Starting a Business? Control Your Risk with a Franchise??

So you want to start your own business but don’t know where to start? Maybe you’re concerned about risk, lack of experience in the specific business that caught your fancy or are nervous about blazing an entirely new trail.

 For the thousands of folks looking to gain control over their working lives each year, a franchise offers some compelling advantages. For one thing, instead of beginning your research

by talking to people operating a similar business, you can learn the ins and outs from people in the very same business. A franchise operation offers a veritable network of support, plus a treasure trove of statistics and operating history is available to give you a leg up in the marketplace.

By contrast, when you start an independent business, you must invent your concept and innovate your own marketing, inventory and accounting controls and countless other procedures from scratch, some ahead of time, and, inevitably, some on the fly as you go along, which will likely significantly impact your bottom line as you get started and optimize your systems.

 For some, therein lies the excitement. These are the folks willing and able to accept far more uncertainty, but many others prefer a less bumpy path.

 With a franchise, many of those risky variables disappear since the franchise company has already figured out a system that works. The tricky part comes in selecting a franchise that’s right for you and has a good track record of success, which can be challenging in an arena in which about 800,000 franchise establishments operate in 75 different industries, generating a $2.1 trillion impact on the domestic economy, according to a 2007 study by the International Franchise Association.

 Getting some assistance is as easy as locating a franchise coach who can help steer you toward reputable franchise companies. Of course, like everything else associated with your own business, the responsibility lies with you to do your due diligence before signing your name to any dotted lines.

 We suggest you start with these five steps to narrow down your franchise search and maximize your success with your new business:

 Conduct a personal Inventory

Write a list of your professional and personal skills. Then write a wish list of the types of businesses you would like to operate and the types of skills necessary to run these businesses.  See where they intersect!

 Research Possible Franchises

Check the website of the International Franchise Association for a comprehensive listing of franchises that suit your personal profile. Consider consulting a franchise coach, who will already have vetted many franchise companies.

 Zero in on a few franchises

Request a copy of the franchise disclosure document for your selected list of franchises and read through these for: the franchisor’s background, initial and ongoing costs, litigation history, plus information about the types of training and support they offer, as well as their method for advertising, including who pays.

 Interview Existing Franchisees

Learn about the types of support offered by the franchise companies, how it helps them, and find out how much their businesses are earning to check if it matches information in company disclosure documents. Franchisee profits can vary widely due to geography as well as other factors.  You want to find out what it takes to succeed with this franchise.

 Interview former Franchisees

Learn why things didn’t work out for them. You might get an earful about the franchise company’s shortcomings, or you might hear the franchisee wasn’t really cut out for this type of business.

 The knowledge you gain by going through this research process is indispensable to you in whatever business you start. As you’ve likely heard before, success happens where opportunity meets preparation. And your research is critical to your preparation.

Dan Citrenbaum is a franchise coach and consultant to entrepreneurs, who helps people achieve their dreams as small business owners. He has a proven track record helping people select and buy a franchise or existing business. Contact Dan at dcitrenbaum@gmail.com or at (484) 278-4589 and view his company website at www.entrepreneuroption.com.

©Dan Citrenbaum 2019

Financing a Franchise May Be Easier Than You Think

Perhaps the most essential building block to starting a new business is sufficient capitalization. So what are the best ways to ensure you have enough money to start and run your business until you begin to earn a profit?


Preparation must come first, so by the time you sink any money into your new business, you will have completed your due diligence and set a solid path to success. This includes extensive research into your future business, including interviewing many people along the way to help you settle on a business that best matches your skills, experience and interest.


If, like many budding new business-owners you select a franchise, you will have consulted a franchise coach, an accountant, plus the many experts with the franchise company, trained to help you start a successful business.


Since many franchises are purchased by people who have never owned their own business before and may even be new to the particular industry, traditional bank lending may not be a viable option. The good news is that many other financing options are available to finance your new business.


Most franchisees put together a package that may include:

  • A loan from the U.S. Small Business Association (SBA)
  • Traditional savings
  • Home equity loan, or
  • Increasingly common, rollover of a 401K or IRA.


While using retirement funds to help you start a new business should not be undertaken lightly, this procedure has many advantages, according to Sherri Seiber, chief operating officer of FranFund Inc., a Fort Worth-Tex.-based firm that has advised thousands of franchisees on funding their new businesses.

The use of a retirement fund rollover allows you to self-fund your new business and save the costs associated with a loan. Demand for loans, at its highest level since the Great Recession, still exceeds supply, according to an article in the June Franchising World magazine.


“This rollover program is the No. 1 way businesses under $150,000 to $200,000 are getting funded,”Seiber said. “Sixty-five to 70 percent of our clients use this (method) alone or in conjunction with a loan.”


Some people use a rollover as a way to inject equity into a loan application.
The main caveat is that you could lose your retirement savings, and as Seiber notes, if you don’t believe you can be successful in your new business, this path is probably not for you —and, of course, you may not want to go into that business at all.


Seiber said the Employee Retirement Income Security Act of 1974, allows people to roll over a portion or all of their 401K or IRA (not a Roth IRA) into a new 401K profit-sharing plan sponsored by your new corporation, which buys stock in the new corporation without penalty or paying additional tax.


So the 401K becomes a stockholder in the new business. The operating account of this new corporation can be used for any legitimate business expense, including paying yourself a salary during the start-up phase before you begin generating revenue.


Seiber noted that most of her clients do very well funding their franchises this way. FranFund has only a 3 percent to 4 percent annual attrition rate, but not all these are failures, she said. Of course, most of FranFund’s business comes from referrals, and most of her clients have completed extensive due diligence beforehand.


The final question you have to ask yourself is if you really believe you have what it takes, meaning skills, experience and work ethic, to make a success of your new business. If the answer is a resounding yes, then why not invest in yourself?

Wondering When the Profits Will Start Rolling In? Find Out Before You Invest in a New Franchise!

So you’ve selected a franchise and have your initial investment capital saved and now you want to know: How much money will I make? To answer the question you’ll need to weigh your costs against expected potential revenues.

The beauty of a franchise is you actually have a good shot at figuring all these numbers out. Between the financial disclosure document (FDD) and information available from existing franchisees, you can get a good feel for expenses, as well as potential revenues, so long as you factor in differences related to location, local market and, not to be forgotten, the range of talents and experience individual franchisees bring to their businesses.

Why is it so important to do this math upfront? In a phrase, operating capital.

Lots of folks eager to become entrepreneurs for all the usual reasons -to control your own schedule, achieve work-life balance, be your own boss, and make more money -may neglect to factor in all the capital requirements.

At the beginning of a new business comes the transitional stage. This means you need money to run your business until you learn your way around a new market, new procedures and customer care. During this transition, you won’t generate enough revenue to cover expenses. So it’s essential you have enough capital to keep the circuits humming.

Your first task is to get a realistic sense of how much capital you need to get started. Fortunately, the FDD will provide this view of your costs. Some companies will even provide an idea of potential earnings. A franchise coach can help guide you through the process, but it’s never too early to start your research.

Three Keys to Understanding Your Potential Earnings

Know your Timetable

Most businesses take three to 12 months to start earning profits. The slowest to become profitable are franchises with a lot of costs or ones that take longer to build a customer base. And if the margins are thinner, you need to generate more volume. For example, a document shredding franchise, which requires expensive equipment, may take as long as 18 months to run in the black but can eventually become quite lucrative. Retail franchises can be among the quickest to turn a profit because a good location will quickly draw customers.

Accurately Estimate Your Fixed Costs

The franchise disclosure document provides a list of all your costs -everything you need to open -which are far more extensive than just the initial franchise fee. Examples of the types of fees you’ll find under Items 5 and 6 in the FDD are: IT and system setup and initial marketing. Then comes ongoing fees, such as local marketing additional training, ongoing IT or software costs, costs for audits, insurance, and on and on. In short, all of the costs you would expect to encounter.

In your calculations, you should also factor in the cost of consulting an attorney and accountant, which we strongly recommend.

Estimate Potential Income

Flip now to Item 19 of the FDD to read if the franchisor has made any earnings claims. Only about one-third of franchisors make earnings claims, and how franchise companies address this issue varies.

To fill out the picture, your most important information can be found in Item 20, where you’ll find a list of franchisees. You want to call as many franchisees as possible, preferably those operating in locations similar to yours, to verify all the information in the FDD and get an idea on profits. Word to the wise, avoid the question: “How much money do you earn?” Instead, try a softer approach, such as: “How long until I can expect to make $100,000.” Then try out different income amounts.

All three steps are essential to your preparation. Doing the due diligence required to choose the right franchise upfront will help you experience the pleasure of being your own boss for years to come.

Want to Buy a Franchise: Learn to Navigate the 23 Steps to Success

Want to Buy a Franchise: Learn To Navigate the 23 Steps to Success

Twenty-three? That’s the number of items in the Franchise Disclosure Document -your golden ticket that franchise companies are required to provide their prospective franchisees.

The disclosure rules enforced by the Federal Trade Commission (FTC) give you the tools you need to choose a franchise. Once you learn to navigate this comprehensive document, you should be able to make a match that will allow you to succeed in your new business.

The trick is to figure out where to focus your energy. A franchise coach can help you understand the fine print. But as you begin to peruse these documents, we recommend you focus on the following items:

Item 1 – The Franchisor

The very first page gives you the business history of the franchisor, where it is incorporated, other names under which it has operated and a general description of the business.

Item 3 – Litigation

You’re not looking for a gotcha moment for a single lawsuit, but if you see a history of many lawsuits brought by franchisees, heed the warning, stop reading, and cross this franchise off your list.

Item 7 – Initial Investment

Don’t blink at the numbers. Without enough start-up capital, your business will likely flounder. You need enough money to run your business for a few months. You will see a list of costs including an initial fee, costs to improve the leased space, estimated wages, lease payments, cost to purchase furniture and fixtures and a sign, architectural and engineering fees, initial investment in inventory, insurance, plus additional costs estimated by the franchisor.

Item 12 – Territory

Some franchises have what’s called a protected or exclusive territories. This is a promise that they will not allow another franchisee to operate within a specified distance of your location. Protected territories are not necessarily better, but you do want to understand the parameters.

Item 19 – Earnings Claim

Only about a third of all franchises make earnings claims. When making earnings claims, franchises are required to provide specific supporting materials, including exactly which outlets were included. Since earnings for individual franchises can vary substantially, we recommend you verify any numbers you see in this section with individual franchisees.

Item 20 – List of Franchise Outlets

Your most important section since this is where you will find the key that will help you open the door to a successful business future: the names, locations and phone numbers of all franchisees currently operating, as well as franchisees no longer operating. You should call as many as you can, both current and former franchisees, to learn about their businesses. Has the franchisor’s support systems been helpful? How long did it take for them to become profitable? Are they satisfied with the franchise? Would they purchase this franchise again? For the former franchisee, what went wrong?

Item 21 Financial Statements

Franchisors are required to include copies of their audited financial statements for the most recent three fiscal years to demonstrate the financial condition of the company.

Hardly ever when you enter a business, do you receive such a comprehensive roadmap to help you plot your way to success. It’s up to you to use this treasure trove of information and complete your due diligence so you can make the choice that makes your career.

Are You Cut Out for a Franchise? Take the Quiz!

 

Buying a franchise is one of the quickest, safest ways to start your own business, but a franchise is not for everyone, particularly if you’re the type of person who likes to blaze your own trail.

For starters, to be successful with a franchise — that is to maximize your potential earnings — you must be prepared to follow the franchisor’s system, the time-tested method the company has for virtually every aspect of its operations, including staffing protocols, an advertising campaign and store build-out plans.

After working with dozens of franchisees over the years, I still see new franchisees decide they can cut corners, for example, by declining to hire enough people to cover the day-to-day responsibilities of meeting the needs of customers.

The owner may decide to save money by doing some of the work himself, for example, cleaning houses or caring for seniors. As a result the owner has less time to build the business, creating a steady and growing clientele to generate earnings. While that owner may save some upfront costs, he or she loses long-term earnings potential.

So how do you know if you are a good candidate for a franchise? Answer eight easy questions:

1.    Are you prepared to thoroughly research the business?

Selecting a franchise may be your first most important step, and the process requires solid research, from reading background materials to putting shoe leather to pavement and visiting franchisees.

2.    Are you prepared to work hard?

Just because the business comes with a system doesn’t mean you won’t have a learning curve. Of course, once you have good employees in place and operations running smoothly, many franchise operations will allow you to take an afternoon for golf or to attend a child’s track meet. Many franchisees set a realistic goal to work 30 to 35 hours per week within three to five years of starting their business.

3.    Can you call for assistance when needed?

A good franchisor wants to help you through the start-up phase, so to take full advantage of what you’re paying for, you need to be willing to ask for guidance. A good franchisor will likely offer many good suggestions, possibly a long to-do list that will require time to implement.

4.    Do you have enough capital to set up the business to operate as designed?

Before you buy the franchise, your research should have told you how long it will take to operate in the black and the Franchise Disclosure Document will tell you your upfront expenses. Getting to profitability varies by location and franchisee. You will need to be work hard and pay operating expenses for some time before earnings begin.

5.    Can you accept paying the franchisor royalties and other specified fees?

These fees are the price you pay for a proven operating system, built-in research and development, a fully vetted list of suppliers, as well as an advertising campaign and ongoing support and training.

6.    Will you accept structure in your business?

If you would rather create your own approach to a unique business that reflects your particular vision for a product line or service, you don’t want a franchise.

7.    Can you accept advice from authority?

When you buy into a franchise system, you are part of a team, and the franchisor needs each of its franchisees to present a consistent image to the buying public. No reinventing the system.

8.    And, most importantly, can you trust the system to work?

If the answer is no, then don’t buy the franchise.

Ideally, you will answer yes to each of these questions. If you answered no to more than two, then you might want to consider an independent business. I also suggest you consult a franchise coach, who is in the business to help you make the best decision to ensure success.

After all, what you want most is to have a business you enjoy in which you can excel and which will also earn a tidy profit.

Ready to make your dream of becoming an entrepreneur come true?

Get your free evaluation today!

 

Contact Dan Citrenbaum to create the career you’ve always wanted. As a Franchise Coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at dcitrenbaum@gmail.com or at (484) 278-4589.