When you are faced with the opportunity of investing in a franchise business it is important that you do all your homework. The old adage of ‘let the buyer beware’ is applicable in this case. A potential franchisee needs to take the following steps to evaluate a franchise opportunity:
- Do a self-evaluation
- Research the franchisor and the concept
- Prepare a business plan and weigh up the feasibility
- Arm yourself with knowledge and expertise
Are you a good fit?
Be sure to ask the right questions. These include:
- Is becoming a franchisee for me?
- Can I be a part of this business?
- Will I fit in as a franchisee?
- Am I …
– Able to comply with the franchise rules?
– A “go-getter?”
– People orientated?
– Looking for a long term investment?
– Prepared to work long hours?
– Willing to learn?
– Motivated by monetary reward?
– Passionate to make it work?
– Able to manage people?
– Financially sound?
– “Hands-on”
It is imperative that you make sound choices when investing in a franchise, and it is usually advisable to choose a compatible industry. This being said it must be remember that a dancer is not always the best option to run a dance school. Other skills and characteristics required to successfully run the business must be taken into account – the most important being business acumen and financial management skills.
Franchising is not to be considered a “get rich quick scheme” – more like a get rich slowly scheme! The investment will take time to make returns and you must be financially prepared for this. If you are over geared and have had to use too much borrowed finance at the outset – it is going to be difficult provide for essential and unforeseen. It is imperative that the business has a solid working capital base to ensure cash flow is sound. Sometimes it is better to keep it small and simple rather than stretching yourself beyond your financial capabilities. Furthermore it is vital that you consult legal advice, financial advice and discuss it with your family.
The Disclosure Document
As much as the franchisor may be choosing you… you are also choosing them. It is therefore necessary to evaluate the franchisor and examine their track record closely. It is now required by law that a franchisor provide you with a Disclosure Document. This is usually after you have signed a confidentiality agreement as it gives a number of insights into the franchisor’s business.
The answers to the following questions and more should be provided in that document:
- How long has the business been in operation?
- How long has the business been franchising?
- How many franchised outlets are there?
- How many company owned stores?
- What are their expansion plans?
- What is the failure rate?
- How many closures have there been in the last 36 months and why?
- How many franchisees exited voluntarily?
- Are they members of FASA?
- What is the head office infrastructure and the level of support like?
- Is the franchisor a supplier of product, exclusive or not?
- Does the franchisor assist with site selection and lease negotiation?
- Will the franchisor assist with design, shopfitting and opening?
- Does the franchisor assist with obtaining finance?
- Is there initial training provided on operational and business management skills?
- Has the franchisor provided you with financial projections?
- Is the franchise package in place? This includes: Disclosure Document; Franchise Agreement and Operations Manual
- What national advertising and marketing support will be received?
- Is there field support available and how regularly?
- What is the culture of the franchisor?
Market conditions
As much as you need to evaluate the franchisor, it is also important that you take responsibility for evaluating and investigating the market.
You should be asking:
1. Is the business sector healthy or in decline?
2. What is the product or service potential?
3. Has a sufficient market demand been established?
4. Who are the existing competitors?
5. What percentage market share does the franchisor have?
6. What is the value of the franchisor’s brand?
7. Does the franchisor control the marketing?
8. Is there a marketing fund?
9. Do I need local area marketing?
Location, location, location
If the investment you are making is linked to a store or an outlet, then ensure that a proper site evaluation is conducted. You will need to determine the following: the viability of the location; demographics of the area; type of site; position of site; visibility and surrounding infrastructure. It is vital to determine if the parking is sufficient and accessible as well as the foot traffic. Ensure you are aware of the competition in the area as well as the success of existing and previous businesses on this site. The location must also be zoned for business and allow adequate signage visibility.
Do the maths
A critical success factor is ensuring that you do the maths! Spend time on the financial issues and be fully aware of the implications. These include:
- How much does the franchise cost?
- What is the upfront franchise fee? (usually not financed)
- How much is required for working capital?
- Are there any financial projections for the first 3 years?
- What are the ongoing royalty fees and advertising fees?
- Evaluate different scenarios e.g. slow growth/ rapid growth.
- What is the required deposit? It is important to note that the franchisor may not take a non-refundable deposit from you during the recruitment process. Even if a potential franchisee is not successful they are entitled to receive their deposit back less direct costs borne by the franchisor.
A business can turn into a disastrous failure if there is not sufficient understanding of the financials. Franchisees must understand the cash flow cycle, manage business debts and keep detailed records or reconcile financial records on a regular basis.
Speak to existing franchisees
One of the best advertisements for a franchise are the existing franchisees. The franchisor with a compliant Disclosure Document has the details of existing franchisees and you are well within your rights to contact them. Be sure to speak to them and ask the right questions, such as:
- Are they making a profit?
- Are they getting a good return on their investment?
- What unexpected capital was needed?
- How do they feel about the relationship that exists between franchisor and franchisee?
- Are they satisfied with the support being provided by the franchisor?
- If they knew then what they know now – would they buy the franchise?
There are many examples and statistics that quote the success rate of franchised businesses versus independent businesses. It must be understood that franchising is not fool proof. It is not guaranteed success and it does not alleviate personal commitment.
Although there may be a proven business model it does not mean that the franchisor is going to provide everything on a platter for you. The success rate is largely dependent on the franchise that you buy into. However, this success comes from a combination of the support you receive from your franchisor, and the time and effort you as the owner-operator put into your business. Make sure you do your homework upfront and the best of luck in your endeavour.
