I am looking at franchises today, a subject you must familiarize yourself with. What is a franchise though? It is a business established or operated under authorisation to sell or distribute another company’s goods or services in a particular area. A lot of times aspiring entrepreneurs muse on setting up an enterprise from scratch. There is nothing necessarily wrong with that but at times the perfect fit might be looking for or buying into a franchise. It is far less hectic compared to starting from scratch. If you consider the franchise path, what must you know before buying into a franchise?
Go Through The Franchise Disclosure Document
This is basically the document that stipulates all the details regarding the franchisor in question. It will detail how their system works when it comes to franchisees. It is important to know this so that you know how your operational protocols will be. Bear in mind that the franchisor dictates stuff like what you can sell, the prices to adopt, where to sell, and the like.
The franchisor also stipulates the amount of capital you must have to smoothly operate. This document will give you a picture of how it would be like being under a particular franchisor. If the details are unfavourable you can then negotiate or ditch it altogether. Franchise agreements also have a bearing on your future, for instance, if you opt-out of the agreement later. All those are details you should be fully acquainted with beforehand.
Under normal circumstances, this document includes a list of current franchisees. It would be wise for you to contact or visit these franchises to learn about their experience. You will draw some valuable insights from this important exercise. A word of caution here; typically this document tends to be voluminous. This can cause one to rush through without thoroughly going through everything. Do not fall for that trap because if you do, you stand to get disadvantaged.
Find Out About Fees Involved
What will you, as a franchisee be mandated to pay during the business arrangement? You will have to establish if you will have to periodically pay something. Most arrangements will entail you paying royalties; the terms and conditions vary of course. For example, you can be obligated to pay royalties every month. Terms and conditions on how much to pay vary also. For instance, you can be expected to pay a percentage of the sales. In another scenario, you can be expected to pay a specific agreed on amount. So you must find out about all this before you buy into a franchise.
Do You Have The Working Capital?
To run a franchise, there will be working capital required. The franchisor does provide some things for you but as for the working capital that will largely be on you. Before starting you must find out how much working capital will be needed. You must be sure you will be able to have that working capital. Do not gamble with this because failure to have enough working capital will compromise your ability to pay royalties, for example.
Be Aware Of The Success Rate Misconception
When you look at the makeup of a franchise you immediately think it is easy. You would think that realizing sales will be easy and everything will be a stroll in the park. Well, that is not necessarily the case with franchises. The failure rate is just as high as any other business. It is important to know this so that you do not get in with the wrong perception. You will need to approach a franchise with the discretion, diligence, and work ethic required for starting a business from scratch. Do not fall for wrong stats that say that franchises have a 5 per cent likelihood of failing.
When you approach a franchisor they will most definitely paint a glorious picture of themselves. However, you must dig deeper to find out if there are any issues of concern. Companies can be good at concealing dirt on their part. These hidden things can have negative bearings on you once you become their franchisee. Thus you must do some digging to ascertain everything is as it should be. An example is financials; a franchisor should be able to avail you with financial statements or reports. Failure to avail of them can be a red flag or upon inspecting them you can notice some anomalies.
What Your Rights As A Franchise Will Be
Generally, as a franchise, you will be limited when it comes to autonomy. Thus it is vital to know the rights and the extent of the rights you will have in a franchise agreement. You have to look into renewal rights – things like the likelihood of renewals and how long it takes to renew. Will you have the right to acquire assets upon completion of a franchise agreement? There are also issues about ownership transfer rights. These are just some examples but you must comprehensively know what rights you will be entitled to as a franchisee.
Did you know that people with military backgrounds usually run lucrative franchises? This is borne out of their being accustomed to operating in a highly structured system. I say this for a reason because before you think of being a franchise you must evaluate yourself. Do you work well with following rules and regulations or you prefer autonomy? If you prefer having room to explore then franchising might be an unpleasant experience for you. You must also look into any legal history of the franchisor and its current or past franchisees. How many legal cases have been brought against them and what was their nature? Knowing this will greatly inform whether or not the venture will be worth it.