Entrepreneurs find a franchise to be a good investment when starting and growing a new business. A pre-tested and proven business model as well as the support and marketing value of an established brand contribute to a startup’s success. But what does it really take to maintain a profitable franchise?
Know Your Risks
Along with the clear benefits of owning a franchise come risks that might not be immediately obvious. A primary concern is the upfront investment. Where independent startups can be creative and efficient with resources in order to grow, a franchise needs to be operational along the business lines of the parent company. This means considerable overhead, which includes royalties and advertising. Products and policies are equally predetermined, which means any innovative marketing is probably out. Franchises and the parent company also depend on each other for success, which involves good performance on your part as well as your potential to be affected by events unrelated to you within the network.
Measure and Maximize ROI
In any business venture, you want the highest possible return on your investment. A key starting element of that is planning at the outset by talking to other franchise owners and getting a sense of what to expect in terms of the timeline for turning a profit in order to set a solid foundation. This includes doing research on industries that are growing and also verifying a quality product before choosing your best option. Of course, a prominent location will have the best outlook for future return. Franchises also depend on high business volume and a dependable employee base. Hiring good workers and using available means to track prospective business volume allow you to plan and react in business downturns. Calculate and recalculate your ROI to make sure your franchise remains a good investment.
Be Aware of Your Debts
Beginning a franchise can still require you to borrow money from a lender. While some established franchises do offer financing options to franchisees, it’s not a given. If your franchise does not offer financing options, there are other places to turn for help. Many lenders offer SBA loans or similar funding for you to get started with your franchise, but expect to be put through the typical credit checks. Once your franchise is up and raking in profit, those profits are not immediately bankable. Loans, debts, or startup overhead costs need to be repaid as well as federal, state and local taxes attached to business profits. Also, a franchisee will incur maintenance expenses for buildings, equipment, and other relevant assets.
A franchise is a market-tested, existing business model and certainly has new business advantages. Something to keep in mind, however, is that the goal of developing a franchise is not just personal income, but also building personal equity. Part of the return on investment is its future worth if you plan to eventually sell. Consulting with business brokers to assess future value as well as keeping track of prospective sales volume help gauge expectations during regular operation and when planning for future returns.
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