Entering the world of franchising
Table of Contents
A franchise is a business that is set up to run the same as every other franchise in the group, guaranteeing consistency of delivery and service. Think McDonalds. Big Macs don’t change much between New York and Los Angeles.
It’s a great way to get into business especially if you’ve never been in business before. You’re buying into a brand that already works with proven products and services and tested repeatable processes. That takes a lot of pressure off in pre-start phase conducting market research and identifying if there is a demand.
Despite the many benefits of buying a franchise, it’s important you consider which franchise suits you best.
Your franchise checklist
As much as you can, lower your risk of buying into a franchise to ensure it aligns with your values, and ability to do the work.
One of the most important components of a franchise is access to either exclusive products and services only available through the franchisor or a well-known brand customers know and respect which generates sales, or both. Have this as your first test.
When you buy a franchise, the franchise agreements dictate much of what you can and can’t do. If you like following a set formula, then franchising is great. But if you want to make your own decisions or grow the business in a different direction, you may want to start your own business.
Examine the industry and market to see if the industry is growing, stagnant or declining. Look at the market demand for signs that the industry will continue to be viable in the future.
Other aspects to consider before you buy a franchise:
- Make sure you enjoy doing the actual work. Even with platforms and processes in place, running a business is hard, so it helps if you like what you’ll be doing. Plus of course any qualifications you may need to operate legally.
- Talk to other franchisees to get their perspective. Find out what they love about the franchise and what challenges they face, both in the business and in the industry. Their opinion will help you determine if it’s the right franchise for you.
- In your chosen franchise, check to see if any existing franchisees have left the industry, or if any franchised businesses have closed. Ideally the trend is more franchise businesses are opening than closing.
- The franchisor has extensive training, marketing, operating manuals, and other support to guide and assist you run and grow the business.
- You can afford any up-front costs such as the franchise fee, equipment, signage, uniforms, opening inventory, and marketing. Some franchises have low entry costs, while others can be millions of dollars.
- There is a decent return. You’ll need to recover any capital costs over time, plus make a profit that rewards you for your time and effort.
- Conduct your own competitor analysis. Even though you’re buying a franchise, there will still be competition to deal with.
- If you’re at an advanced stage of deciding, ask if you can work in or observe an existing franchise to get a feel for the business, customers, and suppliers.
You’ll also want to understand your legal obligations, including compliance requirements such as health and safety and industry regulations.
Franchise contracts
Once you’ve chosen a franchise that suits your ability, is credible, has potential to grow and provide a great return, you should study the franchise agreement. This contract outlines the terms and conditions that govern your relationship with the franchisor. While the franchise agreement might be presented as a standardized contract, you may be able to negotiate some terms and conditions. This often depends on the franchisor’s size and flexibility.
Common clauses you need to be aware of:
- The up-front fee.
- How the franchisor makes their margin, often either from a royalty on sales or from a clause requiring you to buy the ingredients from the franchisor where they make a margin, or both.
- Territory rights. If the franchisor allows other franchises in your area, make sure you have first option to open another branch or outlet.
- What the franchisor promises to help market the business and bring in sales. There may be a common marketing fund all franchisees pay into, which is then spent nationally.
- The specific intellectual property the franchise provides and how this is protected.
How you can exit the contract is important, as well. For example, you need to know about the length of the franchise contract and conditions for renewal, and whether you’re able to sell the franchise to another person if you need to. Find out what all your options for exiting the contract are. Finally, find out whether there are any non-compliance conditions that could result in the franchise being taken away if you fail to meet them.
Franchises can be very different in delivery and set-up, so it’s critical to seek help and advice at each stage along the way.
Financing
Buying a franchise is like buying into any business and you’ll still need to afford the purchase price of entry.
Once you’ve identified the total set-up costs, calculate if you are still short, then work out your sources of funding, usually your savings or a business loan. Possibly the franchisor may help fund some of the costs which you pay back over time. A financial advisor should be able to identify and determine the best sources of funding for your franchise.
Next steps
Review your financial situation and compare it with the capital required to buy and run a franchise in the initial years. Conduct a background check of the franchisor’s history, financial stability, and reputation in the industry.
Before signing a contract, have a lawyer or accountant specializing in franchise agreements review it to ensure you’re fully aware of your responsibilities and that you agree with the terms. Visit a few franchises and buy from them, or delegate to someone else if you want to remain anonymous. Use the information you gather to determine if the franchise aligns with your values and goals.
