Franchising is one pathway to entrepreneurship that many people find attractive, but the first step is finding the best franchise fit.
In recessionary times, interest in franchising typically sees an uptick and that is true now, amid the global COVID-19 crisis. However, choosing the right franchise is one of the most important financial decisions a person can make so we reached out to a franchising expert to shed some light on the process.
Jose Torres is managing partner of FranNet South Florida, an arm of the national franchise consulting firm. He helps his clients find the best fit for them among dozens of franchise opportunities and do the due diligence needed to validate their choices. Torres has been with FranNet about 12 years and is also a franchise owner himself. Prior to joining FranNet, he was an executive with Kraft Foods.
“We educate and help guide individuals who are looking to run their own businesses. Not everyone is fit to be a franchise owner so the first thing we want to do is understand the candidate and whether they would be a good fit. We use a lot of tools, assessments, and one-on-one consultations to really understand if the business owner has what it takes, and also do they have the right financial assets to pull this off,” said Torres.
HOW FRANCHISING WORKS
A franchise is the rights to use trademark licenses, systems, trainings and the trademark of the franchise in exchange for money. Franchisees will pay an initial franchise fee to get the rights and typically royalties as well. In South Florida it takes on average about a $150,000 investment, including working capital, to set up a franchise operation; the minimum investment in the Miami market is about $75,000, Torres said. However, there is financing available through the SBA, franchise funding firms and traditional lenders.
FranNet does not charge clients for the services. If a match is made, the franchisor company pays a fee. The cost of the franchise to the buyer is the same whether or not they use FranNet’s services, Torres said. FranNet works with hundreds of companies in 25 different industries.
What type of client is a fit for franchising? “We are looking for block and tackling business skills,” Torres says. “They have to be self-motivated, they have to have confidence, and they have to know how to manage people, allocate resources and manage their time. In franchising, you have to wear a variety of hats.”
Torres said his clientele come from roughly three buckets. Some are aspiring first-time franchise owners, often formerly from Corporate America looking for a way to have their own businesses. Others are already business owners but are looking to expand or replace their current portfolio of businesses. The third group are foreign nationals, particularly from Latin America, who may be using an Investment Visa.
Franchise businesses were among the first out of the gate for receiving PPP loans, Torres said. Because these independently owned and operated small businesses are part of a network, the companies helped their franchisees take advantage of all the stimulus available. They also helped them renegotiate leases with landlords and terms with banks. Most importantly, Torres said, they gave them a roadmap to how to reopen safely. “When you are franchise owner, you are in business for yourself but not by yourself,” he said.
ADVICE FOR SELECTING A FRANCHISE
Still, he said, buying a franchise is probably one of the most important decisions in somebody’s life so they have to be cautious and understand why are they getting into business and what do they want the business to do for them. “Once we understand that, we can start peeling the onion on what they would be a good at and what they enjoy doing and then we can look at the different business models available in franchising that could be a good fit,” said Torres, who himself owns franchises in property management and mobile healthcare testing services.
Here is some of Torres’ advice:
- Understand your strengths. Are you good at managing people or customer service or marketing and generating leads? Not every franchise requires the same skills of the owners. Take inventory of your skills.
- Look for something you are interested in, with this caveat: Sometimes passion can cloud your judgement. “So I like to look for the combination of strong appeal with good fit, that’s when the stars align,” Torres said.
- Expand your scope. People think of franchises as fast food and retail but the fastest-growing franchise businesses are in education, healthcare, technology and wellness.
- Never evaluate just one business in isolation. “That’s a huge mistake,” Torres said. “Evaluate and compare and contrast several different business opportunities because the reality is there is no such thing as a perfect option. Each will have pros and cons.”
- Research — the due diligence and deep dive – is critical. You have to make sure that you are looking at the business from all angles, asking the right questions and leaving no rock unturned. Research must include reading and understanding the massive Franchise Disclosure Document, which franchises are required to make available. And it should always include speaking with existing franchisees, and not just the ones the franchise points you to.
“Every franchise will tell you they are the best thing since sliced bread. They are very proud of their business model and no company will tell you otherwise,” Torres said. “But you have to make sure you evaluate whether what they tell is what is happening in the marketplace. We help clients do this by showing our clients how to carry out the conversations, what information to request, how to analyze it, but one of the biggest pieces is for the individual to speak to existing franchisees. The conversations are going to be telling.”
TRENDS IN FRANCHISING
In the age of Amazon and e-commerce, there has been a shift from a product based economy to services. “What we are now seeing accelerate is the growth of services that cannot be bought off the Internet. Those are franchises that are growing and well positioned in this environment,” Torres said. Franchises in the areas of fitness, health and beauty, healthcare services and home maintenance are among them.
A few trends Torres is seeing:
- People’s homes have become their sanctuary. They realize it needs repairs and upgrades so the trend right now is that they will continue to spend on repair, cleaning and keeping their home in top shape, he said. There are hundreds of franchises in the home arena.
- Franchises that specialize in assisting small businesses, such as helping them with technology, is another trending area.
- Healthcare, including concierge healthcare services, is another big area in South Florida.
- The pet industry continues to be huge. There are more households with pets in the state of Florida than kids. It is an $80 billion industry.
Torres is optimistic about the way franchisees are navigating the current crisis.
“Franchises are pivoting with their business models so they are not just reacting but they are innovating and leading the new way of doing business.”
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