Unemployed professionals turn to franchising for new opportunities
The pandemic has created a recession like no other. Americans finding themselves unemployed were given the impetus to take the risk of starting a new business, which led to an entrepreneurial renaissance. It is possible to open your own business without starting from scratch by purchasing a franchise. This can be an attractive way to start and potentially reduce some of the risks associated with a start-up business.
So what is a franchise? A franchise is a legal relationship in which one party, the franchisor, grants the other party, the franchisee (you), the right to use and benefit from a brand and trading system in exchange for a fee.
Franchising, as with any new business, is a significant financial investment. Determining the right franchise to buy means you need to consider the system, the terms of the contract, and the financial risks.
Consider the following when acquiring a franchise:
Competition in the market. If a business is looking to get a franchise to take advantage of a trend, it is definitely not alone. Even with the trends, there is a saturation point in the market.
The strength of the franchise system. Is the franchise you are considering well established? When buying a franchise, the strength of your brand awareness is important.
Passion. You must be passionate about the business you are starting. While a franchise has the potential to hit the ground, the day-to-day of its operation, employees, etc., are still present as with any new business.
When purchasing a franchise, it is strongly recommended that you have the franchise disclosure document reviewed by an experienced franchise lawyer to avoid costly mistakes. Franchisors often indicate that the FDD is not negotiable. This is not true. In this post-pandemic world, provisions that should be carefully considered include:
System standards. Standardization is a hallmark of franchising because customers know what to expect they usually visit a franchise. If your franchise agreement requires you to use a designated supplier, that supplier may not be able to meet the needs of your franchisee due to unforeseen circumstances.
Minimum royalties and contributions to the marketing fund. Some franchise agreements include provisions for minimum royalties and marketing contributions. These provisions oblige franchisees to pay a recurring amount regardless of their income.
Legal compliance. It is common for franchise agreements to include provisions requiring franchisees to comply with all applicable laws and regulations.
Force majeure. The force majeure provisions make it possible to deviate from certain provisions of the franchise agreement in the event of a pandemic, wars, major storms and other catastrophic events. When negotiating a franchise agreement, franchisees (and their franchise agents) must now carefully consider this clause and negotiate the changes necessary to protect against the types of business risks presented by the COVID-19 crisis.
Buying a franchise is a big financial investment, and the cost can be daunting. Each loan option has risks and rewards to consider, including:
SBA loans. These are loans from a commercial bank that are guaranteed by the US Small Business Administration. They allow potential franchisees to access the necessary funds and can guarantee banks a guaranteed repayment.
Conventional bank financing. If you are not eligible for an SBA loan, another option may be to obtain conventional bank financing.
Franchisor financing. Some franchisors offer financing to new franchisees, which, if available, is disclosed in point 10 of the Franchise Information Statement.
Private Equity. Although most private equity funds focus on investing in large multi-unit franchisees, private equity avoids the risk of default on a loan, but it comes with other conditions.
Veterans Funding Programs. If you are a veteran, you may be eligible for the International Franchise Association’s VetFran program or one of the many SBA programs that are exclusively available to military veterans. These programs offer financing, discounts and other incentives.
Home equity line of credit. If you have equity in your home, you may be able to get a home equity line of credit to finance the purchase of your franchise.
Pension saving. Using your retirement savings to fund your deductible requires careful assessment because of the possible tax implications and the risk of losing your retirement savings if your deductible fails.
It is possible to open your own business without starting from scratch by purchasing a franchise. Getting that head start and support can be an invaluable benefit.
Click here for more information on the June-July 2021 issue of Northwest Indiana Business Magazine.