Going into business is risky as the high number of business failures show. A good franchise is one way that risk can be reduced. A good franchise provides a proven product and model for success. It provides excellent systems, training and support. On the other hand, a poor franchise only works in some locations, is restrictive and expensive, and offers poor support. A poor franchise can cost you dearly. Learning to tell a good franchise from a poor one is essential.
You need to take the same care in buying a franchise as you do when buying or starting a business. Often when buying a franchise, it does not exist in your area and so you have no specific figures to review. Fortunately the Franchising Code of Conduct legislates that certain information must be provided to you by the franchisor to assist you in researching the franchise.
Doing your own market research, rather than just relying on what the franchisor tells you, is important. How viable would the business be in short term and in the longer term? Would it be able to grow to the size where is provides you more than a job? What is the competition like? How will it be impacted by imported goods and internet sales? Will it work in our region?
A very helpful part of the market research can be talking to other franchisees. The franchisor must provide details of all current franchisees and former franchisees that have terminated in the past three years. Tracking down ones that left should provide insightful information as well. Find out: how supportive is the franchisor? How effective is the franchisor’s marketing?
Clarifying the territory is important. Not just the area shown on a map, but whether it is exclusive to you or others can operate in the area as well.
Also, being required to buy product from the franchisor may lock you into expensive non-competitive product costs.
Establish clearly all the costs: the purchase fees; ongoing fees; capital costs, such as fit- outs and equipment; and working capital. These must all be disclosed to you.
The franchisor also must provide an auditor’s statement as to their viability or provide the last two years of financial reports.
The franchisor should provide you with financial projections for the franchise. It would be good to verify these by talking to franchise owners in regional areas similar to yours.
Finally you need to gain a good understanding of the franchise agreement, which should be provided at least 14 days before signing. You need to understand the requirements and restrictions this contract is placing on you. It is essential to get legal and accounting advice about the agreement that will point out problems and issues that you may not see.
A franchised business can be a great way to get started in business. If you pick the right one your chances of success in business can be increased.