Finding Your Perfect Match – Trickier than Tinder!
Top tips in choosing the franchise that’s right for you!
The cyberage has changed so many of the ways we conduct our life, from ordering groceries to finding Mr or Ms Right. For the big decisions however, most of us use the internet as a research tool.
We weigh up what’s available and then we go out and walk-the-walk to make that final choice.
Buying a franchise is very much like finding your life partner. Some might say that given franchisees spend an average seven years in a network, it outlasts many romantic partnerships!
What can you take from your dating experiences, as you look to tie your fortunes to the franchise network that will fulfil your hopes and dreams for future security? Knowing as much as you can and building trust are obviously key. However, what questions do you ask and when? What can you learn about them from others in their circle? When do you meet the folks and how do you keep an open mind while still testing the credibility if it all seems too good to be true?
Chemistry is great, but there’s also nothing like some trusted advice and careful planning before you say “I do”.
Let’s look at some of the commercial, legal and cultural issues to explore so you can genuinely evaluate whether a franchise is right for you and a good proposition for the future. There is always risk – how do you assess it and how can you reasonably manage and contain it to best ensure the happiness and success you desire?
But it’s so hard to decide!
The statistics always tell a story: marriages fail – and so do businesses. In fact four out of five independent small businesses fail in the first five years and of those, about half of them fail in the first year. Comparatively, approximately one out of five franchise businesses fail in a five year period.
Much of this can be attributed to the proven and profitable business model with systems,a brand, marketing, a reliable supply chain, training and ongoing support. However, simply buying a franchise doesn’t ensure you will be successful. Let’s define what you want, what you’re prepared to commit and how to find and evaluate what’s on offer!
What do I want?
Even if most of us only know what we DON’T want!
You will be committing your time as well as your money. So number 1: successful, profitable franchisees are owner/operators – not negotiable! A seven day a week business, such as a fast food outlet may require working public holidays and nights. You may need to employ staff or family members and one of the family may be giving up a job to work in the business. A work from home, mobile or a part-time franchise that fits around school children, or a semi-retired lifestyle may have less impact on your life and your family.
How much can I commit?
Always the big question!
What IS the total commitment required – including operating capital to pay rent, staff, utilities, cost of goods, loan repayments, royalties etc, until the business becomes profitable? And factor in interest on loans, your wage and the time it will take to recover your original investment. Can you meet your current commitments like home, car, credit card and still maintain your lifestyle if you buy this franchise?
It may take many months to build the business and match your current income. So how much can you really afford? Be realistic about how much you will really need to survive, even if it takes longer to become profitable than you plan.
How does the profile stack up in reality?
Okay, you’ve met a few times and this is looking good….maybe this is the one! But how can you tell?
Firstly you need a business plan that includes some financial information or a model and trading data – a Profit & Loss statement (P&L) from other franchisees’ and/or corporate stores if possible – so you can to figure out if the business is profitable. You need to know at a very basic level how many goods or services you need to sell or how many clients you need to see each day, and what the average spend would need to be to break even, after meeting all your overheads. Ask the franchisor and speak to other franchisees so you can judge whether the numbers add up for the site you’re considering. The best business concept won’t work if there is not enough traffic to make the sales you need.
You’ll also need a good handle on the operating costs. Very roughly, cost of goods (COGS) and wages should each be around 30 per cent respectively and rent should not be more than about 10 per cent of turnover. But you need to know what is sustainable in the network you are considering.
Ask other franchisees about the costs and how long it took them to be profitable, so you figure out how much operating capital you will need to cover your costs until you turn a profit.
How do I figure out if it will last?
There’s no answer to this or anything in life – you can only evaluate everything you can find out and manage the risks.
Calculating your return on investment (ROI) simply put – if the financial information is as close to accurate as you can get, and factoring in interest on loans to fund your franchise, your operating capital and your wages – how long will it take to get back all the money you have invested?
A very rough guide to ROI businesses:
- under $100K should return the investment in 12-24 months
- $180-400K should return the investment in 2.5 to 3.5 years
- $500-$850K should return the investment in 4 years+
- over the $1M mark may take 5 or more years
But the larger the investment, the larger you would generally expect your annual remuneration. Under $100 may return a $50- 70K annually whereas a $1.2M business may return $250-400K annually in time. If you can meet the debt, the interest and a living wage in the first year, you should be building a sustainable business. Generally the business should grow more rapidly over the next three-four years and your ROI will be realised as your business matures. You’re aiming to pay down residual debt more quickly from this stage to be debt free in five years. The term of your franchise agreement (and your lease) need to be long enough to get back your initial investment and hopefully build some capital plus the eventual value of the goodwill when you sell. For this reason, it is good to secure an option for second term in your franchise agreement.
It’s often the little things that turn you off
The thing that didn’t seem like a deal breaker when you were dating, could be a deal breaker in the long run – so look to the seemingly little things.
What to look for:
- Is the business seasonal with variation in sales throughout the week or year, or even throughout the day? Knowing this will help you staff the business and determine if there is enough revenue in the busy times to offset the quieter times.
- The location of your franchise business is important as there can be a difference between outlets in the same network. Go to the suburb you are considering – work out whether there are enough potential customers and check out your competitors. Examine your franchise agreement to see if you have an exclusive operating or marketing territory.
- Fit out costs can lead to a serious fall-out between the franchisor and franchisee. Confirm whether the fit out costs are fixed or if they’re estimates contact the contractors directly to clarify and agree how the fit out and costs will be managed to ensure you have enough money. Blowing the budget during the fit out can seriously impact the operating capital intended to run the business and jeopardise your success.
- Leases – check the terms and ensure your franchise agreement and lease terms line up.
Can I “try before I buy”?
Yes, but only a taste!
It’s very important to check out the Operations Procedures and Training Manuals. They should tell you exactly how to run your business: systems procedures, ongoing support, marketing – by the franchisor, your responsibilities to the franchisor regarding financial reporting, attendance at conferences and minimum performance criteria – onboarding, training for you and your staff and whether there may be any additionalcosts. Your compliance to these manuals may be tied to your franchise agreement so review this in the franchisor’s office if necessary before signing the agreement.
Do your values align, do you want the same things?
This is a deal breaker isn’t it?
You need to maintain the passion and commitment as this is going to define your life in a large measure for many years to come. Does the business match your experience and skills, are you passionate about the industry, the service and products, do you share the franchisor’s vision and believe in the company’s mission? Your genuine commitment to the brand will motivate your employees, inspire loyalty from your customers’ and ensure your profitability.
The awkward conversation
It’s the inevitable conversation that you know will determine the final outcome.
The agreement both parties undertake and the pledge they make to each other. The franchise agreement is similar – you may get a mountain of documents, so break them down and examine them page by page. Read every line in every document. Don’t be intimidated by the language – highlight anything that doesn’t make sense or you don’t agree with. Make notes on the side with questions to ask your accountant or lawyer, as you’ll get the best response from your advisors by identifying your concerns.
Looking at the circle of friends and family to get the bigger picture
Just like quizzing your potential partner’s friends and family to get some background, you will need to identify relevant business partners to speak to. Research the business on the internet, look up old press releases, go into several outlets and watch how the staff and customers interact. Most importantly, speak to other franchisees about life as a franchisee and what it’s like being part of the network. Mention any concerns, ask them about how responsive the franchisor is and see what independent verification you can get for everything they tell you. Speak with former franchisees and even competitors of the franchise you are considering, to gain as much information as possible.
Meeting the parents!
Nerve-wracking, but necessary!
Your interview with the franchisor (or recruiters) will be similar. You will answer questions about your background, intentions and ability to run the franchise. But it’s also the perfect opportunity for you to make a good impression and a chance for you to ask the franchisor questions about their business expansion plans. This can include details of training, locations and what expenses may arise. Lastly, understand their vision for the brand and identify the culture of the network to see if your values are aligned.
Take trusted advice before taking the big step
Under the Franchising Code of Conduct franchisors are required to provide a Statement of Independent Advice to franchisees prior to entering into the franchise agreement advising them to seek legal, business and accounting advice. You wouldn’t buy a house without a building or pest report or a conveyancer/lawyer to handle the contracts. Buying a franchise is no different – it is simply common sense to pay the relatively small amount to engage professionals to assist and protect you. Be certain to get the commercial and legal advice in writing and try to negotiate a fixed fee for the services.
DCS Group CEO and partner, Suzanne Jarzabkowska, heads up the multidisciplinary franchise team at DC Strategy.
She has achieved successful outcomes as an entrepreneur in the private sector, in the international NGO sector and in the franchise industry. Suzanne specialises in organisational behaviour, performance and change management, franchise development, risk management and conflict resolution. She writes and presents widely domestically and internationally advising franchise networks, private enterprise, public sector and not-for-profit organisations.