The concept of franchising is a win/win for both the franchisor and franchisee. It's an excellent way for brands to expand their reach without putting forth a lot of money upfront. They expand by using the franchisee's money. Those who wish to get into business without having to start from the ground up may want to consider starting a franchise. This can allow them to start seeing profits faster than they might with a new and untried business concept. That's because when you buy a franchise, you're buying an already-established brand and a product that has been tested and proven. That doesn't mean that every franchise opportunity is right for everybody. It's important to analyze a franchise opportunity before you jump in. So, how do you analyze a franchise opportunity?
What Does It Mean to Analyze a Franchise Opportunity?
Analyzing a franchise opportunity is the same as evaluating a business opportunity. It means taking a closer look at everything about the franchise before you decide if it's the right franchise for you. If you're new to buying franchises, you might have a franchise lawyer or franchise consultant help you analyze the franchise you're considering. This can help you avoid some of the pitfalls you might overlook as someone who is new to franchising. There are numerous things you want to look at when you are evaluating a franchise. Some of them come to mind right away, and others might not even come to mind. One of the first things you want to do is talk to those who are involved with the franchise. This doesn't mean just the franchisor. Don't forget to speak to other franchisees. Ask direct questions about the annual sales they generate, how long it took for them to get to that level, and how helpful the franchise was in helping them generate increased revenues. Other questions to ask include:
- How much advertising does the franchise do and what is the cost to you?
- How intensive is the franchise training?
- Does the franchise protect your territory?
- How available is the franchisor to its franchisees?
- What are the key performance indicators of the franchise?
- What are the costs of growing your business?
Costs go well beyond the initial cost of purchasing the franchise. You need to be aware of these costs versus the annual income. Some of the costs you need to take into consideration include:
- Franchise Cost – This is the upfront purchase price of the franchise which often includes training, franchisor support in helping select a franchise location if there isn't already one. It also includes the right to use the company brand and products.
- Ongoing Franchise Fees – Fees paid to the franchisor quarterly or yearly. This could include royalties, equipment fees, supplies, etc.
- Rent and Utilities – You'll want to figure these out when you are evaluating the cost of doing business with income generated by the franchise.
- Legal and Accounting Fees.
- Build-Out Costs – Are you required to pay for physical location if one doesn't exist? This varies from one franchise to the next.
What About the Franchise's Reputation?
The reputation of the franchise you are buying into is crucial. How do consumers see the brand? What about how the franchise treats its franchisees? The more respected a brand, the more likely you will benefit by being a part of the family. Ask about the brand's values. You may not agree with their political or moral stances, which could make it hard for you to work in line with the franchise's visions. These are not necessarily monetary issues, but they could affect your relationship with the franchise down the line. Are you required to pay for a physical location if one doesn't exist? This varies from one franchise to the next.
Always Refer to the Franchise Agreement and Ask Questions
In the end, there will be a franchise agreement signed. The franchise agreement will cover franchise fees, including royalties, advertising obligations, your rights with licensing and use of brand trademarks, training, quality control expectations, legal fees, default, damage, and complaint limitations, franchise termination rules, and other stipulations. This single document will answer a lot of your questions and help you make an informed decision before you buy a franchise. Get your hands on it as soon as possible and take it to a franchise lawyer who can help you break down every clause in the document. Know what you're getting into before you sign.
Most importantly, as we've already mentioned, don't rely strictly on what the franchisor has to say about expected revenues or anything else about the company. Talk to several franchise owners and get an average income expectation. Consider their locations versus where your franchise will be located. A franchisor is always going to give you the highest estimation of potential earnings. You want to get solid information from those who have already been operating a franchise for several years. This allows you to gather more accurate information about the franchise you're considering.
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