5 things you MUST know before buying into a franchise
When many people embark on a second career they don’t turn to a new job or even a role change – they turn to opening their own small business. In fact, a great many people turn to the world of franchising where their options are vast and wide. From a McDonalds to a 7-11 the options range from retail to lawn mowing and the services industry – but; if you are not careful your franchise could turn out to be an absolute nightmare. Here are my top tips!
#1: Select the right business for you: never walk into something blindly and wherever possible try and mix what you are passionate about with a franchise opportunity. In other words if you are going to buy into something the chances of success will be higher if it is something that is genuinely of interest to you. For example, if you like tea but end up in a coffee franchise that confidence in the product may not come through to potential customers. Also make sure you do your research before signing up to anything – test the foot traffic, research the local area, survey if people really do want what you have to sell them.
#2: Always do your due diligence: always make sure that you don’t take everything on blind trust and you really drill down into the opportunity – in other words just because the franchisor may have said something doesn’t make it true. They want to sell you something remember? Raynia Theodore suggests the following:
the particular franchise network and the franchisor's reputation in the market place;
the expansion plans of the franchisor;
the relationship between the franchisor and its franchisees - this can easily be ascertained by talking to other franchisees within the franchise system;
any current or threatened legal proceedings against the franchisor;
the total amount the franchisee will need to invest in setting up the franchised franchise;
the location where the franchise is to operate from a fixed site;
if the prospective franchisee is considering purchasing an existing franchise then the prospective franchisee should request from the vendor historical trading information and examine the financial reports of the franchised business.
#3: Always review the franchise documents and legal stuff! This is always a trap for players because it speaks to down the track when things might get a little challenging. In Australia recently there have been a number of instances where terms and conditions around exit and use of franchisee services has seen a lot of people go to the wall. Everything from not understanding margins properly to underestimating the role wages and payroll management works. Always check through the agreement and spend the money on a lawyer who knows what they are doing to run the ruler over it. By that I mean there is no point getting someone who specialises in criminal law to look at a commercial agreement.
#4: Ask for cash flow forecasts: cash flow is king when it comes to any small business so make sure you ask the franchisor what modelling they have done, drill down into the expected sales figures and targets and; most importantly, factor in all additional costs that you will find in the agreement – such as back end administration, marketing etc. Also; make sure you understand what it means to reach a break even point.
#5: Reputational review: try and seek out other current or former franchise holders because there is nothing like asking someone who has been through it all before. Don’t always believe the PR spin from the franchisor because they will always tell you the good stuff – former franchise holders can often be found in online forums and simply by googling the name of the brand and looking at the news feature on the search tab.
What are top franchise brands in the world?
Subway (sandwiches and salads) | startup costs $84,300 – $258,300 (41,916 locations worldwide in 2015).
McDonald's | startup costs in 2010, $995,900 – $1,842,700 (36,368 Locations in 2015)
7-Eleven Inc. (convenience stores) | startup costs in 2010 $40,500- $775,300, (56,439 locations in 2015)
Hampton Inns & Suites (midprice hotels) | startup costs in 2010 $3,716,000 – $15,148,800
Great Clips (hair salons) | startup costs in 2010 $109,000 - $203,000 (3,694 locations in 2015)
H&R Block (tax preparation and now e-filing) | startup costs $26,427 - $84,094 (10,800 locations in 2015)
Dunkin' Donuts | startup costs in 2010 $537,750 - $1,765,300
Jani-King (commercial cleaning) | startup costs $11,400 - $35,050, (11,000 partners worldwide in 2004)
Servpro (insurance and disaster restoration and cleaning) | startup costs in 2010 $102,250 - $161,150
MiniMarkets (convenience store and gas station) | startup costs in 2010 $1,835,823 - $7,615,065