Areas to investigate when buying a franchise
Areas to investigate when buying a franchise
Buying a franchise is a significant and life-changing move that requires a lot of consideration and thorough research to make a well-rounded and confident decision.
With so many facets of a business, we look at some of the key areas to investigate before signing on the dotted line.
Firstly, is franchising right for you?
One common misconception among potential franchisees is that they believe they are basically buying themselves a job. This couldn’t be further from the truth. Franchisees need to be prepared, willing and able to take on the responsibilities associated with running their own business.1
Similarly; the ‘cash-cow’ assumption - that a franchise is profitable from day one. There are lower risks involved with buying a franchise, but like any business they require a defined strategy and ongoing development to become profitable.
Another common misconception is that a franchise will run itself, and some owners make the mistake of becoming complacent once up and running. There will be some form of start-up training and ongoing support from the franchisor though it takes consistent hard work and exceptional business management skills to build and maintain a successful franchise. Even if it reaches a point where staff can manage the day-to-day operations, you still need to be actively involved in the business.
Can you work within a set structure and operational guidelines?
While you may have the entrepreneurial drive and want the freedom of owning your own business, franchising models don’t offer much wiggle room when it comes to expressing individuality, as they are generally founded on the basis of tried and tested methods for best results.
What are your income and lifestyle expectations, and how does that impact your options?
Franchising is much more than fast food, from all forms of hospitality to retail, b2b and services, there are many types of franchise concepts available - each with unique strengths and weaknesses, so you need to assess what style would best support your personality, goals and expectations. Once you’ve made an evaluation, you can then narrow your search down to a few systems to request further info from.
If you’ve assessed the information and you’re confident that a particular franchise system will suit your needs, the next step would be to commence the application process, while ensuring you have adequate borrowing capacity, including working capital, to successfully establish this type of business.2
The Importance of Due Diligence
It’s crucial to ensure you completely understand the financial, legal and practical implications of operating a franchise and the franchise agreement in its entirety. Dedicating sufficient time to the due diligence process is key in making an educated decision to reduce the risk of issues later on.
Where to start
The process can seem overwhelming, Griffith University’s Asia-Pacific Centre for Franchising Excellence has developed a free online pre-entry franchise education program, to assist prospective franchisees with conducting their due-diligence effectively, and help ensure people are well informed about franchising and what to expect as a franchisee.3
Legal and Financial
The franchisor must maintain and provide franchisees (current and potential) with a disclosure document, which includes current information that is material to the running of the franchised business.4 The disclosure document may include; Copy of lease (in the case where a franchisee is occupying premises leased from/by the franchisor); copies of financial statements and any other agreements pertinent to the operations of the franchise.
It is also now mandatory that prospective franchisees obtain independent, third-party professional advice (solicitor, accountant and/or business adviser) and provide a signed statement informing of such to the franchisor during the purchase process.
To fully understand your rights and obligations as a franchisee, it’s recommended to take some time to study the Franchising Code of Conduct, as it covers all legal and financial requirements in detail.
Operational & Practical
Being familiar with the typical day-to-day operations of a franchise is a common query amongst potential franchisees. But how do you gather such information? As part of your due diligence it’s important you speak to the franchisor, existing franchisees and ex-franchisees. Below are some questions recommended by the Asia-Pacific Centre for Franchising Excellence.
Questions for current franchisees:
- How long have you been a franchisee?
- What first attracted you to this franchise?
Questions for former franchisees:
- Did you get accounting, legal or business advice before buying the franchise?
- Did the business meet your income and lifestyle expectations?
Questions for the franchisor:
- What financial data can be provided to assist the putting together of a detailed and relevant business plan?
- What franchise and industry-specific training or education have you or your personnel undertaken in the last 12 months?
Other areas to investigate:
- The franchise territory - is it exclusive, non-exclusive, do you get first option on additional franchises in the area?
- In addition to the initial capital investment, what other start-up or ongoing costs could you expect to pay?
Training & Support
Finding out what initial and ongoing training and support is important for the day-to-day operations of your business, and whether or not training requires funding external to your initial capital investment.
Do they provide ‘day-in-the-life’ training with a current successful franchisee - whether it is in-store or out on the road with a service franchise?
Does the franchisor provide initial training for your staff? Or is this (and the cost) left up to franchisees?
To what extent does the franchisor provide support? Do they have field support staff, how many and how often do they visit franchisees?
Systems & Processes
Are the operations manuals up to date, and go into depth regarding policies and procedures for the majority of business matters? E.g. From scripts for sales calls to best practices for HR and recruitment.
What proprietary systems do they have? Is the POS system custom made for their products and services or is it left up to franchisees to purchase and maintain an off-the-shelf model?
Industry & Market Research
An activity often overlooked by franchisees is conducting their own market research, albeit necessary to understand your customers, competitors and industry.5
- Who are they and what are their needs?
- When and why will they buy?
- How much are they willing to pay for your products or services?
- What products and services do your competitors sell, and for what price? How do they market their business?
- Do you know your competitors’ current market share, pricing and competitive advantage?
- Are there any political, legal, economic, social and cultural issues that may affect your business?
- Stay up to date with trade-specific journals, become a member of industry associations and attend relevant expos/trade shows.
By now you may have researched and found that the entry cost to buy well-known franchise brands is quite high, and out of reach to the majority of prospective franchise owners.
This doesn’t mean that owning your own franchise business is impossible; you just need to know what to look for. During the due diligence phase of purchasing a franchise, branding and marketing are the areas sometimes overlooked.
Look for consistency: Subscribe to the franchisor’s email-marketing list, request copies of brochures, flyers and any advertising material (magazine, print ads etc.), make time to go through their website and find out when it was last updated. Is the look-and-feel modern and consistent through all mediums? Are their messages the same or similar? When a company invests appropriate time and money (potentially the money you will be contributing to marketing) into developing the brand identity and branding strategy, everything should look flawless and consistent.
Presence in the industry: Have you checked out their social media profiles? And those of their franchisees? Are there many online reviews about them, their products or services, or their individual franchises? If they have a high social media presence and followship, with unique content - they can be perceived as a leader/innovator in their industry. Prospective franchisees should look at what the brand stands for, if they align themselves and their personality with the brand, and what kind of support they will receive from the franchisor to build the brand locally. And, is that brand strong enough to pull customers for that particular product or service?6
How long should due-diligence take?
Even though there is a 14 day waiting period when buying a franchise, this shouldn’t be considered an indication of how long the duediligence process ‘should’ take.
Don’t feel rushed; buying a franchise is possibly one of the biggest life decisions a person can make, and not forgetting franchise agreements are legally binding documents; due-diligence is a process that should continue until you are comfortable that you are making a fully-informed and confident decision.
Bobbie Cole joined Top Snap in 2016 as part of the Marketing & Franchise Support team, training and assisting franchisees with daily business operations.
Top Snap is a business-to-business franchise, providing a full range of visual marketing services to the real estate and property industry.