Article provided by Xero
Franchises are built on proven concepts, with market-tested products, and they often come with business systems that make admin straightforward. There’s a lot to like. But there are also risks to consider. Here’s how to check if a franchise is right for you.
Franchise reality check
A good franchise can take some of the guesswork out of starting a business, but they’re not failsafe. Risks include:
- high startup costs – you’ll pay a fee to sign up
- staffing requirements – you’ll probably need employees from day one
- extra overheads – you’ll have monthly franchise fees and payroll costs
- demanding sales targets – you’ll likely be in a low-margin, high-volume business
- limited control – you won’t have complete autonomy over your business
Not all franchises are created equal. Some give you great advice, heaps of support and excellent business systems. Others will sell you a logo and leave you on your own.
Becoming a franchisee can be hard
The good franchises know they’re good. If their locations are consistently profitable and they give you really good support – they’re probably going to demand more of you, too. They may expect you to:
- have business experience
- have industry experience
- be an enthusiastic brand evangelist
And if you join a successful franchise chain, you may have limited control over the business. It’s worth asking questions before taking the leap. Here are some questions for:
- the franchisor
- other franchisees
- an accountant
- a lawyer
Questions for you
Becoming a franchisee is a massive commitment. You’ll have a lot of legal obligations, you’ll spend a lot of money, and you’ll work very hard. So start by checking that the franchise is a good fit for you.
- What level of support do I need?
Are you comfortable taking the initiative and figuring things out on your own, or do you want a franchise that provides a detailed manual?
- How much risk am I comfortable with?
Will you be comfortable taking on debt to buy into the franchise and hire staff? This isn’t like starting as a sole trader, where overheads can be relatively low.
- Do you trust the franchisor?
Your franchisor can make or break you so get to know them. Check they’re not involved in court proceedings, ask other franchisees what they’re like, and make sure you’ll get on.
- How do I want to run the business?
Some franchisors give you a lot of freedom to do your own thing, others give you strict parameters. Make sure their management style fits with your personality.
- How much can I afford?
Those first few months will be lean. You’ll have a lot of launch costs, ongoing franchise fees to pay, and low income as revenue takes time to ramp up. Make sure your first budget is realistic and check that you’ll have ample cash (or finance) to get through it.
Questions for the franchisor
Don’t be afraid to interrogate the franchisor. You need to figure out if they have a sustainable business, which will require a lot of questions. If they’re a good franchisor that cares about their franchisees, they won’t mind.
How’s the business doing?
Start by getting a summary of the business, including a report on sales, revenue, and growth. You’ll also want to see forecasts and goals, but remember there are no guarantees those numbers will be realistic. Now’s also a good time to check the bios of senior management to ensure they’re reputable and experienced.
What’s the outlook for new franchisees?
Once you’ve seen the big picture for the whole business, ask how the franchisees are going. Are they making money? What does a franchisee budget look like (you’ll want to see what sorts of costs are involved)? Ask if they have models for predicting revenue in new locations.
Not all franchises have this level of data and so their answers to these questions may be vague. That doesn’t mean they’re a bad business, but you’ll have to be comfortable with doubt and risk before becoming a franchisee with them.
How strong is your data?
A franchisor may show you market research and financial projections but don’t accept it at face value. Make sure the data is reliable by asking:
- when the research was done
- how many customers (or stores) were involved in the study
- what the assumptions were
If you’re not confident interpreting data that they give you, take a copy to an accountant.
What are the main teething problems?
Ask them what franchisees struggle with in the early days. A good franchisor will be happy to share this information. They’ll want you to avoid common traps and pitfalls. If they can’t give you specific direction, it’s a sign they’re not concerned about their franchisees.
What are the key performance indicators (KPIs)?
The business you’re buying into has been repeated again and again by multiple franchisees. The franchisor should have learnt what separates the successes from the failures – and they should share that information with you in the form of KPIs. These will be 3–5 key things that – if you get them right – will greatly increase your chance of success.
Can I speak to other franchisees?
The franchisor should introduce you to existing franchisees. Ask for franchisees who are in similar locations to yours. You’ll want to speak with those people before becoming a franchisee yourself. Don’t feel obliged to accept the first list of contacts they give you, if you don’t think those franchisees are in a relatable situation.
Do you provide proven business systems?
See if the business has established processes to guide you through things such as:
- customer service
- health and safety
It’s even better if they give you access to automated systems for things like accounting, time-recording, payroll, inventory management and customer relationship management. Efficient systems for these business functions can save you a lot of time and money – and increase your chance of success.
How will growth be handled?
Will the franchisor provide good marketing support to help grow the business? And when growth happens, how will the franchisor manage it? You probably don’t want another franchisee to move in across the road, so see if you’ll get exclusive access to the local market.