Buying a food franchise is a big and exciting step for young entrepreneurs. But before you invest in a food franchise, you must carefully study the business if it is profitable. Seek experienced mentors like Franchise-Know-How to know your best options. Do not be afraid to ask these questions before you delve into the food franchise business:
1. Does it have a generating cash flow?
You must evaluate the critical components of the food business such as gross sales, cost structure, and maintenance. You must carefully understand these factors to know if the business will profit you.
- Gross sales
The gross sales, also known as revenues, is the income produced in normal business activities like selling goods or products from the business. To know if the franchise has good revenues, you should inquire about the products it offers. A food franchise must have more than two sets of products. If you want your cash flow to grow, then choose franchises that offer multiple goods.
You should also know the quality of the food franchise and the franchiser. You can do this by asking other franchisees information regarding their annual sales, the length of time they reached their sales target, key performance indicators (KPIs), and the support the franchiser gives them.
- Cost structure
The cost structure of the business are wages, franchise fee, rent, product costs, and utilities. These costs are the expenses you incur to manage and grow your business. You should consider these costs in order for you to calculate your gross income. Other expenditures such as advertising are shouldered by the franchiser to help build the business brand and attract customers.
- Maintenance
Maintenance is different from cost structure in a way that the former is things you need to sustain the business in its current situation whereas the latter is a fixed asset you have acquired to start the business. For instance, when you run a cafe business, you need to buy coffee makers. Coffee makers are included in the cost structure, but if you replace the bean hopper or residue tray, then that is maintenance.
In order to save on maintenance expenses, double check the quality of equipment and the physical location of the franchise. Even if it takes years for some maintenance to occur, it can still lessen your revenue.
2. Does it provide comprehensive documentation?
In the USA, a franchise disclosure document (FDD) is basically provided to franchisees buying a US franchise even before the sale process. The FDD encloses everything that the franchisee needs to know about the business, including the roles of both the franchisee and the franchiser. As a franchisee, you need to know everything about the business, so ensure that you get the comprehensive documentation from the franchiser.
You should check the franchiser’s record, including their operations, financial data, training manuals, and management system to know how they run the business. You also need to consider the communication platform being used to reach out to customers and the franchiser. This documentation together with social reviews lets you size up the track record of the company, whether they have good long-term viability or they will end up bankrupt after some years of operation.
In investing for the best food franchise, you have to know the hows of the business in order for you to know if you want to partner with it for a longtime. If you know the terms of your franchise agreement, you will be able to calculate when to get back the return of your investment (ROI). Since ROIs typically take time to build, knowing the viability of the franchise you are investing is critical.
3. Am I into it?
Of course, the most crucial part is to assess your personality. You need to know if you are willing to devote your time to the food business or you are just investing because of its popularity. You have to assess yourself if you’re prepared to face the complexity of running the business. It’s best if you’re passionate about the business because you have that drive to pursue the business, solve whatever problems you encounter, and not give up easily.
Ask these questions before you invest in a food franchise so you can weigh in the pros and cons of investing in a food business. Business investments are complicated especially for new entrepreneurs, but with the right questions,understanding will follow.