How To Choose The Right Franchise Business

Image by: N i c o l a
By Michael Sterling

The 1950s image of a young boy with his dog sitting in a drug store talking to Mr. So and So, the owner of the store, is a poignant image of the pleasant American life. What we fail to realize is that the Mr. So and So’s of the world are slowly disappearing off the grid. 

Nowadays, people are buying franchise businesses left and right. A Subway here, a Starbucks there, and even celebrities like Magic Johnson got in on the craze, buying a string of Coffee Beans. But the trick in reaping the benefits of your investment is knowing how to find the right franchise.

Is There A Consumer Future? 

Just because a business is a hot commodity nowadays, doesn’t necessarily mean that they will be that way over the next decade. This is why companies like Dominoes and 7-11 have dominated franchise investment ranks, according to Forbes. When it is a company that is recognized by consumers, there is more franchise value.

Franchise value refers to the popularity of a certain brand in the minds of consumers. If someone is driving down the freeway and sees a Starbucks next to a mom and pop coffee store, they are more than likely to exit for the Starbucks. It is the result of psychological branding and marketing. 

Warren Buffet has said that franchisers shouldn’t consider an interest in a business unless they are willing to own it for at least ten years. There are only a handful of companies that are certain to bring solid returns over that time.

Make Sure The Costs Are Doable 

There is nothing that will rip your investment down more than inaccurate predictions of financial costs. According to Investopedia, start-up costs, royalty fees, payrolls, property tax and food/product costs will affect your take home pay tremendously – make sure you don’t fall in the hole!

Depending on the location and how popular the company is will determine how you should move forward. Most companies won’t help the franchisee with start-up costs, causing owners to withdraw bank loans. However there a select few businesses that do which you should research on America’s Best Franchises. 

In total monetary spending, a franchisee can pay as much as $200,000 to $2 million. Be sure you know where your money is going and why it is going there in the first place.

Predictability Of Success

If you would have invested in Starbucks twenty years ago, you would be one happy shareholder today. Starbucks is a great example of seeing the NEED for something. Howard Shultz, CEO saw the need for a “coffee culture” in America. Why? Because there wasn’t one.

Being the first at something is always the key ingredient. If it is an already established company you are seeking, you can miss the years of financial growth you could have gained with smaller businesses. Today, there are many corporations that target a vast amount of markets. Finding one that is unique can be challenging, but always rewarding. Keep your eyes open.

Location And Demographic

All businessmen know this rule. However when it comes to franchisees, this is not just a rule, but the law! Most corporations will do a bit of research behind the location, but will often miss the demographic. This is where you come in.

If you’re going to set up a franchise, be sure it is in an area that you are familiar with. Particularly one where you have family members or have lived for a few years. It can be in the most perfect location, but if the demographic doesn’t appeal to it, you are in the hole.

Imagine that you want to open a KFC near the Theater District of a big city. It’s populous, a lot of residents live there, it has big crowds on weekend nights – it all seems okay at first. But then, you fail to realize that most of the people who live within the blocks are rich and like to dine in sit down restaurants with fancy wine and $50 steaks.

Not to mention, all the people who are walking in the area are on their way to the theaters or the bars – which means their dressed nice and would rather make it a night out with champagne toasts.

Now imagine your luck had you opened it ten miles away in the Arts district, where the demographic is usually younger, hipper and less financially secure. The combination of location AND demographics is crucial, and is mostly going to be up to you, not headquarters – be smart.