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What to Consider When Investing in a Franchise

Starting a new business is fraught with uncertainty, especially when it’s a brand new entity in the marketplace. For many entrepreneurs, they want more security for their investment. Looking toward a franchise is a smart strategy to avoid the pitfalls of developing a new business altogether. With a foothold already in the market, investors only see dollar signs ahead. However, there are certain factors to evaluate before plunging into the franchise world.

Cold Stone ice cream

photo credit: Daniel Go

The Initial Investment

Franchises aren’t just sold to anyone, but require both personal wealth and liquid assets. For some of the top brands, $1 million is the minimum liquid asset amount you would need to simply qualify for a franchise. Research your desired company thoroughly to understand their investment stipulations. Some companies are more open to investors than others. Networking may be involved to see if some parameters can be eased, such as investing $900,000 instead of the full $1 million.

Automatic Customer Base

What most investors see when looking into a franchise is the ample customer base. Millions of people have probably already tried and became loyal to a restaurant or retail store, for example. If this brand is lacking in your area, there could be a push to see one as soon as possible. Cities often advertise and welcome the franchise with open arms when a grand opening occurs. No other business has as much anticipation for an opening as a franchise.

Strict Operational Rules

You may have some grand ideas about adding products or altering a restaurant layout after starting the franchise, but be aware of strict corporate rules. Franchises rely on a familiar brand and appearance at all their stores. Read over all the operational rules to understand your limitations. Color schemes, uniforms and even equipment must be purchased and implemented as dictated in the corporation’s rules. There may be little room to add your own flair, making this business aspect stifling for some investors.

Easing Advertising Costs

Marketing a business is a full-time job, requiring extensive investment for a brand new business. Franchises have millions of dollars at their disposal to advertise a brand. Part of your investment goes towards this campaign. Although you won’t have a say in specials or design, the sheer effort and monetary commitment isn’t your responsibility to bear. Crafty ideas could bring in more customers than ever with smart marketing tactics from the best in the business.

Watch Those Percentages

It’s not just an initial investment that the franchise requires. Read all the fine print when you sign on to a franchise. You’ll also need to pay a certain percentage of profits to the corporation. These rates vary widely, so have an accountant look over the information. A deal may not be so good when considering the rate amount. In exchange for a fair percentage, however, you receive the support of a successful brand ready to build your wealth with you.

Takeaway

Building wealth through a well-known franchise is a stepping stone for many investors. You, however, are required to take care of a number of things when it comes to financials.

Let’s take one of the popular franchises, Cold Stone. In your FDD (Franchise Disclosure Document – was Uniform Franchise Offering Circular) you will find relevant info with regard to the franchise.  You will find Cold Stone franchise cost, including initial investment figures and fees, the territory assigned to your franchise, trademarks, earning claims, and so on. You need to pay attention to what’s stated in your FDD, as it’s your basis for making an agreement with Cold Stone’s headquarters.

As usual, if you are uncomfortable working with the FDD, be sure to hire a lawyer to guide you in the process.

Regardless of the financial responsibility, the name brand could be worth it as the main headquarters continues to improve on their product and increase advertising. Taking some legwork out of the entrepreneurial world is part of the franchise investment strategy.

About author

Ivan Widjaya
Ivan Widjaya 2594 posts

Ivan Widjaya is the Owner/Editor of Noobpreneur.com, as well as several other blogs. He is a business blogger, web publisher and content marketer for SMEs.

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