10 things you need to know when you buy a franchise
The South African franchise industry presents a mind-boggling array of franchises, and every month more are added to this fast-growing sector. Wonderful choice, but the bling generated by each franchise’s aggressive marketing can be blinding to someone looking for a solid business opportunity.
Fortunately, those prepared to work their way methodically through a number of basic steps will be able to cut through the clutter and find a franchise in which they can thrive, says Jeremy Lang, Business Partners regional general manager. He offers the following tips for someone looking to buy a franchise:
1. Know the industry
Choose a franchise in an industry that you know. Your industry knowledge is an important tool for judging the value of the business opportunity, to know if the business suits your personality, and to help you succeed. The ideal scenario is to have worked in an outlet of a franchise that you intend to buy. Failing that, work experience in a similar business is invaluable. Where even that is lacking, choose a franchise with a thorough franchisee training course, the bare minimum for any franchisee.
2. Choose within your budget
Work out what price range you can afford – savings together with finance that you would realistically be able to raise. There are a number of things to keep in mind here. First, too much finance can ruin your venture. Even if you can get it, be wary of overburdening your business with too big a loan. Second, calculate the entire investment required, including set-up costs and working capital. Do not limit your funding to just the franchise fee.
3. Check out the franchisor
The first two steps should dramatically narrow down your search and allow you to focus on a particular franchise. Now you have to investigate the franchisor. Start by having a look at the documentation the group provides, but go beyond that. Find out as much as you can about the reputation and financial help of the franchise. The business media and internet searches can reveal a lot about a company’s reputation. Membership of the Franchise Association of South Africa counts in the favour of a franchise, but it does not guarantee success.
4. Speak to franchisees and ex-franchisees
This is probably the most important exercise in the process. A franchisor should be able to give you a fully updated list of franchisees and ex-franchisees and their contact details. You can test all the assertions of the franchise group with the franchisees – their levels of support, the quality of their training, the profitability of the business, and the integrity of the franchisor’s business dealings.
5. Investigate the site
Just as important as the integrity of the franchise group is the suitability of the site that you are going to choose for your outlet, or, in the case of non-retail franchises, the area in which you are going to operate. You have to gain a truly deep understanding of the market around your site, not just merely the foot traffic past it, but what kind of foot traffic it is. Are they your target clientele? If you have access to advice from experts or the franchisor, use it, but do your own independent research to help you think deeply about it.
6. Get the value calculation right
You have to make sure that you are not overpaying for the franchise outlet that you have in mind, whether it is a new or existing one. Once you have done your due diligence and market research, sit down with an accountant to check your financial projections and value calculations. Industry specialists are helpful if you can afford them.
7. Get legal advice and knowledge
The franchisor will give you a franchise agreement to sign. This is a crucial document detailing the rights and obligations of you and the franchisor. Get a lawyer, preferably one with knowledge about the franchising sector, to go through the document with you, not only to make sure that it is fair to you, but also to explain any clause that you do not understand. While you are in a legal frame of mind, get to know your rights as a franchisee as embodied in the Consumer Protection Act.
8. Lease considerations
Don’t neglect to get legal and strategic advice on the lease you will sign with the landlord. Some franchisors may recommend that they hold the lease, which can help you if they use their clout to negotiate a good rental. But the disadvantage is that you lose some control over your business if the group ever decides to disband as a franchise.
9. Think before taking on a business partner
Do not just go into business with someone because it seems nicer than doing it alone. A business partner must add value, such as bringing a skill or capital that you do not have. Even so, you have to make sure that your values and expectations of reward are aligned.
10. In the end, it depends on you
The strongest franchise brand can still fail if you, the franchisee, do not make it work. Just as in any other business, your operational and cash-flow management must be sharp if you are going to make a success of it. Hands-on management is almost always required. And remember, if you are an experienced independent business owner and this is your first attempt at franchising, you’ll need to get used to operating according to the rules of the group.