When it comes time to start your own business – Beware the know-it-all Let your due diligence guide you
You know the type. You tell them your great new idea, and they tell you they know all about that type of business. They will tell you “I heard a friend of a friend say they knew someone, who had a terrible experience…” You get the picture.
The best advice of all is to tune them out, because odds are they don’t know the whole picture. They may have heard one story, but you will want more than a single data point before you make your decision.
One of the great reasons to go into business with a franchise is you can find plenty of evidence to help you decide whether a business is worthy of your time and effort or not.
The beauty of the franchise concept is hundreds of people have trod those steps before you and they’re there to tell you how it’s all gone and how it works. Franchisors are also required by federal law to disclose a great deal of information in the Franchise Disclosure Document (FDD) that can tell you everything from upfront costs to details about its operating systems.
In addition, experts can help you further hone your final selection, whether the business matches your financial wherewithal, as well as whether the numbers add up. So plan on spending several months on research, then when you’ve made your selection, consult an accountant and a franchise lawyer.
The process of narrowing down your choices from around 3,000 possible franchises across some 75 industries can seem daunting. So here’s what you need to know before making a decision.
How much does it cost?
And that means everything, including the franchise fee, any marketing fees, costs to set up your business, including equipment and supplies, plus working capital to keep the lights on until you start earning a profit. Most of the answers will be found in Items 5-8 in the FDD, but it’s always good to talk with franchisees to learn if they’ve had additional, unforeseen costs.
How extensive is the franchisor’s training and support program?
You should get all the support you need to get you going in a new franchise business. The training should more than make up for any limitations of your own background in a business where you may have very little experience. If for any reason you consider the program insufficient or its executives less than accessible, there may be a problem – so certainly pass by that franchise.
How many franchisees are in business?
You will find a list of franchisees in the FDD, but the franchisor can answer: How long have their franchisees been operating? How time-tested is the system? How well individual franchisees are performing is best answered by the franchisees themselves.
The franchisor’s obligations
Better to find out early what the franchisor will cover as part of its fee and what will be your responsibility. Does the franchisor help with site selection and/or lease negotiation? How much marketing/advertising support do they offer?
Is there a franchisee network of support?
Many franchisees say these types of support mechanisms, whether a formal mentorship program or franchisee network, provide the best source of assistance to get their new businesses up and running. Look for ways the franchisor helps connect you to fellow franchisees.
Restrictions on the franchisee
You should know the renewal and termination terms. Will your territory be exclusive? And you need to know upfront what rules apply if you want to sell the business. Legal advice is always a good idea.
How much income do I need to cover my requirements?
A franchise allows you to know all your costs before you sink a dime of your own into this business, so if, when you’ve done all the math and added up your expenses and figured out your likely income after six months, one year, two years and longer, and you still won’t achieve earnings necessary for your lifestyle, this business may not be for you.
What type of marketing support does the franchisor offer?
Will you have to run your own local marketing program? These costs can add up.
Doing a thorough due diligence can mean the difference between success and failure. For starters, it will help you choose the right franchise for you, and, more importantly, it helps you separate the winners from the losers. So when it comes time to invest in a new business, you know way more than any know-it-all!
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Contact Dan Citrenbaum to help you 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 firstname.lastname@example.org or at (484)278-4589.
© Dan Citrenbaum 2020