Answering Frequently asked Franchise Questions

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Franchise Q&AToday, we’re going to answer some of your franchise questions! We’ve received a number of questions from you on our various social media outlets; some questions have been asked multiple times so we made sure that those questions made it into today’s Q&A.

Our first question is from Megan. And Megan’s question is:

“Should I start my own business or use my money to invest in a franchise?”

Megan, this is a good question and it probably has a much longer answer than we’re going to be doing here, but let me just say this:  what you’ve described are two very different approaches and it’s really personal preference. If you’re going to build your own business, there’s pros and cons to that, just as there’s pros and cons to being in a  franchise.

Starting you own Business

With your own business, you’re going to have to do all of the development yourself. So, you’re going to have to write a menu, write the recipes, determine where you’re going to source product. All of the equipment, you’re going to have to spec that. The floor coverings, the window coverings, the ceiling, the look of the restaurant. All of those details and there’s many of them, you’re going to determine yourself. The pro of that, at the end of it, you’re going to have Megan’s Restaurant and it’s going to be yours and you have something to be very proud of.

Going the Franchise route

On the other side of this, you’ve got franchising. The pro of franchising is that you have a concept that normally is going to be known, so it has concept awareness. And all of those things I just mentioned and many more are already determined for you. So, the menus, the recipes, the sourcing of the product, the window shades, the flooring, the ceilings. All of that is done for you. And it’s all specked for you, so you don’t have to go take the time or the money to do that. The con on a franchise is you’re going to pay a royalty for that and that’s what you’re paying the royalty for.

The money that you pay to the franchisor is to pay for all that work that was done prior and all the work that they will do going forward for you. And that will be there with you forever. It will be a line item on your P&L. It’s going to be somewhere in the vicinity of 4 or 5% upwards to maybe 10, 11, or 12% and that will be with you as long as you’re a franchisee.

Okay, next up is Terrell. Terrell asks:

“I want to open a restaurant franchise, but I’ve never worked in a restaurant. Do I need to have restaurant experience to apply for a franchise?”

Well, the simple answer is no, you don’t have to have experience to apply for a franchise. But there may be requirements that you can find from the Franchisor that will answer this question better for you. I would suggest you look on the Franchisor’s website or get some information about the specific franchise and see if they require you to have background and experience in operating a restaurant. They should be pretty clear about that.

You may find that some Franchisor’s actually want you to have experience in the restaurant sector. So, if you’re in QSR (quick service restaurant) or you’re in fast casual, or even fine dining, they may want you to have some specific experience in that sector. That doesn’t mean you can’t go looking for other franchises, because many do not have that requirement.

But I would say most of them would have a requirement that you have some experience in operating a business. Now, that doesn’t mean it’s your own business,  maybe its just working for others in a business. In fact, I would say that should be a minimum criteria that you should have of yourself. You need to have some comfort with operating a business before you decide to go buy one.

Okay, our next question comes from Neil and he’s got a three-part question:

“How much should I save up to invest in a franchise? How much will it cost?” And, “Can I apply for financing for a franchise?”

How much you should save up to invest in a franchise really is a product of how much is the franchise going to cost you? So you need to do some due diligence of looking at different franchises and each franchise will give you a general idea on how much it typically costs to build one. They can’t give you specifics, but they’ll give you a general idea or range of how much it will cost you to build out. And a lot of times you can find that information on the Franchisor’s website. Or if not, you can always just call the Franchisor and ask and they will be happy to tell you that.

Then, your next question is how much will it cost? It’s hard to say. You’re going to have to pay some of it yourself. And that number is going to be determined by how much you can afford and how much the franchise costs. And actually, this may help you when you do due diligence to find which concept you really want to invest in.

The final part of your question is, can I apply for financing? And yes you can. There’s some typical ways people apply for financing.

Friends and Family

One way would be friends and family. So, you can go through friends and family and ask them if they’re willing to invest in your franchise. You have to give something up for that. But that’s one way that you can approach financing.

Commercial Loans and SBA Loand

Another way would be going to a bank and looking for commercial loans to build a restaurant. And even through the banks, you can look at SBA loans, which is a typical way a lot of first time franchisees will look to finance. You will find that the SBA is probably a little bit less expensive than a commercial loan. It is a little bit more work on the side of the franchisee to go apply for an SBA loan.

In all cases, I think it’s important to note that if you borrow money, nobody’s going to lend you 100% of what you want. Typically, you’re going to find that with a bank or the SBA, that you’re going to have to be willing to put in 25 to 35% your own money and you will spend that money before you’re going to be able to use any of their money in the build out or the development of the franchise.

Okay, our next question is from Suresh, and he asks:

“How much money can I make with a franchise?”

Well, Suresh, isn’t this the main question that we all want to know?!

Unfortunately, there’s not an easy answer here. First of all, understand that the Franchisor cannot give you this answer. The Federal Trade Commission does not allow that to occur because it would have the franchisor making an earnings claim. And they will not do that. So, this is going to require some legwork on you. Now, certainly the Franchisor is going to want to help you to get that answer because they’re going to know that there’s no way you’re going to franchise a concept if you have no idea what its potential to make. So they’re going to help you with that.

The Franchise Disclosure Document is a very long document that basically discloses the history and the current operations of that particular franchise. It typically will have ranges of costs in there so that you can take that and then apply it against a pro forma or P&L so that you can start to map out what that franchise will do for you in sales all the way down to its profit. The franchisees list that they give you, you can contact those franchisees, and the franchisor will instruct you to do so.

And then, with the franchisees, understand, are not governed by that same Federal Trade Commission rule. They can tell you how they’re doing in their restaurant. Now you’ve got to be nice to them because they’re going to be giving you information that they may consider proprietary. But they are able to give you information about their sales as well as their profit. So that’s something that you definitely want to take advantage of, because that’s a way for you to take the ranges that you will get from the franchisor for all things: for sales, for equipment, for construction. They’ll give you ranges that the franchisees that are in the system can give you more specifics and that’s going to help you to build that pro forma that you’re going to need.

You’re going to need that pro forma not only for yourself, but if you go to borrow money, every bank or lender is going to want to have a performer of your business, which is basically your forecast for that business for the first year and probably out to at least three years. So, your legwork starts there. It’s a long journey, but you want to take the time, because you want to answer the question you’ve asked. It’s an important one.

Our final question comes from Erick. And Erick asks:

“What kind of personal information do I have to give to the franchisor?”

Well, this is a good question, particularly in an age when we’re all concerned about privacy and identity theft. But the fact is that a franchisor is going to require some of that information so that they can evaluate you. The Franchisor wants to make sure that they are trying to make your future location a success for you as well as for them.

So, what type of information should you expect to give them at a minimum? You will have to fill out an application for the franchise. That’s going to require background information, your resume, and will require you to submit a Personal Financial Statement (PFS).

A PFS shows your assets and liabilities and it works it’s way down to a net worth. It then shows the depth of financial resources that you have to make this franchise work.

The other information they’re going to require is credit report on you as well as a background check. Again, the Franchisor is going to have a profile of what a successful Franchisee looks like. That information is contained within the private information that they’re going to ask you to deliver to them.

So, I think it’s important you understand that Franchisors, at a minimum, would probably ask for what I just mentioned. They may ask for more. But it’s all to evaluate you as a potential successful franchisee.

That wraps up this Q&A, if we didn’t feature your question here, we’ll save it and will get to it next time! If you want to submit a question, please send us an email at tmastro@franchisefrankness.com.

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