MSPC CPAs

Financial Success for Franchises

The following article originally appeared in Global Franchise Magazine.

As a CPA, I understand the growing interest in franchise opportunities, especially as the entrepreneurial spirit grows. I have seen many new franchisees succeed. However, I have seen others fail. Frequently, we can recognize the small missteps at the beginning of the process that makes all the difference between success and failure.

Owning and operating your own business can be incredibly alluring. Yet, like many attractive things, a closer examination can lead to the discovery of ever more defects. These flaws cannot be wholly removed from entrepreneurship, in particular, the potential for capital loss. These pitfalls decrease as your business becomes more established, processes are perfected, customers are obtained, and brand familiarity spreads. Franchising is an efficient and proven way of managing these start-up risks by allowing eager entrepreneurs to rely upon the expertise of a franchisor with an established concept, time-tested model, and brand supported with an existing client base and reputation.

If you have determined that owning a franchise is in your future, there are some considerations you must weigh when you begin to analyze your business’ prospects. I’ve distilled these considerations to three key insights. They are based on my experience working with clients over the years on both successful ventures and abject failures. These include: knowing what you are getting into, learning the lessons of your predecessors, and not overextending your finances.

Know what you are getting into

Once you find the franchise opportunity that seems like a good fit, explore the value the franchisor brings to the table, like business processes, name recognition, client base, as well as financial and marketing support. With all you gain from a franchisor, it is easy to think of your relationship as a purchase of these items – though the relationship is much closer to a partnership.

Business processes are an opportunity nested within an obligation. You will be contractually required to adopt a pre-packaged system of the franchise process in order for you to retain your franchise rights. This is an element which cannot be overlooked. The business processes adopted can be stringent and may include preconditions limiting purchases to selected suppliers, requiring minimum training standards for employees, detailing equipment to be purchased, allowing inspections from the franchisor, mandating the use of certain approved billing/point of sale systems, maintaining certain hours of operations, and obtaining certain levels of insurance.

There are additional costs and obligations which extend far beyond those related to business practices. The first is submitting yourself and any co-owners to the franchisor’s vetting process. After you are approved as a potential franchisee, you would need to make capital investments to build-out your franchise. As part of a co-branded enterprise, you always run a risk that bad publicity from other franchisers may taint your operations and lead to losses of revenues or outright failure.

Learn the lessons of your predecessors

I always recommend that my clients talk to a number of owners in the franchise they are considering joining, make site visits, and talk with employees. Do they receive the support they need from the franchisor? What stumbling blocks did they have? If they could start over again, would they do the same business? Many franchisors encourage such visits and offer to arrange introductions, though you are more likely to get a less planned set of responses from a franchisee that you choose.  Remember, the franchisor is invested in you carrying on the brand’s legacy. They want their franchisees to succeed as well and want them to be comfortable and confident in their pursuit.

I would also encourage you to go a step further and ask these same questions of those who operate a similar business franchised from a competitor. Try to discern why they chose option “B” over your “A” selection. You can also try to judge the satisfaction of the owners across brands – surely an essential indication for a future owner.

Often, potential franchisees feel pressure to act quickly and seize opportunities. Don’t let pressure play a part in your decision. Rash action should be avoided. There is a tremendous amount of fear that the right opportunity might be lost due to inaction, but the right opportunity is one where you have been able to consider what is needed to be successful fully.

Don’t overextend your finances

All business failures suffer from one common element, a lack of sufficient profits. I have seen situations where this ending is preordained because business owners lacked sufficient capital to launch a long and fruitful venture. Though there is no way to guarantee future profits for a business, it is necessary to have a level-headed approach to estimate the cash required to develop a consistent revenue stream.

Franchisors will give helpful guidance to estimate some of the costs, particularly store build-outs, signage, initial fees to the franchisor, equipment purchases, and minimum training. It is the responsibility of the investor to review those amounts for reasonableness and also look at some of the hidden costs: months of rent during pre-operational build-out, staff acquisition costs, staff payroll during training and ramp-up, location-specific license costs, professional services (legal, accounting and architectural), insurance, and the cost of time spent planning the launch.

The wide range of potential additional costs are one reason that speaking with other owners is highly recommended – you can get an idea of the real costs incurred. It is also an excellent reason to find qualified advisors like the experts at MSPC, who have been through the process before, to help you make your plans. When looking at your cash needs, you must be careful to include any interest payments which would be due to the lenders.

Another issue is when people fail to account for their loss of other income, thinking they will keep their “day job” until the new business opens – this is often impossible. Preparing for the franchise launch and then being immersed in the day-to-day operations will require all your energy and concentration.

Conclusion

Financial success in a franchise business cannot be assured, but failure to adequately plan will guarantee failure.  By finding the right help, researching the company thoroughly, and detailed planning you can maximize your chances to be a winner with your franchise business. Our MSPC team can guide you through every one of these steps–not just rolling through a simple checklist, but thoroughly examining your options, your resources, and helping you take the right steps to achieve your dream of successful franchise ownership.