Is franchising appropriate? Three Considerations Before Jumping Into a Franchise Opportunity

Jonathan Keyser is the founder of Keyser, the largest commercial real estate brokerage company in Arizona.

The franchise industry is expected to add more than 800,000 jobs in the U.S. by the end of 2021, totaling 8.3 million jobs nationwide. According to data shared with webinar attendees by the International Franchise Association (IFA), this will be the largest annual growth in franchise locations ever. This growth equates to 26,000 new franchisees in 2021, bringing the total number of franchise locations in the US to 780,188.

Keyser is a commercial real estate brokerage that serves tenants and occupiers of space, and our retail division working with retailers, franchisors and franchisees has seen so much activity around franchising. Why? Because franchises are proven concepts that enable expansion, backed up with business training and support. They are accompanied by a almost guaranteed success model. If you’ve been looking for a new business venture, franchising may be for you.

If you’re seriously considering jumping into the franchise, there are three considerations to keep in mind before making this commitment, no matter what brand you’re interested in.

1. Is the fit right?

A franchisee and franchisor have a mutually beneficial relationship. If one is successful, the other is usually successful. That said, franchisors want to make sure their franchisees are the right choice for their business. Depending on the franchisor’s business model, they may require a certain level of personal involvement from the franchisee, in addition to the typical and expected obligations of a business venture. These “fitness requirements” can be a commitment to a lifestyle, previous work experience with that brand, or even participation in cultural or religious practices. It’s in your best interest to research a brand’s standards to ensure 1) you can meet their expectations and 2) there are no surprises in the way they do business.

After choosing the brand of interest, do your research to make sure you qualify. Inquire about the possibility with the franchisor and you will receive a Franchise Disclosure Document (FDD). The FDD illustrates the full picture of what you can expect from a brand, the customer experience, the requirements/guidelines and the financial commitment you can expect.

2. Do the financial requirements allow you to participate?

When researching franchise brands, you will find that there are requirements for personal assets or liquid assets. This is the baseline for a franchisor to determine whether or not you are a viable candidate for a franchise. For some brands this can be tens of thousands of dollars and for others it can be as much as $1 million or more.

Just because a brand requires you to have a certain amount of cash doesn’t necessarily mean it’s the whole entry fee. There are additional fees and costs associated with opening a franchise, such as:

• Franchise Fee: The initial license fee to use the site’s logo, business model, and trade secrets.

• Royalty fees: a fixed amount or percentage of the turnover.

• Advertising/marketing costs: the national marketing costs for brand awareness.

• Local Marketing Costs: The money a franchisor expects franchisees to spend marketing their territory or location.

• Equipment, layout and construction costs: The cost of converting a generic site into a curious built-up space that is fully utilized.

• Ongoing costs: such as food, labor and distribution of the product.

The FDD provides franchisees and potential franchisees with all of this basic data to help them understand the capital needed.

3. Can you meet commercial real estate expectations?

Choosing the right location for your franchise is critical to the success of your business. After choosing the brand, choosing the location is probably the second most exciting step in the process, but in many cases the value and the process itself are overlooked. Your franchisor has guidelines regarding what is and is not acceptable for the brand and in some cases can provide you with a lead broker to help you through the process.

Some brands allow franchisees to select their own commercial real estate advisor. In these cases, franchisees must select a commercial real estate broker who:

• Is a tenant-only advisor; this ensures that the goals of the advisor are aligned with the franchisee and franchisor rather than the landlord.

• Has in-depth knowledge of retail and can provide location selection insights based on artificial intelligence, analytics, demographics, psychographics, and market data.

• Can tailor their recommendations to the requirements of the franchisor; these guidelines are there because they have been successful. It is not advisable to opt for a commercial property that has not been approved by the franchisor.

Becoming a franchisee requires dedication and dedication that goes far beyond finance. If you’re ready to take on the challenge and commit to a franchise’s business plan for at least five years (on average), franchising could be the next best business venture for you.

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