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Things you need to know before buying a franchise

Posted by: Eye on Books on 10 Jan 2018 | 0 Comments
Franchises are considered to be safe because they are proven concepts, their products are market-tested, and most often are intact with business systems used to make administration even simpler. There’s a lot to like, however, you also have to consider the risks. Here is how you can tell if the franchise is the correct one for you.

Related blog categories: Franchise, Startup

 

Franchise wake-up call

A capable franchise can reduce parts of the initial work right from the first stages of a new business, but this does not necessarily mean that they are reliable. Some of the issues associated with franchises are as follows:

  • Extensive start-up costs – franchises are often expensive to get started in
  • Staffing needs – you’ll need to make extensive hiring right away
  • Too many overheads – you’ll have to pay a share of your profit to the franchisee ongoing
  • Having to meet sales targets – sales are often unforeseeable, and the franchisor may even apply penalties if sales targets aren’t met
  • Not fully in control – the franchisees will often interfere in your decision making and often stipulate which suppliers you must use

But all franchises are not the same. Some will offer you substantial advice, and tons of support as well as software. Others will just give you a logo and leave you by yourself so do your research upfront!

 

Becoming a franchisee isn't easy

In demand franchises know they’re in demand. If they have given you a great location and excellent sales numbers, they will probably ask you for a bigger percentage. Often they will demand that you have,

  • Some experience in the business world
  • Experience in the industry
  • And have an enthusiastic business persona

You may also have limited control over the business, this why you need to ask yourself some questions. Sometimes this limit on freedom is really grating to someone that wants to improve their business even more.

 

Franchise business

Questions to ask yourself

Purchasing a franchisee comes with responsibilities and commitment. You will have to abide by legal obligations, they can be costly, you’ll spend a lot of money, and you’ll also need to work very hard. So, find out what franchise suits you the most by checking that the franchise is a good fit for you, what you want from business and even your personality type!

 

How much support do you require?

  • Would you like the franchisor to help you or would you prefer to do things by yourself?
  • How much risk will you be willing to take? This isn’t a small-scale business, overheads will be rather big so will you be willing to take a loan?
  • Is there a relationship of trust between you and the franchisor? This is the person that can either make or break YOUR business so make sure you know them and their reputation in the industry.
  • How would I be operating the business? You need to make sure the franchisors management approach matches yours because some will allow you extensive decision making powers, whilst others won’t.
  • What can I afford? You will need a lot of liquid cash during the initial stages. Launch costs, fees to pay, rent, it will take some time to build up a revenue so make sure you have a budget that is realistic and keeps all the expenses in mind.

 

Franchise business questionsQuestions to ask the franchisor

Be confident and ask the franchisor any questions you may have. You need to establish the credibility of the franchise and this will require you to ask many questions. If the franchisor is confident and reliable they won’t hesitate to answer your questions.

 

 

 

 

How is the business going?

Get a summary report on the strengths and weaknesses of the business; where they are doing well and what they lack. Get a report on their finances, their targets and growth. You need to keep in mind that there are no guarantees that the numbers they provide are accurate, this is why you should talk to people who work in close proximity to the business.

What's the overall scenario for the franchise?

How is the franchise's current situation? Are they gaining a profit? What are their costs? Ask for a cashflow. You may not necessarily be provided with all the data you require but make sure you are comfortable and overcome your doubts.

How reliable is the data you have collected?

The franchisor can come up with data that shows that they are a multi-million company but does that mean their data is reliable? The answer is not necessarily.

You need to ask them:

  • When was the research conducted
  • Number of samples included in the study?
  • What are the assumptions?

If you are unable to understand the data, show it to your trusted financial advisor, bookkeeper or accountant.

What may be the problems faced in the initial stages?

Ask them! What issues might their franchisees struggle with during their initial days? A reliable franchisor will willingly guide you in this aspect, usually they won’t set up any traps and if they withhold any important information, then they may not be reliable to work with and shows that they don’t have much concern for their franchisees.

What are the company's KPIs?

They have an experience of selling their franchise so by now they must have a clear picture of how to be successful and what results in failure. A competent franchisor will willingly share this information with you because at the end of the day it is their name at stake. They should give you a list of 3-5 important points that you should follow thoroughly.

Are you allowed to speak to other franchisees?

The franchisor should willingly introduce you. Try to meet those who are most similar to you in terms of location and/or experience.

Will you be provided with a reliable business system?

You need to know whether or not they will help you with the following;

  • Hiring
  • Wages and payroll
  • Marketing
  • Develop customer satisfaction
  • Health & safety procedures

And bingo! If they give you an automated cloud accounting software and can recommend a bookkeeper that knows their franchise system and reporting requirements, it will make your business extremely efficient to operate, and less time consuming. It will save you a lot of money that you could lose in financial data errors.

 

Questions to ask franchisees

Ask them to introduce you to other franchisees operating in and around your town, speak to these people and extract as much valuable information as you possibly can in regards to the franchise. Try to find some by yourself. This information is extremely valuable.

How was your first year of business?

This stage is also known as the teething stage and can be a little tough to handle. Hopefully you’ll get an answer similar to what the franchisors initially stated but they will hopefully share some practical approaches to the problems in their teething stage.

What KPIs do you work to and believe make an impact?

They should be similar to the franchisors

What challenges does their franchise business face?

All businesses face challenges and if you are prepared beforehand this will be helpful. Ask them what challenges they have faced in terms of finance, revenue and ask how the franchisors have been of help.

 

Ask bookeeping expertQuestions to ask your lawyer

It is important that you thoroughly understand the agreement or contract that has been drafted. Get a professional to interpret the terms to you in lay man language. You don’t want to end up signing up for something you didn't know about. The lawyer will be able to spot any terms that are unrealistic or inconvenient.

Interpret the agreement so you can understand

By now you’ve made careful considerations and have probably already set up your mind that you will be becoming a part of this franchise and which is why you have the agreement contract. This contract has all your rights and responsibilities documented and so it’s important that you understand it correctly. This is where a lawyer maybe able to help. Discuss your interpretation with the lawyer and tell them what you think it means and the lawyer will tell you what its’ actual meaning is and whether it’s something you should agree with it or not.

What if things don't work out as planned?

It is important that you are a little pessimistic. It might not all be sunshine. Plan your emergency exit. Think about all the possibilities; how will debt be paid, can I sell my plant & equipment, can I sell the franchise. These are all things to consider and plan.

Make sure you won't be financially ruined if things don't work out. Don't wait until it's too late to think about these things.

 

Perth franchise bookkeeperQuestions to ask a bookkeeper

Find a bookkeeper with franchise experience so they are familiar with tax requirements, and they know the business model well already. If the bookkeeper has clients in the same franchise that's even better. They'll know about what things to look out for.

 

Ask them;

 

New Career wooden sign with a street backgroundBecoming a franchisee is a big step

Don’t just think that because you’re buying a franchise it’ll be safe and easy. You’ll be spending long hours to make the business work just like any other, give it some thought, and don’t take the decision lightly. You’ll need to love be passionate about the industry, product or service as well as the brand itself.

 

Use as much information as you can gather to make an informed decision. Ask others in the franchise, ask your lawyer, ask your accountant and bookkeeper.

Finally, don’t forget to think about what comes next when you’re ruling the world! Will you buy another location? Stay in the one you have or sell? Whatever your plan, make sure it works for you financially!

Good luck!

 

 

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