Compatibility is a key factor in any partnership and it is important that you and your business are indeed in harmony
When determining whether a franchise is suitable, you need to consider:
- Your personal goals.
- The operating hours.
- If you have a passion for the types of products, services, and customers.
- Your ability to manage staff.
- The level of skill required to run the business.
When choosing a franchise, it’s important to consult your professional advisers - your accountant, lawyer and bank manager - at the earliest opportunity. Their specialized knowledge and guidance will be invaluable as you consider many elements during the process.
Your accountant will help you evaluate the true profitability of the existing business and prepare your profit and loss, as well as cash flow forecasts. They will also help you work out a fair price to pay for the business. Your lawyer will help you understand all the legal documents – the disclosure document, the franchise agreement, the sale contract, etc. A banker will advise what finance is available and appropriate.
Systematic evaluation is necessary to establish which franchise is most suitable for you. The following steps may help you assess whether a particular franchise will meet your requirements.
Step one: What type of franchise do you want?
Determine the business that suits you best by considering your skills and their applicability to the franchise that appeals to you. Analyzing your personality can also be helpful in deciding what type of franchise would make most sense. Ask yourself the following questions:
- Are you prepared to sell? A franchise gives you a business but it doesn’t necessarily give you customers.
- Are you and your family prepared for the sacrifice? Remember that running a business takes lots of time, effort and dedication.
- Will you be able to deal with the stress that comes with running a business?
- Do you want to be your own boss or are you happy to follow someone else’s blueprint? Consider how you will feel about the restrictions imposed by a franchise arrangement.
Also worth considering is whether you like working indoors or outdoors, how you will feel about recruiting and training staff, and any areas where you lack business skills, such as finance or marketing. Will the franchise you are considering offer any support with honing these skills?
Some good sources of information are:
- Your local Chamber of Commerce, which may be able to put you in touch with franchisees (people who have purchased franchise businesses) whose experience you can benefit from.
- Websites such as Franchise Direct® that have listings of franchises you can search by state.
- The ‘Businesses for Sale’ section of the newspaper.
Step two: What sort of franchise can you afford?
The cost of buying into a franchise may vary from less than $5,000 to more than $1 million. Entry costs and ongoing fees and royalties may vary widely. If you are borrowing, don’t obtain more than your business can repay.
- When investigating the cost of a franchise, you will need to take both initial and ongoing costs into account.
- Be clear on the working capital you will need.
- You normally pay a percentage of sales (royalties) to the franchisor. In addition, you may have to purchase stock, marketing materials and training from the franchisor, so check what they will charge you.
Finally, always bear in mind that a franchise making money in one location may not necessarily be so successful in another area.
Step three: Getting more information
Look closely into the way franchising actually works and question the franchisor thoroughly.
Key questions to consider:
- How long did the business run and how successful was it before it began to franchise?
- How strong is the franchisor’s financial position?
- How many franchises have been opened? How many have closed or changed hands and why?
- How successful are existing franchisees?
- What levels of training and support does the franchisor provide?
Get a full list of franchisees who are already operating the business and talk to as many of them as you can.
You should also independently investigate the market conditions and potential for your proposed franchise.
Your enquiries should include:
- Current and projected market share.
- Whether it’s a growth industry.
- Key market trends.
- Local, national and international competition.
- Market threats and opportunities.
Step four: Company research and reference checks
In addition to the information you receive from the franchisor, your lawyer may wish to undertake checks and enquiries to ensure the business performs as it’s been represented to you. Those checks should include:
- Company records, including details of directors and shareholders.
- Whether any complaints have been made to the Federal Trade Commission.
- Whether any legal actions are pending against the company or its franchisees.
Next steps
- Evaluate all the legal, financial and operation aspects of any franchise you are considering, and your suitability for it.
- Get professional advice on any profit forecasts and other figures you are given by a franchisor.
- Develop a thorough business plan that you can show your bank. Make sure you understand and can explain all the forecasts and figures.
