Before you decide to go ahead and start to purchase a franchise, you must consider the same issues as you would if you were buying or starting any other business. Do online research on the franchise system, know the market you are going to be operating in and understand how the business works.
It is also super important to consider the issues specific to franchises, such as what happens if the franchise or franchisor fails. The franchisor will act in their commercial interest. It is your responsibility to protect and act in your own commercial interests.
Don’t Rush Putting Pen To Paper
When you purchase a franchise, you’re often dealing with a sales person. Avoid rushing into making a quick decision. When you are given new information or documents take the time to understand them, verify the information and get advice. If the franchisor tries to rush you, remember you can walk away. There will always be other opportunities.
To gain valuable knowledge about franchising as a career and before you purchase a franchise, it would be a great idea to talk to other people who have already done what you are planning to do. Talking to other franchisees will make it easier for you to determine if franchising is the right career move for you to make.
It is encouraged that you take the time to talk to at least 10 franchisees and tap into their knowledge. Ask them about all the pros, cons, and if there are any hidden costs.
It is important to keep in mind that ego is a big thing in the business world. Therefore, some franchisees might not feel comfortable with admitting to you that they have struggled.
Questions to Ask Other Franchisees
- What information did they learn about franchising that they didn’t gather from their research before they became franchisees?
- How long did it take them to become profitable?
- How much did they budget for their enterprise, and how much did they end up spending?
- What was the toughest part of building the business?
- How supportive is headquarters?
- How challenging is it to hire good staff?
- Based on their experiences given what they know now, they would do it again or recommend the franchise to a close family member or friend?
Planning To Purchase a Franchise? Consider getting professional help and advice
To help your business get off to a good start it would be advised that you hire an accountant and a legal expert to help you navigate your journey as a franchisee. An accountant and lawyer will help you review your financial health and how it will be affected by the franchise arrangement before you sign a franchise contract. The reality is if you’re buying a business that costs between $150,000 and $1 million, you need an attorney to look at the documents and tell you what they mean.
Count Your Money
Take a look past the minimum requirement for buying a franchise, usually listed as the franchise fee and the cost of equipment. Getting a franchise up and running also in most cases requires a huge fee for marketing costs and the need to survive on break-even books, or a period of net losses, before your business catches on. Even if you’re franchising a well-known brand like McDonald’s, customers still need time to discover your new location. Before taking on a franchise it is important that you have access to money that will cover both business expenses for six months and your personal living expenses for at least a year.
Do a Cost Benefit Analysis
Write up a big list of the many pros and cons of becoming a franchisee. Draw a line down the centre of a piece of paper and on one side, write down the benefits you’re getting, such as the established brand, proven market, training, recipes if it’s a food franchise, staffing guidelines, store design.
On the other side list the costs and liabilities, including franchise fee, money you’re required to pay for marketing, mark-ups on merchandise and ingredients the chain requires you to buy, the share of sales you must pay in royalties. Consider whether you could hire a consultant to help you open up your own donut or sandwich shop, and instead of paying royalties, mark-ups and marketing fees, keep that money for yourself.
Consider working in a store
This is arguably the most reliable way to see how a franchised business works from the inside, and whether your personality fits the company culture. A business such as Domino’s strongly favours franchise applicants who have worked their way up from delivering pizzas. Some businesses, have a policy of granting franchises only to people who have worked for the chain for at least three years. To ensure that taking on a franchise is right for you it is highly advisable that you consider spending six months as a worker before you become a franchisee.
Make Sure You Understand the Franchising Agreement
Purchasing a franchise means you’re buying the rights to run a business under a brand name. Often these rights are subject to conditions that are set out in a franchise agreement.
The franchise agreement is a legally binding document that details the rights and responsibilities of both the franchisor and franchisee. Once you enter into a franchise agreement, you are legally committing to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals. Often franchise agreements are written so they favour the franchisor, you will often have significantly more obligations than the franchisor. Sometimes this reflects franchising as a business model, and sometimes it is a bad business deal. It’s important to get advice to understand which one you might be signing.
Before You Sign A Franchise Agreement
Before signing a franchise agreement and purchase a franchise, obtain as much information about the franchise as possible and make sure you understand the risks. As soon as you show a genuine interest in a franchise, franchisors must give you a short information statement outlining the risks and benefits of franchising.
At least 14 days before you sign a franchise agreement or make a non-refundable payment, franchisors must give you:
- a copy of the Franchising Code
- a disclosure document
- the franchise agreement in its final form
You are able to take more than 14 days to think about the offer, and you should not rush into making a decision.
Before signing an agreement it’s important to understand what issues may arise at the end of an agreement. Some questions you might like to discuss with the franchisor, your legal adviser and talk to other franchisees about include:
- Will the franchisor purchase unsold stock, marketing material, equipment and other assets?
- Is the franchisee entitled to any compensation for goodwill in the business?
- Will you be subject to any restraint of trade (or similar) clause?
- Are you aware of the types of events that may lead to non-renewal or termination of an agreement? How would this impact you?