To Franchise or Not to Franchise
“Should you buy into a franchised business, or not?
You have the passion. You have the drive. But do you know what you are getting yourself into?
Entering into a franchise agreement with a franchisor can seem like a good idea. They have experience in the industry, the business model and operation systems are set up and ready to go, the marketing plan is in place, all you need to do is sign up and get started, right?
Wrong.
Like anything in business (and in life), you need to know what you are getting yourself into, what your obligations are along the way, and how you can get out if you need to. Deciding whether to buy into a franchise is no different. It may be set up and structured, but that doesn’t mean it’s guaranteed to work.
Here are my 7 Tips when considering buying in to a franchise:
1. Don’t rush: Take the time to obtain all the legal, business and accounting advice that you need to, to be comfortable and sure that this business is the right fit for you.
2. Due Diligence: Speak to other franchisees, current or past, and find out what the real financial and personal commitment is to run the business successfully, and find out what the franchisor is like to deal with during the relationship. A good relationship with the franchisor is going to be important, because you will be locked in to this together, so find out now what the experience of other franchisees have been.
3. Fees: What fees are payable to the Franchisor, in additional to the initial franchise fee. Is the ongoing franchise fee fixed or calculated on a sliding scale comparative to the gross profit of the business? What other fees are payable?
4. Profit: After identifying the fees, what does the actual profit margin look like – you should discuss this with your accountant.
5. Training and Support: What sort of initial and ongoing training is provided, and is it going to be enough? Importantly, does this training come at a cost to you, and if so, how much. How have other franchisees found the training – is it enough, or does it fall short of helping you do what you need to do to run a successful business.
6. Get your business structure right: A sole trader, partnership, company or trust. Get advice and make sure you have the right structure to suit you.
7. Exit strategy: How can you get out? Can you sell the franchised business, and if so, what will be the assigned fees? Be sure to understand the process you will need to go through to obtain the franchisor’s consent to any proposed sale/assignment.
8. What will happen if the business fails: What is at stake. What will it cost you - literally?
There is no substitute to preparation, so take the time to know what you are getting into before you sign up to a franchise. If you need help getting your head around the terms and conditions contained in the franchise documents, ask your business lawyer. The franchise could work out to be your perfect match - but make sure you take your time and learn as much as you possibly can before you decide. ”
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You might like to read more of our tips in our Legal Advice for Small Business: The Ultimate Guide.