Tips for starting a franchise As more consider opening franchises, banks offer advice

http://www.utsandiego.com/news/2014/jan/18/financing-tips-franchise-business/

More people in America are opting to open franchises than start their own businesses, we reported earlier this week.

Franchising attracts people because it offers the perks of business ownership with less risk. It's especially compelling for military veterans, said Jim Salmon, vice president of Business Services for Navy Federal Credit Union. Navy Fed has about 10,000 business-owner clients in the San Diego area, and 56,000 nationwide.

"We have a lot of military folks coming out of the service looking to do something for themselves, and they are particularly attracted to these franchises, because they give folks a road map to follow," he said. "A lot of these young men and women come from an environment that's very structured and structure-oriented, and they're very good at following and sticking to a plan."

Even with a plan though, franchising is not risk-free, and lenders will expect you to prove you can succeed with the company.

We rounded up some tips from financial experts at Wells Fargo and Navy Federal Credit Union to help potential franchisees prepare for the leap into franchise ownership.

You'll need big money up front and in reserve.

Buying into a franchise requires you to make a large initial investment, so it’s important to ensure that your current and future finances are in order, said Wells Fargo Business Banking President Steve Bernstein.

"Ask yourself how much money can you afford to lose?" he said. "How much can you afford to invest? And how can you get financing if you need it?"

A surprising number of people don't realize that even after paying your franchise fees on a new operation, you also need to have some capital stashed away, Salmon said. He likes to see at least six months of living expenses and operating expenses for the company; sometimes more.

"You can't go in with just heart and attitude and desire," he said. "You have to have some capital saved up to put toward the venture and survive on while your business is getting on its legs. I think people tend to underestimate the start-up time for getting even a franchise business fully up and running."

Research the industry and evaluate the franchisor.

Get your hands on materials from associations and groups like the International Franchise Association, the American Franchise Association and the American Association of Franchise Businesses and Dealers, said Bernstein.

These groups will help you not only understand the franchise process, but some also have a wealth of information on individual franchises.

It's also a good idea to work with an accountant or business adviser to review a potential franchisor's financial history and current situation, Bernstein said. Review the Franchise Disclosure Document, or FDD, which is required by the Federal Trade Commission. The FDD will tell you if the franchisor is in bankruptcy or has been involved in recent litigation disputes, among other important information.

Know your market.

As with any business, you need to do your research, said both Salmon and Bernstein.

Know your target customers and their habits, and know your competition. Also know your franchise business, and whether you will be competing against other franchisors or even company stores.