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Things to consider before becoming a franchisee

- Bryan and Andrea McGinness are CEO and COO of WineStyles Tasting Station and write quarterly about the world of franchising for IowaBiz.com.

As an entrepreneur considering investing in a franchise, it’s important to ask the right questions before investing in a long-term relationship with a franchiser. As the largest private wine and craft beer retail franchise in the country, we wanted to share some of the most common questions we’ve received from entrepreneurs and some of our current franchisees over the years.

What is franchising?

According to the International Franchise Association, franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. 

What is a proven system, and why is it so important?

When joining a franchise, a prospective franchisee should look for a brand with a proven business model. What does this mean, exactly? Well, what systems does the company have in place to ensure your franchised location will be profitable? Most companies offer support in areas such as marketing, training, real estate and operations, to name a few. When you sign a franchise agreement, you are buying the rights to replicate a business model. This includes the rights to using the product, signage, logos, uniforms, advertising and marketing. As part of a franchise brand, opportunities for originality are limited, so it’s imperative that the franchise you partner with offers a business plan with adequate training and ongoing support. Successful franchise owners want the opportunity to be in business for themselves, while still being part of a well-established company.

How much will it cost?

Costs of opening a franchise vary greatly by industry segment and can range anywhere from $50,000 to $5 million. Franchise brands require new owners to pay a “franchise fee” — an initial fee when the franchise agreement is signed, which can vary from brand to brand. The fee may cover the cost of training and support, assistance with site selection, etc. Franchisees will also pay an “initial investment” cost, which can vary based on brand and industry. These startup costs typically include construction and build-out, equipment, fixtures, inventory, working capital to open and operate a location, as well as grand opening advertising. Royalties and other fees, like a national marketing fund, should also be considered before establishing a long-term relationship with a franchiser.

Should I speak to current franchisees?

Before committing to one particular business, we suggest doing your homework and vetting current franchisees to learn more about their franchising experience. Consider asking them questions about the initial training and ongoing support they received. You can also ask about their relationship with the franchiser and their expectations for annual revenues when they first signed on. Validation is part of the due diligence process and will give you a greater perception of the business from an owner perspective.

How long is my commitment?

Most franchise agreements come within an initial term between 10 and 20 years. It’s important to make sure that this fits into both your personal and professional long-term goals and you consider the location of your franchise before signing the dotted line.

As you continue researching and evaluating each franchise opportunity on your list, additional questions will arise. The International Franchise Association is a great organization and resource for prospective franchise buyers. To learn more, check out www.franchise.org/franchising-101.

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