Investing in a franchise can be a smart way to start a business. Starting a company on your own without any assistance is extremely difficult. Not only do you need market knowledge, but you need to understand how to actually operate and finance your company. Running your books, hiring and managing employees, and finding customers isn't easy to do.
When you purchase a franchise option the franchising company gives you the blueprint for your success. The company has successfully built their own business and likely those of other franchisees. They have incentive for you to succeed - the better your franchise performs, the more money they make, and the more likely they are to expand their business into new markets. From your perspective you are getting to operate a name brand company with the manual on how to do things right. You won't have to worry about building up a name for yourself or which store layout to go with, it has been decided for you.

5 Tips for Smart Franchise Investment

If you are interested in investing in a franchise, heed these tips:

Know your net worth and liquid capital.

Your financial house must be in order before you jump into franchising. Most companies want to know what your net worth is and how much liquid capital you have. Having $200,000 in the bank is a lot more attractive than $200,000 in assets such as home equity. Some franchise operations will not talk with you if your net worth is less than $1 million, so research the company's franchise fees and agreements before you jump through too many hoops.

Be wary of extraordinarily high - and low - franchise fees.

The best, name brand companies do normally come with a high franchise fee. That is to be expected. But if you see a relatively new company asking for very high franchise fees, a mental red flag should go up. Do they have the resources to really make you successful or are they going to take your money and run?

Likewise, the same holds true for low franchise fees. If it only costs $1,000 to start your company you can't really expect that much support from the home office, your territory probably isn't protected, and your business isn't likely to be unique enough to warrant a franchise.

Interview the company and ask to speak to successful and failed franchise owners.

Don't read the franchise marketing material and send off a check. You need to interview the company, tour their headquarters, and talk to both successful and failed franchisees. They would love to let you speak with successful owners because that is going to drive you to investing in them. However, if they stiffen up when you ask to speak to failed franchise owners, be wary. A company should be able to talk openly about what caused failures in the past, and advise you on how to avoid the same fate.

Read everything they send you.

It should go without saying, but you should read over all the documentation that is sent to you several times. Know exactly what you are getting into before signing on the dotted line and writing a check for thousands of dollars. Some companies require the owner to also be the operator rather than hiring a manager to run it for you. Get all of your questions answered up front based on your findings.

Ask how large of a cut the company gets.

Most franchise operations require not only an up front franchise fee, but an ongoing marketing and support charge that is taken off the top of any revenue generated. This fee can be as low as 1% and as high as over 10%. Depending on the type of business taking that kind of hit off the top of revenue can make having a profitable operation very difficult. You may need to run operations for several years before breaking even, so be financially prepared for that scenario.