It is critical for you to do as much research about potential franchisors as possible, so can make an informed decision about which franchise you will eventually buy into.
There are some basic things you should look at when evaluating different franchises.
- Profitability – Both the franchisor and individual franchisees must be financially healthy
- What is average start-up cost, average unit sales, main expense categories, gross and net margins for the business, best practice income and expenditure models and how long does it take to break even and then make a profit?
- A track record of success – Is this concept viable? Has it succeeded elsewhere? Does the franchisor have a good credit rating?
- A strong USP – a business that stands apart from the competition
- Effective financial management and other controls
- A positive image – the public should have a positive image of the franchisor, since the business is based on its reputation.
- Integrity and commitment – If the franchisor has strict criteria and spends a lot of time screening the franchisee, it means they want only the best franchisees, ensuring a greater chance of success.
- A potential franchisee should seek opportunities in industries that are growing
Assessing a franchisor
Here are some questions to ask about a franchisor:
- Does the franchisor have an own contribution policy?
- What does the franchisor offer in terms of marketing, training and aftercare?
- Is the franchisor willing to co-operate with the franchisee and his financier, should the business fail?
- Is the franchisor financially strong? This can be determined by checking financial statements to ensure the franchisor is solvent.
- Does the franchisor have future expansion plans and what are they?
- Is the franchisor a member of FASA (see FASA’s website: www.fasa.co.za)
- How long has the franchisor been franchising?
- How successful are existing franchises?
- How many franchise outlets are operational? What is the failure rate or closure rate of existing stores?
- How many company-owned stores are there?
- What image does the franchisor portray?
- Are there franchisees with multiple stores?
- When dealing with the franchisor’s people, how well do they treat you?
There are a variety of sources the entrepreneur can use to learn about a franchise opportunity. Probably the most important person to interview is a current franchisee; and read the Franchisor’s Disclosure Document.
Can you afford the franchise? There are many financial implications of becoming a franchisee, including an upfront fee and start-up costs. And on an on-going basis, you must also provide working capital, pay periodic franchise fees and make provision for living expenses.
It can take several months or even longer before the cash flow of the business is strong enough to cover expenses. Most franchisors also require the franchisee to fund between 30 –50% of the complete investment from their own resources.
Can the franchise afford you? You can decide what you’ll earn – on paper. In practice, the business may not be able to support the lifestyle you have become accustomed to.
Research, research, research and ask as many questions as you can. Buying into a franchise is a major life-changer, so have all your facts in order before you take the leap.