Is Franchising A Fit? Three Considerations Before You Jump Into A Franchise Opportunity
4 min readJonathan Keyser is the founder of Keyser, the largest occupier services commercial real estate brokerage firm in Arizona.
The franchise industry is expected to add more than 800,000 U.S. jobs by the end of 2021, totaling 8.3 million jobs nationwide. According to data shared to webinar attendees by the International Franchise Association (IFA), this will be the largest yearly growth in franchise establishments ever. This growth equates to 26,000 new franchise businesses in 2021, increasing the total number of U.S. franchise establishments to 780,188.
Keyser is a commercial real estate brokerage that serves tenants and occupiers of space, and our retail department that works with retailers, franchisors and franchisees has seen so much activity surrounding franchising. Why? Because franchises are proven concepts that allow for expansion backed with corporate training and support. They are accompanied by an almost guaranteed success model. If you’ve been in the market for a new business venture, franchising may be in your future.
If you’re seriously considering leaping into the franchise world, there are three considerations you need to think about before jumping into this commitment, regardless of 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 being said, franchisors want to make sure that their franchisees are the right fit for their business. Depending on the franchisor’s business model, they may require a certain level of personal commitment from the franchisee above and beyond the typical and expected commitments of a business venture. These “fit requirements” could include a commitment to a lifestyle, past working experience with that brand or even participation in cultural or religious practices. It’s in your best interest to do your due diligence on a brand’s standards to ensure that 1) you can adhere to their expectations and 2) there are no surprises on how they conduct their business.
After you’ve chosen your brand of interest, do your research to make sure you qualify. Inquire about the opportunity with the franchisor and you will then be provided with a franchise disclosure document (FDD). The FDD illustrates the full picture of what to expect from a brand, its customer experience, the requirements/guidelines in place and the financial commitment you should expect to make.
2. Do the financial requirements allow you to participate?
When researching franchise brands, you’ll notice that there are requirements for personal net worth or liquid assets. This is the baseline for a franchisor to determine whether or not you’re a viable candidate for a franchise. For some brands, this can be tens of thousands of dollars, and for others, it can be up to $1 million or more.
Just because a brand requires you to have a certain amount of liquid assets does not necessarily mean that is the whole price of admission. There are additional fees and costs associated with opening a franchise, such as:
• Franchise fee: The initial licensing fee to use the logo, business model and the establishment’s trade secrets.
• Royalty fees: A set amount or percentage of sales.
• Advertising/marketing fees: The national brand awareness marketing fees.
• Local marketing fees: The money a franchisor expects franchisees to spend on marketing their trade area or location.
• Equipment, fit out and construction costs: The costs to transform a generic location into a branded, built-out space utilized to its full potential.
• Ongoing costs: Such as food, labor and distribution of product.
The FDD provides franchisees and potential franchisees with all of these basic details in order to give them get an understanding of the capital needed.
3. Can you adhere to 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, its value and the process itself are overlooked. Your franchisor will have guidelines as to what is and what is not acceptable for the brand and, in some cases, may provide you a master broker who can assist you with the process.
Some brands allow franchisees to select their own commercial real estate advisor. In these cases, franchisees need to select a commercial real estate broker who:
• Is a tenant-only advisor; this ensures that the advisor’s goals are aligned with the franchisee and franchisor rather than the landlord.
• Has a deep understanding of the retail industry and can provide site selection insights based on artificial intelligence, analytics, demographics, psychographics and market data.
• Can align their recommendations with the franchisor’s requirements; these guidelines are in place because they have been proven successful. Choosing a commercial real estate property that is not approved by the franchisor is not advisable.
Becoming a franchisee takes dedication and commitment far beyond finances. If you’re ready to accept the challenge and commit to a franchise’s business plan for at least five years (on average), franchising could be the best next business venture for you.
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