6 Questions You Should Ask Yourself Before Deciding to Become a First-Time Franchisee
Choosing to invest in a franchise can be a life-changing decision, so itís important you donít take it lightly. The business model can hold fantastic benefits for entrepreneurs who make the leap, but if youíre about to become a first-time franchisee, you should ask yourself the following questions.
Joining a franchise usually involves long hours and a lot of hard work in the initial stages Ė and once youíve signed on the dotted line, itís difficult to walk away. So, before you do, you should make sure youíre suited to the role of franchisee and choose the right franchise for you. To do this, ask yourself the following six questions.
1. Is there a demand for the product or service?
If youíve built up an idea of your perfect business, itís easy to get carried away with the excitement when the time finally comes to launching it. But, if youíre to set yourself up for success, you need to make sure thereís sufficient demand for the product or service you want to sell in your desired location. This isnít just about whether local customers would potentially like your offering; youíll need to think about whether they would actually spend their money with you.
Letís say, for example, youíre interested in opening a cafť. Investing in a business premises on a street with three other coffee shops is likely to be problematic. But choose a location among successful restaurants and fast food outlets, and you can be confident youíve selected a spot with limited competition but plenty of potential for food businesses.
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2. How much can I afford?
Before you start making a shortlist of franchises youíd like to invest in, you should work out exactly how much you can afford to hand over. The good news is, many banks are willing to lend up to 70 percent of the investment costs to franchisees, thanks to the relatively safe business model of the franchise.
If your budget is fairly low, you have two options:
a. Invest in a low-cost franchise opportunity Ė Running with the cafť example, if you wanted to join a franchise like Dunkiní Donuts, you could scale down your ambitions and put your money towards a smaller cafť business.
b. Think outside the box and invest in a different type of franchise opportunity Ė As sectors evolve, new types of businesses are coming forward, giving those with a limited budget the chance to get creative. For instance, in the cafť sector, you could consider starting a mobile coffee stall like Coffee Blue, avoiding expensive high-street rental payments.
When youíre doing your calculations, remember to account for ongoing fees. These contribute towards the training and continued support youíll receive, as well as the business as a whole and nationwide marketing campaigns. Theyíre generally charged as a percentage of the profit you make and are paid alongside other expenses like rent, equipment hire and staff wages.
3. Is the territory exclusive?
Many franchisors offer investors an exclusive territory; i.e. no other franchisees will be given the licence to operate within that region. Although this may not seem like an important factor, it can have a huge impact on your future as a business owner.
If customers can get exactly the same products or services in the same location, you could lose a significant portion of your sales, as they head to the other branch. Being granted an exclusive territory means you wonít be in competition with other franchise units in your area, so look out for this when browsing franchise opportunities.
4. Does it match my ambitions?
Once youíve found the right franchise for you, itís vital you make sure it matches your values and ambitions. Does the franchisor share your goals for long-term success? Do they operate ethically? Are they committed to franchiseesí development?
It doesn't matter how dedicated or passionate you are as a first-time franchisee, you won't be able to grow your business if the franchisor doesn't have a similar outlook and level of ambition to you. So, take the time to find out about their plans for the brand as a whole Ė and whether they will support your desire to open additional franchise units when the time is right.
5. Have I spoken to other franchisees from the network?
Talking to some of the businessí existing franchisees is a crucial part of the due diligence process. Thereís no reason for them to hide the truth, so theyíll be able to give you an honest account of their experience as a franchisee. Be sure to ask them whether the franchisorís financial projections were accurate and whether they suffered any setbacks when joining the company.
Good franchisors will encourage you to meet up with other franchisees in the network. Their success depends on your success, so they wonít want to welcome an investor making an uninformed decision and may not perform well in the future.
If a franchisor tries to stop you meeting franchisees or tries to cherry-pick who you speak to, this should serve as a warning sign; this may not be the best franchise to invest in.
6. What are my rights when it comes to selling up?
It seems strange to think about selling your franchise before you've even opened it, but it's essential you consider this early on. You may not have plans to sell on for a profit or move away from the area. But, regardless of the reason you may want to sell up in the future, you need to understand how you would go about it.
Franchise resales can be complicated and there are certain costs and restrictions you need to be aware of. The franchisor may implement early termination fees or maintain the right to choose the next buyer. You should check all the rules and regulations in the franchise agreement before you decide the franchise is right for you.
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Get it right
Buying a franchise is no guarantee of success but being prepared and understanding what it means to be a franchisee will help you on your journey. Take the time to assess the market, read about your rights and talk to those already in the business. Only then will you be on your way to running a profitable franchise unit as a first-time franchisee.
Remember Ė franchising can be the key to a successful career in business ownership, but itís not for everyone. Before you start asking yourself all the questions listed above, make sure youíre 100 percent sure the model is right for you. If you canít decide, see our article: How to Evaluate Whether a Franchise Opportunity is Right For You.
And, when youíre ready to get the ball rolling, see our Franchising 101: The Official Franchise Start-Up Checklist Part 1 and Part 2.
Alice Tuffery, Point Franchise ©
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