways to determine whether a franchise will be profitable, much of which you can extrapolate from a Franchise Disclosure Document. These include:
Keep these tips in mind when researching franchise opportunities for profitability:
Once you hone in on the right franchise decision, you will have to take a series of steps before you are ready to own and operate your business.
It’s important to note that while some franchise agreements are negotiable—many are not. You should seek legal advice before making one of the most important decisions of your life.
The largest barrier when it comes to opening a franchise relates to capital. After you sign your franchise agreement, you’ll need to quickly assess if you have enough money to support your new investment—which includes the franchise fee due immediately after signing the franchise agreement.
When it comes to figuring out how much money you will need to launch your new business, you can find estimates of fees and startup costs in Items 5 – 7 of the FDD. This will also provide you average monthly sales and year-over-year revenue growth. Keep in mind that you’ll need enough funds to cover construction and development costs, long-term leases, equipment, and any signage or systems you need to run your franchise.
Funding sources could include:
There are thousands of choices for investors shopping around for the right franchise. However, not all franchises are smart investments. That’s why it’s important to research opportunities, assess your own interests, and compare the franchises you are interested in.
To help prospective buyers like you find the best opportunities each year, Franchise Business Review surveys thousands of franchisees across hundreds of brands to give you a comprehensive look at the top franchise opportunities on the market today.
Details on this year’s top-rated franchise brands can be found on our Top 200 list.