Here's a list of things that you should consider before starting a franchise business.
Franchise business has become popular in almost every industry now. It is a lucrative business opportunity for budding entrepreneurs. If you are thinking of foraying into a franchise business but are deterring because of lack of knowledge in the franchising world, then let’s offer you a complete guide to franchising.
1. Evaluate your current situation
Before starting a business, you should evaluate what is your situation today. Some of the things that you can look for are whether you want to start the business by yourself or your family will be there, whether you are working or unemployed, etc.
2. Write about what you want
You should always write down whatever you are looking forward to achieve. It will help you evaluate yourself as to what you are looking for.
3. Think why entrepreneurship
You need to think about why you are considering running your own business. When things get hard, you need to remember why you chose this business.
4. Assess how you will do it
You need to assess the different business ownership models that are available in the market. You have to evaluate your family condition, financial situation, budget for starting the business.
When you are looking to become an entrepreneur, there are only three options that you have. Either you can start an Independent Business, or you can buy an Existing Business, or you can buy a franchise.
Before opting for starting an independent business, please consider these pros and cons.
- What is your experience: You need to see what are your background, learning, and idea. Think about whether your idea is great or does it have possibilities.
- Capitalization: If you feel that you are undercapitalized, this is not an option to get into. However, if you feel your idea is great, you can get yourself funded.
- Unlimited possibilities of a business idea: There are unlimited business opportunities that you can choose if you want to start your own business.
- Marketing and sales: Marketing and sales will be something wherein you will be completely independent. It’s you who has to start your own business, so you will be the master and owner of taking decisions in your firm.
- High risk with no support: Since you are starting your business on your own, it’s a high-risk proposition with no support. But, there are a lot of service groups, entrepreneurship cells, peer-to-peer groups that are available for guidance.
- Location selection: If you have selected the wrong location for carrying out your business, then it will never be successful.
- Hiring accountants: In order to run an independent business, you need to hire accountants.
- Backend support: You will need a lot of backend support for all the things that you do not know.
- Low cash flow: You will have a low cash flow initially since you have to do everything on your own. You need to keep your overheads minimal and need to manage the cash flow accordingly.
Look out for these pros and cons before buying an existing business.
- Current cash flow: Existing business is a running business so you will have the current cash flow available.
- Existing customer base: This type of business will already have an existing customer base because somebody who started this business would already have run it for quite some time.
- Existing reputation: You will have a lot of existing reputation.
- Previous financial records: You have the earlier financial records of the business that will help you in the future.
- Current staff and systems: You will get the trained staff since the business is running, they have been taking care of customers and serving them well. You will be refining systems rather than making them.
- Accuracy of financial records: You don’t know about the kind of financial records or books that have been maintained by the previous owner.
- Debt acquisition: When you purchase a company, you need to see if there is a loan, a vehicle, or anything that is debt to be sure of the situation.
- Previous owner dependency: Since you are buying a business that is currently running, you will have a lot of dependability on the previous owner.
- No support: Once the person sells the business to you, he has no obligation towards you so you won’t be getting any support.
- Unknown and unseen problems: You will have a lot of unknown and unseen problems so you require a lot of due-diligence before-hand before buying an existing business.
- Lack of documentation: Sometimes when an entrepreneur starts a business himself, they don’t make an operational manual. Therefore, it gets very difficult to run a business without having any manuals.
Franchising means rights to exercise so when you pay somebody fees, in return, they give you his brand name and share his business know-how with you. So, he gives you his name, system, and in return, you pay fees to the company. Some of the pros and cons of starting a franchising business include:
- Proven Model: The business that the person is doing is a proven business model. The person would be taking for a business for a while so he would have partners in place. When you invest in someone’s proven system, the chances of losing your money decreases.
- Brand recognition: The larger the brand is, the more the recognition is. Choosing a franchise makes it easier for your brand to stand out above your local competition. Franchises bring brand awareness with their names from day one. Therefore, customers will know about your products that will increase your sales.
- Operational manuals: You get your operational manuals ready and that’s what you get associated with. It’s a proven business model with operating manuals in place.
- Training and Support– The moment you sign up with a franchised system, they give you training which is upfront. They give you support which is ongoing.
- Guidance: You get a lot of guidance and handholding from your franchisors in the initial years. When you tie-up with a franchisor, he tells you how to manage the business locally. You will also get a lot of support from existing franchisees.
- For yourself not by yourself: The franchise business is for yourself but now by yourself. This means you are running your own business but not sailing the ship alone.
- Site selection support: When your start-up is a franchise, you will be getting extensive support from your franchisor. He will help you in selecting the apt location for starting your business.
- Marketing support: Franchisor will also help you in marketing your business.
- Supplier discounts: You get supplier discounts and there is an economy of scale that is worth there. You will buy something for yourself for one unit but the principal company buys for many of the franchisees together.
- Existing sales process: The existing sales process is already in place.
- Potential national accounts or national online orders: If you take up a franchise of an e-commerce company, you get a national account that gets institutional orders.
- Exit strategy: In this type of business, there is an exit strategy in place. If you wish to sell the franchise then you will have everything that is required to do so like manuals, accounting systems, which will help you sell your business ahead.
- Pay franchise fees between 1-50 lakhs: You pay a franchise fee to the franchisor between 1-50 lakhs towards all the support, manuals, research & development, and the brand name that he provides you.
- Royalties: You pay royalties to a franchisor every month. You don’t pay them if you start your own business or buy an existing business. Royalties vary between 4-10% from the top line business that you do.
- Follow the rules: You need to follow the guidelines created by the principal company as a franchisor.
- Need approvals: If you want to make any change in your business, you can’t do it on your own. You have to get approvals from the franchisor to change anything in the business system that is going on.
- Potential territory restrictions: As the principal company will be having other franchise partners also, you will be given your own geographical territory to work in.
Franchising seems like the best investment opportunity as you are most likely to gain profit right from the beginning of the business if the business model is proven. Investing in a franchise business is one of the most sought-after options by budding entrepreneurs due to the advantages it offers.
There are different kinds of franchise options that you get once you are interested in buying a franchise business.
You can own a unit franchise which means that there is one area or one outlet that you want to take up as your own business and you would operate that.
In this, you will get multiple outlets or centres from the franchisor. It is largely advised to somebody who is experienced in running many units in the business or a seasoned investor or a seasoned entrepreneur wherein he would be able to manage as there is a lot of operational responsibility when it comes to multiunit.
This means that you would get the rights to the franchise and you would sell the franchises ahead and help those franchisees in operations.
This option gives you national rights for a particular brand. For eg: if a brand from one country looks to enter another country and it ties up with somebody who wants to take the brand to that county, then he gets the right to develop that franchise throughout the nation. The master franchise typically has operational and development responsibility.
Here you are into an existing business that is of a similar nature to a company that you want to take a franchise for, so you go to the brand and talk to them and convert your company into his brand. This is what the conversion franchise is.
Once you have decided to opt for the franchise business, then there is a franchise process wherein you should do as much research as you need to before you feel comfortable in taking the step to become a franchisee.
Research options – Do the research before buying a franchise. If you like the product that doesn’t mean that buying a franchise is a good business decision. You need to get into research options very diligently.
Inquire – You need to inquire about the company in which you are investing into.
Franchisor research – You also need to research your franchisor carefully.
Compare – You need to compare franchise opportunities with one another. Look what are the benefits and support systems you are getting from a company and compare them with other brands.
Discovery days –Attend a lot of discovery days. There are companies who do discovery days wherein they elaborate on what is it that they would be looking forward to give to franchisees.
Secure funding – It is important for you to sit on the money once you start the business. Initially, when you get into the business, it might not give you profits so you should be ready for it.
Review with advisors – You need to review things with your advisors that could be personal or professional help that you can get before getting into any of the franchises.
Decide – You need to make a decision as you can’t look for the best franchising company forever.
Here are some of the factors you should consider before buying a franchise:
Understand your budget
You need to know your budget before entering into franchising. You will be required to pay for the location, the staff, the material, and other necessary things. Therefore, it is important to understand your budget carefully and then look for companies that match your criteria.
Research your market
When you are looking to begin a business, it is important to understand the market and its demands. You need to know the requirements, the different brands, and then decide what you want to opt for. Never ever rush into a business without proper research.
Inquire about brands
You need to inquire about the company which you are investing in. You need to compare franchise opportunities with one another as there are various brands in the market that are open for franchising. Look what are the benefits and support systems you are getting from a company and compare them with other brands.
Once you decide to go with some particular company, it is your duty to conduct thorough research about the franchisor. It is important to understand their business model and know their track record before investing your hard-earned money into it.
Demand for the product
If you just like the product that the franchisor is offering then buying a franchise isn’t a good business decision for you. You need to research your target audience and see what the demand for that particular product is in your selected location. You need to see who will buy your products.
Find out more about your competitors. If your selected region has many businesses offering a similar product, then you may need to reconsider your choices of investing in that particular franchise. This is because you may not be able to capitalise on the consumer base to its fullest. Before selecting the right franchise, it is a crucial thing to compare different franchise brands and their competitors.
Build your business plan
You need to build your business plan in order to smoothly run a business and evaluate your options. It will also help you in discovering any weaknesses in your business idea so that you can address them beforehand.
Cash flow projections
Cash flow forecasting is really important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.
See how much manpower is needed for starting a business. It will help you calculate your expenses and manage your budget.
Training and support
You need to understand the training and support system that has been led down by the company. Franchisors train you according to the company's demand by providing full support. The companies that provide training and support at every step are the best ones to take franchisee of.
Franchise fees and royalties
Carefully look at how much franchise fees and royalties the brand is charging. A royalty payment is usually made monthly or quarterly. The most successful franchisors take great care in determining what their required royalty fees will be.
You need to see a long-term growth plan from something that you are getting into. Before investing huge money in buying a franchise, you need to look into the future prospects of the brand and what is the potential it holds in the near future.
Once you have taken up a franchise, there are certain rules and regulations that you have to follow. Franchisor offers the guidelines that are made with prior experience and expectations which the franchisee has to follow.
You should definitely consider these pointers before buying a franchise. They will help you in evaluating your options and make you successful in the longer run.
Franchise agreements - It’s a legal document that we sign with a company. You need to go through it in detail, read and understand the document completely. You need to understand things like how long is the franchise term, whether you have rights for your geographical area or not, what happens if your business is not performing, and what are the exit options.
Financials – You need to analyse and assess the risk involved in it. Every business has a risk but it’s good to assess the business first so that you can be prepared for the hard times.
Trade Marks, IP, and registration – A franchisor who has a particular brand needs to have these trademarks, intellectual property rights, and the registrations in his name.
Know your obligations, strengths & weaknesses – Before getting into any business, you need to be sure that these are your obligations, strengths, and weaknesses. It’s important to know yourself.
Do not be pressured into signing – Do not go ahead into signing anything until and unless you are hundred per cent sure. You should take an informed decision so don’t get pressurised.
1. How did the business start?
2. How long was it established before it became a franchise network?
3. How long has the business been franchised?
4. Who founded the franchise?
5. What are their background, experience, and skillset?
6. What are they really selling?
7. How long did it take for them to reap the profits from their business?
8. How many hours do you dedicate to your business on a daily basis?
9. Ask them how much time they spend in their business on a daily basis.
10. What’s their biggest competitive threat in the marketplace?
11. What’s the biggest opportunity?
12. Are there any benchmark targets in place that need to be achieved by the franchisee?
13. Ask them about their competitors, especially those operating in the local market.
14. What’s happened to the market over the past five years?
15. Where do you see the company five years from now?
16. Are you planning for any major strategic changes in the concept or the product in the coming years?
17. What major changes have the CEO implemented in the past three years?
18. Will there be any financial assistance from the franchisor?
19. Is he responsible to find a location for the franchisee?
20. What criteria are used to find the right location?
21. Does the franchisor negotiate the lease on behalf of a franchisee?
22. Will he provide support with employee recruitment and training?
23. Are the operations manual up to date and accessible?
24. Who would manage the refurbishment of the sites, if they are needed?
25. How much do you spend on research and development?
26. What support do you provide to franchisees that help them build revenues during their first six to 12 months of operation?
27. What support will I receive on a day-to-day basis?
28. Is there somebody in the company who works in the franchise support department?
29. In what ways do they collect best practices and share them with franchisees in their system?
30. What key performance indicators (KPIs) do they share with franchisees?
31. In what way KPIs are shared with the franchisees?
32. How do they support underperforming franchisees?
33. Are franchisees encouraged to meet regularly as part of a more extensive support network?
34. What does the initial training involve?
35. Is there any cost involved in initial training?
36. What are you trying to accomplish with your advertising?
37. Will there be any control as a franchisee on the marketing decisions?
38. What is the success rate of franchises?
39. What is the most significant challenge that franchisees face?
40. What percentage of franchisees renew their franchise agreements?
41. How many are the existing and prospective franchisees?
42. Where are all the existing franchisees located?
43. What is the satisfaction level of the current franchisees?
44. How are disagreements resolved?
45. What is your biggest franchise disaster?
46. How many franchisees have been closed so far?
47. Are there any plans to sell the business in the next five years?
48. Do owners plan to pass the company on to their next heirs?
49. Any litigation that the company has experienced?
50. Can a franchisee sell-off?
51. Is there an exit strategy?