March 21, 2007
10 Things To Consider Before You Franchise
1. Initial cost of the franchise
A good franchise will give you a chart or table showing you exactly what costs you will need upfront to run your business during the first couple of years. However, the immediate costs are only one aspect of keeping in mind whilst franchising.
2. Other costs
You should prepare for costs such as leasing equipment and property from the franchisor or possibly paying the franchisor a percentage piece of gross sales or gross profits as well as the annual fees. You must account for these expenses whilst analyzing the franchise deal. Other expenses are
- accounting and legal fees
- rent, security and utility deposits to your landlord
- cost of a debt service if you are borrowing money to buy into the franchise
- insurance for liability and casualty
- disability and life insurance, employee benefits and payments you will make to retirement plans
3. Money you will be making
As money making is the primary motivation for most people looking at buying a franchise, you will want to do your own projections of the startup costs, ongoing costs, and potential revenues. The only information that the franchisor can provide can be found in the UFOC - Item 19. These numbers are limited but helpful; adjust your prices and expectations according to your own market, not the franchisor’s top performing units in other markets.
4. Track record of franchise system
How strong is the franchisor?
It is a good idea to talk with other franchisees in the system and those who have left the system. In this way you will learn whether the franchisor has fulfilled its promises, if their business has met expectations, and if they are pleased being a part of the franchise system.
How experienced is the Management System?
Have a look into the franchise’s management system. Take a look at the detailed resumes for each of the key managers – you are looking to work with people who have many years of experience in the business so that they can assist with solutions if you have any problems in the future.
How many franchisees are there?
A franchise model that has franchisees in various territories and has been running for a few years is relatively fundamental when looking for a high-quality franchise system. This is to confirm that a franchise store in Queensland will work just as well in Victoria.
5. Limitations on suppliers
Where you will receive your supplies from? Will you have to buy specific goods from a certain retailer and/or the franchisor? If these specific purchases are required, it may mean that you are not allowed to source less expensive alternatives.
6. Regional security
Does the franchise give you an exclusive territory for the length of the franchise period, or can the franchiser sell a second or third franchise in your territory? You should confirm that they cannot put a company-owned store in your territory and that the franchise will continually pass on to you inquiries they may obtain directly from customers in your geographic area. Have a look at the consumer demand in your market area, that there are sufficient numbers to fuel your bottom line.
7. Opportunity to expand
Find out whether you get priority on new franchises in the same area as you. Many of the successful franchisees are the ones that have multiple outlets in the same area and are able to expand. You can be limited to a territory when you buy a franchise and sometimes are not able to expand or advertise outside of that territory.
8. Franchisees sell out
Franchisees can sell their business as a successful business venture but it is important to understand that franchisees fail each year and it would be a good idea to find out the percentages that do not make it past the first year or two.
9. The value of a re-sold franchise
Have a look at those franchisees who sell their franchises. What did they receive for their resold franchise in comparison to what they put in? Look into whether it was actually profitable or were they simply looking to get out due to “failure”?
10. Know your exit strategy
For example would you be able to sell your franchise? Would the company charge you something to sell your franchise or otherwise restrict your ability to pull out of the business? The reason for understanding your exit strategy is that knowing where you want to end up can help you get there. Your primary concern will be to ensure that the franchise agreement you sign presents you the opportunity to exit or carry on the business in accordance with your plans.
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