6 Local Factors to Consider Before Buying a Franchise
It's easy to see why new entrepreneurs would consider investing in hot franchise opportunities. The franchise model poses few risks with many rewards, such as significant support, thorough training, lower start-up costs, and more. Once you've realized the benefits involved and decided to move forward with the idea of purchasing a franchise, you have to decide which one is the right fit for you. Considering local factors will make this process easier.
There are numerous aspects of operating a franchise that differ from state to state. From real estate leasing prices to local licensing agreements, there is a lot to become educated on. Additionally, conducting local research prior to opening a franchise gives you vital insight into the market you would be entering. Gaining information now will save you from making mistakes down the road. With that said, here are some of the local factors to keep in mind before moving forward with franchise business opportunities.
1. Financial Factors
Though some franchise expenses are fixed, such as royalty fees, certain components are likely to vary depending on your location in the country and possibly even within your state. Take, for example, the money spent building out your operations site. The price tag associated with labor and materials will be higher in bigger cities like Miami or New York City than it will be in areas of the Midwest. States such as California have higher business costs than those like Nevada or Texas.
That being said, franchises running out of larger cities typically charge higher prices for their products or services, so it usually evens out in the end. Take business location into consideration heavily before proceeding with purchasing a franchise. If rent or other factors will cause a strain on your business, then you have some additional planning to do.
2. The Franchise Rule
The Federal Trade Commission has a set state regulation called "The Franchise Rule." This mandated regulation was planned in order to produce a higher level of consistency and transparency within franchise operations. In addition to this rule, some states have put in place their own bodies of law.
As of right now, 13 of the 50 U.S. states require a franchisor to register and create an addendum stating that they comply with all state regulations. Illinois, Washington, California, and New York are just a few states that have these directives. While most of the work that these regulations create is for the franchisor, it is important to note that it is essential for franchisees within these states to sign the state addendum when moving forward with business franchising.
3. Market Potential
After you have narrowed down your list of potential franchises to invest in, you should investigate the level of demand in your area for the products or services you could be offering. Ask yourself what your local population would realistically want or need. Determine what your demographic is and think about how you will cater to them.
Generally, big-brand fast-food restaurant franchise opportunities such as Dunkin' or McDonald's tend to do well even if there are a few within a small area. In fact, according to Statista, the most famous yet most lucrative U.S.-based franchise in 2020 was McDonald’s, which brings in over $93 billion in sales. That being said, you likely don't want to position yourself incredibly close to another franchise under the same name. Conduct thorough market research now so that you can feel confident that your franchise will fair well.
Don't forget to consider what makes sense for your geographical location. Opening a franchise that sells a niche product is a big risk if the product doesn't align with the land or weather that your city or town has. For example, a franchise that sells ice cream will see a higher volume of customers in a place that is warm for most of the year than somewhere that sees significant snowfall.
Another part of market research involves scouting business locations. Where can you position yourself in your city or town that will encourage your client base to enter your building and spend on your product or service? Do you want a space that will generate heavy foot traffic? This factor is less important when it comes to businesses that simply produce a product or businesses that travel elsewhere to perform their services.
4. Franchise Competition Questions
Once you have a solid understanding of the customer pool, it is time to focus on another important business franchising factor: your competition in the area. Look around the area where you are thinking about opening your franchise location. These are some good questions to ask yourself when opening a franchise:
- What businesses are you likely to find yourself up against?
- Do you have it within yourself to be tough and deal with this competition?
- Do you know what other businesses will think of you opening your franchise and does that matter to you?
- What is your unique selling point (USP) that sets you apart from your competition and how can you capitalize on it?
- What type of support can you anticipate receiving from your franchisor in terms of dealing with nearby competitors?
5. Past Successes and Failures
When evaluating the competition, think not just about what you will have to do to set yourself apart, but about how other, similar businesses have done it in years past. How have businesses similar to yours performed in the last decade or so? If there is little competition, ask yourself if it is because you are entering an untapped market or if similar business owners have tried to no avail to find success in your city or town. Pondering the wins and losses of local businesses may inform some of your own business decisions later on.
6. Licensing Necessities
Potential franchisees should be mindful of the unique licensing requirements in their state, county, or city. Most states will have a short list of basic requirements for franchisees such as obtaining a business license. Keep in mind, however, that there may be further local licensing requirements.
Discuss this possibility with your franchisor and learn what they and other franchisees have had to do in the past to satisfy all requirements. They will know the ins and outs and should provide ample support throughout the process. Franchisees may also consider hiring a business lawyer to further elaborate on all requirements. Local attorneys should be able to explain, in simple terms, every action that you need to take, and they may be able to handle the majority of the paperwork on your behalf.
Now that you're aware of the local factors to consider, you are ready to get started with your own franchise. We at Franchise Recovery want to help you on your journey toward becoming a thriving franchisee. Be sure to check out our services today!
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