The growth of small businesses in the African American community continues to rise despite the current economic conditions. According to a 2006 Census Bureau report, the number of black-owned businesses in the U. S. grew by 45% between 1997 and 2002, more than four times the national rate for all businesses.
Today’s tough economic environment has created heightened interest in an alternative to traditional small business ownership–franchising. The franchise arena can be a rewarding career option for professionals who want a change from corporate America and desire entrepreneurship.
Purchasing an existing franchise is often regarded as a feasible way to reach one’s dream of entrepreneurship. However, few realize that it’s the owner of the franchise system (the franchisor), not the franchisee, who retains control and accumulates the most wealth.
“There’s no shortage of African American franchisees, but there are very few of them who are willing to step out and become franchisors,” says Robert Kushell, president of Kushell Associates Inc, a franchise development company based in Chapel Hill, North Carolina.
To determine if you’re ready to franchise, ask yourself:
Is your business profitable? “One can not franchise an idea. You have to prove that your core business is profitable by having a track record of growth and profitability,” Kushell says.
In addition to tracking growth, you need to understand how factors such as property taxes, zoning laws, and demographics will affect business. Miriam L. Brewer, director of diversity at the International Franchise Association (IFA), recommends working with your city’s Economic Development Office when examining market conditions and the ideal location for your franchise.
“Each city has a master plan that details exactly what’s going to happen in a particular area,” Brewer says. “It’s a good resource to use when compiling data regarding both present and future locations of roads, housing, business parks, and shopping centers.”
The IFA, a membership organization comprised of franchisors, franchisees, and suppliers, provides guests and its members a host of pertinent information about the franchise arena.
Is there growth potential? Examine both current and long-term market trends and conditions for your product or service. Is there growth or consolidation in the market and how will it affect your business in the future?
To answer these questions and other pertinent information regarding growth trends and economic forecasting, contact your local Small Business Development Center (SBDC). Funded in part by the Small Business Administration (SBA), the SBDC is a one-stop resource that offers no-cost advice, counseling, and support to prospective and existing small business owners.
Operating in over 1,000 offices across the U.S. and its territories, the SBDC also offers low-cost training workshops and seminars that cover a variety of topics related to small business ownership. Many centers offer economic analysis and forecasting for various industries.
To find your local SBDC counselor, go to www.asbdc-us.org.
What makes you different? Understand what differentiates you from your competition. A distinctive product or service, diverse target markets, a unique marketing strategy, or reduced investment costs will set you apart from others.
“Franchising should be treated as a separate business outside of your core business,” Kushell says. “It demands the same critical thinking, expertise, and hard work that any other successful venture requires.”
Before becoming a franchisor, you will also need to:
Have a business plan. This document is one of the most important tools to help you obtain financing. A solid business plan provides more than just historical and projected financial data. It’s a comprehensive document that details the purposes of the plan, background of the venture, analysis of the market, description of the product or service, and management’s experience. It also considers the viability of operating a franchise program and establishes a strategy for success.
A viable business plan is generally composed of: an executive summary detailing your goals and objectives; a brief summary of how you got started; your company’s goals; biographies for yourself and other key individuals; a description of product or service; market potential for your product or service; a marketing strategy; a three- to five-year financial projection; and an exit strategy.
Sandra Conaway, assistant director for Maryland’s Central Region of the SBDC says that it is possible to write a business plan yourself. However, it is a good idea to have someone familiar with the components of the document to review or assist you.
“When you begin writing your working document, I recommend consulting with a SBDC counselor who will review, critique, and provide input about the information you’ve gathered. If more data is needed or you have further questions, a counselor will refer you to the right resource to complete your business plan,” Conaway says.
To view examples of sample business plans, Conaway suggests the online site, Business Plan Pro, at www.bplans.com. This site provides more than 100 free business plan samples, covering a wide range of industries for your review. In addition, you can contact your local SBDC, for a more comprehensive list of business plans to use as a template when writing your own.
Determine your role. Do not try to do everything yourself. Determine who will take on the added responsibility of running both the core business and your new “first child.” Will you need to hire and train additional staff to handle the expansion? Do you have the management skills? If you lack expertise, will you relinquish those duties to someone more qualified?
Be sure to hire someone reliable who can handle those responsibilities that prevent you from focusing on the bigger picture– growing your franchise. Brewer states, “Initially, you will want to do everything yourself because you need to know your business. However, there will come a time when it is not only necessary, but also mandatory that you bring others on board to help you to take care of the day-to-day aspects of operating the franchise. ”
Document your business. A franchisee does not want to reinvent the wheel to be successful. Therefore, document your policies, procedures, forms, business practices and systems into a user-friendly operations manual, known as a franchise system.
Franchising is a costly endeavor, but do not cut corners when it comes time to developing your franchise system. Brewer explains, “Be sure to work with an attorney who deals with franchises on a daily bases. Franchise laws change often, so it’s important that the attorney you are working with is knowledgeable about the current laws.”
Also, take the time to properly set-up your legal entity to shield your personal assets. “If you fail to work with a qualified professional who’s familiar with the franchise industry, you could end up paying twice as much trying to undo something that was done incorrectly,” Brewer says.
The IFA provides a list of professionals such as attorneys, consultants, suppliers, and others in the franchise arena that can help. To find out more information about franchising or to become a member of the IFA, go to www.franchise.org.
Secure your finances. Franchising is an expensive undertaking. Unfortunately, many franchisors fail because they simply do not have enough money to run the business. The amount of capital needed is contingent upon the scope of the expansion
plan. Franchise fees alone can run from a few thousand dollars to over a million dollars depending on the business. Other costs include franchise development, legal, and marketing fees, to name a few.To finance your endeavor consider:
Small Business Administration (SBA): Competitive rates make this a cost effective solution to financing. Look into the 7(a) and CDC/504 loan programs. Information about these loan programs can be found at www.sba.gov.
Specialty franchise financing: Commercial lenders specialize in franchise financing through structured term loans and equipment leases.
Joint venture: Share responsibility and ownership of the franchise with a business partner you can trust.
Local businesses, family, and friends: Have individuals and/or organizations give financial support or purchase stock in your business.
If you can find individuals who believe in your idea and are willing to financially support your business, then great. This is a practical solution, especially when getting a loan from the bank not an option. Borrowing from family and friends gives you more flexibility in terms of your payment schedule. You also retain most of the business’ control and it builds camaraderie amongst the group.
However, do not take this relationship. Conaway states, “I highly recommend that you treat this relationship just like any other formal business agreement. It’s imperative that you set-up some type of agreement or contract with those individuals you receive money from.”
The contract should outline the terms of the agreement and include variables such as your payment schedule, the interest rate (if applicable), and the percentage of funds invested by all individuals. It is a binding document that requires all participating investors to sign. Be honest and do not take advantage of those who support your enterprise. Losing relationships comes at a high price.