franchising aspects Oct, 29 2010

Judging The Financial Health Of Franchisors

Financially strong franchisor lays the foundation of a successful network of franchisees. Prospective entrepreneurs, therefore cherishing a dream of owning a franchise business need to select a financially stable franchisor. However judging the financial

By Abha Garyali
Sub Editor
Judging The Financial Health Of Franchisors

The franchise industry in India is witnessing a remarkable transformation over the past few years. There has been a tremendous increase in the availability and acceptability of unique franchise concepts. With this growth of franchising aspiring entrepreneurs find it difficult to select the most suitable franchise. Also, the availability of various franchise business options in the market has given rise to fraudulent franchises. Aspiring franchisees must be cautious before investing in any franchise business. Judging the financial strength of any franchisor is one of the important criteria of selecting a franchise. Therefore, entrepreneurs must carry out extensive research about the financial history of the franchisor. This article gives an insight in to the ways, an aspirant can learn about the financial stability of a franchisor.

Risk in investing in an unstable franchise

A franchisor with a successful business at the initial stage, becoming unpopular later on is not a safe bet for investment. This is because of the following reasons:

  • Risk of business shut down: Investing in a franchise company that is financially unstable is a big risk, as the parent company can go out of business or face bankruptcy. This can lead to a complete shutdown of the franchise business.
  • Inefficient training: Lack of finances in the franchise company may lead to inefficient training and support causing dissatisfaction among franchisees. 
  • Increase in franchise fee or royalty: Deflation in the parent company can also lead to a sudden increase in franchise fees as well as royalty fees.
  • No marketing support: The franchisor may not be able to provide his franchisees marketing support that is essential for the success of any outlet.

Judging the financial condition of franchisors

Aspiring franchisees keen on investing in any franchising business should explore the financial history of the company. The first criterion for selection is to find out the financial condition of the parent company. Other things in the list include training being offered to franchisees, location of company, region offered to franchisees etc. Few other factors for judging the financial stability are given below:

Franchise fees versus royalties: It is well known that post franchising a company collects more revenues from the franchise fees and royalties offered to it. But being an aspiring entrepreneur you should be aware that whether the franchise company is making more money from selling its franchises or through the royalties paid by the old franchisees. It is imperative to study these details as it should be kept in mind that a company that generates more profits by royalties is safer than a franchise relying only on sale of franchises. This is because franchise company cannot always continue to sell its franchises at the same frequency as in the beginning.

Perfect equilibrium between fees and royalties: Investing money in a company that maintains a perfect equilibrium between the franchisees sold and royalties generated is always sure to have a strong financial background.

Regular royalties paid:  Royalties are the profits made by franchisees. A company getting regular royalty display that its franchisees are satisfied and are making profits in their business venture.

Nature of franchisor: Moreover, aspirants should also try to find out whether franchisors invest a part of their profit in other lucrative avenues as a back up of any financial crisis in future. . Therefore always make your selection after carefully studying the franchisor besides the company.

Hiring franchise attorney

Most of the aspiring entrepreneurs are basically novices in business arena. For safeguarding yourself and your money it is always wise to take the help of a professional franchise attorney. To make sure you have all the information about the company, you must hire a solicitor. This is because an efficient lawyer will be able to study the growth and development of the company in the last few years. In many cases, a franchisor may witness a steady growth in the beginning but may face stagnation afterwards. As a result, he may have limited resources and financially unstable. Therefore, only a lawyer can conduct a proper research and guide you on the path to success.

Therefore, it can be said that knowing the financial background of any franchise company is essential for aspiring franchisees. Decision taken without complete research can ruin the franchise business opportunity.

Related: The On Paper Franchising Checklist

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