If you are considering buying a franchise you should consider all available information before making the decision.
Franchising is the most successful form of small business but there is no guarantee of success. The risks and benefits of franchising should be fully understood before the decision to purchase a franchise is made.
What is a franchise?In a franchise arrangement, the franchisor collects payments from franchisees for the right to use their brand and systems. Franchise fees can range in price from as little as $5000 to $1 million. Franchisees are generally required to pay ongoing support fees to the franchisor. This may be a fixed monthly fee or may be calculated as a percentage of turnover. Franchisees do not franchise a product, they franchise a business system. McDonald's restaurants are a good example of franchising.
If you are considering becoming a franchisee you should:
- assess your reasons for wanting to own a business.
- understand the lifestyle and income changes that come from owning a business.
- narrow your choice of franchise to one that interests you.
- ensure you have adequate borrowing capacity and working capital.
- closely study all disclosure material.
- seek legal and accounting advice from professionals with franchising experience.
- use the cooling-off period to check your figures before finalising your application.
You should not be afraid to ask questions of the franchisee. You should also speak to as many franchisees as possible. This will enable you to better understand the benefits and drawbacks of franchising and will allow you to adjust your expectations accordingly. The success or failure of the franchise rests on the franchisee's shoulders and you must arm yourself with as much information as possible to allow you to make an informed decision.
Questions you should ask You should discover the answers to these questions before proceeding with the purchase of a franchise.
- Does the industry suit your lifestyle needs?
- Is there a consistent demand for the services of your franchise? Franchises based on fads can be transient.
- Is your intended location appropriate? You must ensure supply for your services does not exceed demand.
- Does the franchise enjoy a positive reputation? Customers frequently see the franchise as part of a chain and a franchise with a reputation for poor service will consequently affect other franchises.
- Does the franchisor offer sufficient support for new franchisees? Well-developed franchisors are skilled at starting new businesses but the question is worth asking.
- What are the staffing requirements for the franchise? This can affect your obligations as an employer.
- Has the franchisor closed franchises of this type? If so, you should ask the reasons for the franchise's closure. Take the opportunity to learn from other's failures
- Do you have realistic financial expectations? Ask other franchisees about their experiences.
If you are satisfied with the answers to these questions you may make the decision to purchase a franchise. You should obtain an information package from the franchisor and carefully review any disclosure documents. It is important that you discuss all documents with a legal professional who is experienced in franchising. The decision to purchase a franchise is a major financial decision and you must ensure you are legally protected.
You should visit the headquarters of the franchisor and meet with relevant personnel. It is important that you understand the people who will be supporting you and that you understand the systems of the franchise. Do not be intimidated into accepting superficial answers to questions. You must be comfortable with your decision to purchase a franchise. Your decision should be made on the basis of solid factual information.
The decision to purchase a franchise could lead to financial security or ruin. Your decision should be based on a thorough understanding of the industry and the franchise. You should also realistically assess your financial status and your financial goals. Most importantly, you should obtain as much information about the franchise and ask as many questions as are necessary for you to feel comfortable about your decision. Investigating other financial avenues may be the right decision for you.