With many people still out of work as a result of the COVID-19 crisis, and with the crisis limiting the opportunities that are available for growing a successful brick-and-mortar business, interest in home-based franchises has spiked in recent months. If you can work from home and be your own boss while relying on the support and experience of a successful franchisor, why wouldn’t you consider a home-based franchise opportunity?
While a home-based franchise can be a viable business, there are various practical, financial and legal considerations involved in starting a franchise of any type—and particularly one that you operate from your own home. Here are the top five considerations for buying a home-based franchise:
1. Is the Franchisor Well-Established?
Just because a franchise opportunity exists and is listed in some online franchise directories, this does not necessarily mean that it is a sound investment. Due to the recent uptick in demand for home-based franchises, many entrepreneurs have rushed to bring home-based franchise opportunities to market.
Before buying a franchise, it is essential to perform thorough due diligence. Schedule a time to speak with the franchisor’s representatives, and also speak with several current and former franchisees. Be sure to thoroughly read the Franchise Disclosure Document (FDD), which provides important information about the franchisor. It is especially important to review the franchisor information in Items 1 through 4 and the franchisor’s financial data in Item 21. If you are deciding between more than one franchise, compare the FDDs to see which one offers the most favorable terms.
2. Will You Receive Adequate Operational Support?
As a home-based franchisee, will you have access to the operational support you need when you need it? This is an extremely important question that you will want to have answered during your due diligence. As a franchisee, this support is a big part of what you pay for; but, too often, franchisees find that the support they receive does not align with what they were promised before they signed their franchise agreement. This is why it is important to speak to current and former franchisees, as you can learn from their experiences how much support you can realistically expect from the franchisor. You can also seek out reviews online.
3. Are the Legal Terms Fair and Reasonable?
You can expect your franchise agreement to be one-sided in favor of the franchisor, but it should not be so one-sided that you are left without any legal rights or remedies. In addition to reviewing the FDD and franchise agreement yourself, you should also have them reviewed by an experienced franchise attorney. They can also assist you with negotiating the terms of the agreement, which the franchisor’s representative will likely try to discourage you from doing.
4. Will You Be Able to Earn a Living?
While you cannot predict the future, you can reach an informed conclusion about how much you believe you can reasonably expect to earn as a home-based franchisee. Your royalties and advertising fund contributions could be in the range of seven percent of your franchise’s gross revenue, and you will need to factor in these fees (in addition to your other costs) when preparing your pro forma statements, which are standardized documents used to calculate and present financial projections for your business.
5. Are You Equipped to Operate a Business from Home?
Finally, are you equipped to operate a business from home? Do you have the physical space the franchise requires, and do you have the discipline to stay focused when you need to? Do you have a quality computer and reliable internet connection? Do you have another source of income or savings to get by while you are getting your new business off the ground? While it sounds tempting to most people, operating a home-based business isn’t for everyone, and you will need to realistically assess whether it is a feasible option for you.
Are you thinking about buying a home-based franchise? Owning your own business is a lot of work, and the franchise industry has a high rate of failure. For those that are successful, though, the rewards of being one’s own boss and being financially independent are well worth it. If it is something you are serious about pursuing, it is recommended to first discuss the opportunity with a knowledgeable franchise lawyer to get a good understanding of the process and your options.
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