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Top Considerations Before Purchasing a Franchise Business – Risks & Rewards

22nd January 2019 - Business & Marketing
Top Considerations Before Purchasing a Franchise Business – Risks & Rewards

Becoming a franchisee is a great way to break into the business world. With a modest sum of capital and a single stroke of a pen, you could become a proud business owner in no time.

But that’s not to say the endeavour is risk-free. In fact, almost 20% of new franchises fail within the first five years. Fortunately, you can mitigate the risk by doing a little research of your own.

Let’s take a look at the top things to consider before purchasing a franchise.

What is a Franchise?

A franchise is when a franchise system, typically a large corporation, leases an individual the rights to trade under their brand name. The individual then becomes the franchisee, and must follow strict rules in their trading practices.

More often than not, franchises fall within the retail and hospitality sectors. An example of one is this homecare agency. In Australia, there are currently approximately 1,200 franchise systems and 79,000 franchises.

Not All Franchises Are Created Equally

There are substantial variations between franchises, even those within the same overarching system. Examples include different fees, lease agreements, store locations, demographics, profit projections, and terms and conditions. Some franchises receive a high level of support from the system while others receive none at all.

For these reasons, it’s crucial to take your time and do thorough research before making a commitment.

The Pros of Purchasing a Franchise

The primary advantage is that you can buy into a well-established brand with a proven track record, thus lowering the risk of your investment. Independent business owners, for example, fail at a rate of approximately 80%, which is four times higher than franchises.

New franchisees typically need little or no prior business experience to succeed. Often, the franchise system will provide in-depth training, ongoing assistance, and a high level of support.

Operational processes such as marketing and policy are typically taken care of by the system. A new franchisee may be able to acquire a large amount of capital through low-interest financing from the system, enabling them to cover the rent and/or fit out of a high-value location.

The Cons of Purchasing a Franchise

No franchise system is a 100% safe bet, regardless of their size. If you were to search franchise UK and choose the biggest company, it would be naive to assume that you will be making a lot of revenue because of the franchise size. Big names such as Dominos, Caltex, and the Food Retail Group have all come under intense scrutiny regarding how they treat their franchisees. Some even collapse entirely, as was seen in 2018 with Oliver Brown.

Common complaints among franchisees include a lack of autonomy, high franchising fees, underwhelming results, excessive restrictions, and a failure to meet expectations.

What to Consider Before Purchasing a Franchise Business

Consider the following before making a commitment.

  1. How much capital do you have? It’s crucial not to overstretch your budget when purchasing a franchise. Remember that most businesses, even already established franchises, take a year or two to become profitable. Do you have enough extra capital to cover working operational costs?
  2. What’s the economy like? A sudden or sharp economic downturn is enough to put a new franchisee out of business, regardless of how well they run their franchise.
  3. What’s the competition like? Are your products and services better than your competitors? Are your prices competitive? If there are already a large number of similar businesses in the same area, the market could already be saturated.
  4. What’s the rental agreement like? How long is left on the lease? Could the landlord temporarily move your store to another location? Even something as simple as renovations or rent hikes could have a severe impact on your business.
  5. What’s the location like? Is there an adequate amount of foot traffic to feed your business? Do customers find the location convenient? If you’re expecting to be forced to undergo a fit out in the future, you could be forking out a lot of money.
  6. What’s the support like? Will the franchise system provide adequate ongoing support?
  7. Are your expectations too high? Most franchisees report feeling underwhelmed by their sales figures, especially in the first few years.
  8. Why is the franchise for sale? Did the former franchisee sell because they couldn’t turn a profit? Can you extend your franchise agreement or terminate/transfer it if things don’t go well?
  9. Are you up for the job? Becoming a franchisee requires strong sales, customer service, and managerial skills. You’ll likely need to work long hours, and the process could take its toll on your mental health.
  10. Are you a team player? As a franchisee, you’ll get very little autonomy, so it’s crucial you’re able to follow direction from the system, even when you strongly disagree.
  11. Is your family on-board? Will your spouse be able to tolerate you being away from home, low earnings, and the risk of failure?
  12. Is the product/service a fad? Be cautious about buying into a franchise that may only be profitable in the short term.
  13. What changes could the franchise make? A change in strategic direction could hurt your bottom line.

Buying into a franchise is a huge business decision. Success could see you secure your financial future, while failure could mean economic ruin. Consequently, it’s important to take your time and to do your research before committing.

In addition to the above considerations, seek out an independent assessment from a qualified agency and speak to other franchisees within the same system.

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