How A Franchise Business Opportunity May Help Turn Your Life Around

Looking to start into a franchise business ?

Wondering which type of franchise opportunity will earn you the best returns on your hard earned investment ?

We are going to give you a brief about the technical characteristics of franchising, upon which we shall expect you to widen your scope before deciding which franchise business to invest in.

Briefing Summary:

• Definition


• The advantages and disadvantages of buying a franchise.


• How to evaluate a franchise.


• Negotiating to buy a franchise.


• Risk Control Checks

Definition:

A franchise business is a contractual arrangement that enables you to set up your own small business without having to start from scratch. You are given a tried and tested formula, and benefit from the experience and support of the franchisor (the company offering you the franchise).

A franchise enables you to enjoy many of the benefits of self-employment with less risk.
Successful franchise businesses have a much lower failure rate than completely new businesses. You can make a good living but you also need to be aware of the potential pros and cons.

Advantages:

A franchise works along a proven business idea. You are actually copying a viable product, service or business which is already in existence.

• It is easy to check with existing franchisees whether the business really works.


• A good franchisor will continuously research and update you on how to improve upon the business idea.
• A strong argument for buying a franchise is the experience of the franchisor. Franchises such as Burger King, MacDonald’s, Midas Mufflers, and others have been in business for many years and you can take advantage of their consumer recognition and proven business formulas.
• You will also be able to use any trade marks the franchisor owns.
• You will be buying into a family of other franchisees who are working toward the same goal, having adopted a similar mission on behalf of the franchisor.
  Some of the best ideas for the franchisor come from the “family”. So you will become part of a network of franchisees who regularly talk to the head office as well as other franchisees.

A good franchise business will give you full support. Typically, this includes:

• Introductory training, usually covering general skills (eg customer service), as well as training you for that particular business.


• Help you in setting up the business.


• A detailed operations manual which tells you how to run the business.


• Ongoing support and advice.

Top franchisors often provide a franchise action guide. It will contain all the information you need to conduct due diligence.

• You will almost always be given exclusive rights to the franchise business in a specified region or to an exclusive client base.
• There will still be competition from other businesses.

Financing the business is likely to be more straightforward. It can be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven start-up.

• Some franchisors have relationships with banks and can help you borrow money, and local enterprise initiatives may supply start-up finance.

The disadvantages

You will be required to pay an up-front fee to the franchisor in order to use the franchisor’s name and open shop. These fees can run into six figures. The franchisor may usually require ongoing fees as well.

You will also have the usual business costs (premises and equipment, stock and other supplies). In many cases, you will buy them from the franchisor.

• You may pay a continuing royalty on sales, or a management fee, regardless of whether your franchise business is making a profit or not. This can be a fixed amount or a percentage of sales or a mixture of both.
• Some extra costs may be charged separately.

For example, a contribution towards the franchisor’s advertising costs or fees for the training you receive.

• As a prospective franchisee, you need to be happy that the franchisor’s services will justify all these costs, which will continue even after you have mastered the business.

You have to agree to operate within certain restrictions.
The contract between you and the franchisor will usually restrict you on what you are allowed to do.

• For example, you cannot change the business.
  You cannot introduce new products for your local market.
• You can only sell your franchise to a buyer approved by the franchisor.
• It is easy to fall into the trap of feeling that, just by buying into a popular franchise business, you will be an instant success. Franchising is just like any other business. You must work hard and make sacrifices to achieve a measure of success.

Your relationship with the franchisor means you are exposed to certain risks which are outside your control.

• The risk of the franchisor failing to fulfill their obligations (eg providing support in the form of brand advertising or training).


• The risk of the franchisor going out of business.


• The risk of the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with.
• If the franchise business has headquarters in a foreign country, problems may arise if you require assistance or need to speak to a company representative in person.
  Make sure the franchisor has an office in your country or, at least, sends a representative to your country on a regular basis.

How To Evaluate a franchisor

The franchisor should provide a detailed prospectus that answers all the basic questions.

What the business is about.
You need enough detail to give you a broad understanding of the business concept.

• What trading locations or territories they are offering you


• Who are their competitors?
  >A good franchisor should provide you with a realistic assessment of the competition.
• What steps does the franchisor take to extend and update the franchise business concept?

Who is the franchisor?

• How long has their business been going?


• How long have they been in the franchising business?


• What experience and achievements do their key people have?


• How solid are the franchisor’s finances?
  Ask for three years’ audited accounts and a bank reference.

How much support will you receive from them?

• What initial training will they provide you?


• Will they help you to set up the business?
  Some franchisors will provide advice on the premises and equipment you need, legal support (eg with planning permission), and so on.
• What continuing support will they provide you?
  This can vary widely from almost nothing to full support.
• Can you get help when you need it?
  The franchisor may have support staff you can telephone whenever necessary.
• Does the franchisor pass on its market research to you?

What are the terms of the franchise business agreement?

• How long will the franchise agreement run (typically five to ten years)?
  Check whether you have an option to renew the franchise after this time.
• Will you have exclusive rights in your area for the full term of the franchise?


• What conditions and restrictions do you have if you opt to sell the franchise?


• What happens if you die or cannot continue in business for some reason?

What about the costs?

• How much is the up-front fee?

Good franchisors will usually make most of their profits from the continuing stream of royalty payments they collect from successful franchisees.
The initial fees should only reflect the costs of franchise development and administration.

• How much will you need to invest?

Check that the franchisor’s figures include realistic costs. Ask whether the items you buy through the franchisor (eg a sub-lease on premises) will include any mark-up.

• Find out what percentage you will be required to pay as royalty fees and how will it be assessed?

Some franchisors reduce the percentage payable once you reach a set turnover. By growing the franchise business over that threshold you can increase your profitability.

• What price will be charged for materials bought from the franchisor (eg stocks)?

The franchisor may mark up the prices. Alternatively, you may benefit from the franchisor’s buying power.

• What other charges (eg promotions, training) will you have to pay?

Clarify what you get for your investment.

What financial return can you expect?

• What actual returns are existing franchisees achieving ?

Be aware that the earliest franchises may have cornered the easiest or most profitable territories.

• Find out what financial returns are projected for new franchises?

Reality Control checks

Do not commit yourself in any way before completely evaluating the franchise business.

Do not pay any non-refundable deposit and do not part with money until the draft agreement is seen by your lawyer.

Pay the franchisor a visit. Ask specific questions about anything which is not clear from the prospectus.

• Do the people seem honest and open?


• Are they trying too hard to sell the franchise business to you? Do not allow yourself to be hurried into making a decision.

Get a specimen contract for your lawyer to examine.

• Never enter into any franchise agreement without legal advice.


• Use a lawyer who has experience of franchises. Many large legal firms have a specialist, while smaller ones may have individuals with relevant expertise.

Visit at least two franchisees: and phone at least three more. This will help you find out what the risks and opportunities are.

• Ask them how their business is going, what they think of the franchisor, and what problems they are having.


• Insist on a full list of all present and past franchisees, including any that have failed.
  Beware of franchisors who refuse to reveal this information.
• Most franchisors own websites. Visit their website to read any user reviews or case studies

Carry out your own market research in your proposed territory. Even if the franchise business works elsewhere, you need to be sure it will work in your area of choice.

• What potential customers are there?


• What competition is there?


• What are the long-term prospects?

Prepare a business plan, just as you would for any other start-up business. Base this on your market research and on your own financial forecasts not those provided by the franchisor.

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