We, at Main Street, are sharing a frequently asked question from a person looking to buy a franchise. Franchises are a great way to start a small business but requires careful due diligence and planning.
Question: How do I start a franchise? I am interested in franchising a hotel/motel. What information should I gather before initiating the process? What resources are available for new franchisers to understand franchising, and what is the process involved in starting a franchise, maintaining, and ultimately resulting in a successful business?
Hello Clark County, Nevada!
So you want to open a franchise. As with any major business decision, it takes a bit of planning. Unlike a startup, a franchise cannot be bootstrapped because you are getting a business out of the box. This means you need to be clear about the business model, understand the success factors, carefully scrutinize the legal agreements and have enough resources to support the startup period and the overhead costs you are buying into.
There are three categories I would group your planning into:
1) Legal Preparation
First, you need a lawyer with experience in franchise agreements to help you understand the Franchise Disclosure Document (FDD). The FDD contains information about the franchisor, the franchise system, the requirements made of the franchisee (you), and the costs/fees associated with the operating franchise.
This is a dense document written in heavy “legalese.” However, there is some very important financial information about the franchise such as financial statements and historical financial performance measures contained within. Unfortunately not all FDDs are required to have historical financial performance information (depends on state). But as an alternative, you can do research on existing comparable franchise performance.
Second, the Franchise Agreement lays out more specifically the relationship between the franchisor and franchisee and the terms for the purchase. Here again, a lawyer is helpful to clearly explain the structure of the contract that is represented by the Agreement, how you get in, and how you get out. For a hotel/motel, I would expect location/site selection to be super important. The Agreement would state who controls choosing the location of the franchise and under what terms.
2) Research the Franchise
Research the market external to the franchise: Like any business purchase, you will need to research, research and research the franchise; location, the target market, past performance, competitors, and other franchise owners. As you will be limited to the marketing and branding set out by the franchise agreement, you will need to be clear about what the success drivers will be. You must answer these two questions:
- How do I convert sales leveraging the franchise marketing/promotion platform?
- What are the buyer persona conversion strategies I can control?
Research the business model and operations of the franchise: This is about franchise operations and understanding the operational KPIs that measures success. You will need to map out the customer journey, from conversion to experience to follow-up. Understanding how to build, maintain and the costs associated with these processes will help you be clear about the internal drivers of success for your franchise.
3) Create a Financial Plan
If you need to get a loan to purchase the franchise, then you will need to demonstrate your financial plan for repaying the loan. Even if you don’t need a loan, a financial plan is critical. The key information will be the burn rate, that is how much money will be going out the door and not replenished over the startup period until you reach steady state.
Then ask yourself, “do I have enough capital resources and financing available?”
A detailed a financial plan is critical. A high-level budget will not cut it. There should be enough public financial information available from the FDD, information from other franchisees and competitors to create a detailed financial analysis and financial statement projections. Many franchisors will provide a sample budget to understand the financial obligations.
A Certified Financial Planner with experience in business planning can help you develop the financial plan.
Bottomline: Successful franchise owners leverage the lessons learned from other franchise owners. Through proper planning, they arm themselves with enough information to drive their startup success.
American Association of Franchisees & Dealers (AAFD), www.aafd.org
International Franchise Association (IFA), www.franchise.org
Nevada Small Business Development Center (NSBDC), http://nsbdc.org