Five things not to do when buying a franchise
Buying a franchise is a huge decision to make. Even though youíre investing in an established brand name and have the support of the franchisor, you still need to be prepared to work hard and be driven to achieve success.
As with starting any business, you need to do your homework. You should only enter into a franchise agreement after performing thorough due diligence. It's often more challenging to get out of a franchise contract than it is to get into one, so you need to be sure that you've found the right business partner before you commit.
It can feel overwhelming when you first step into the franchising world. There is so much to learn and itís vital you understand what youíre getting into before you become a franchisee. We want to make sure your route to becoming the boss is as smooth and straightforward as possible, so weíve created a list of five things you should never do when buying a franchise.
1. Don't be rushed into anything
Excitement, nerves, enthusiasm; when you're about to start your own business, you're likely to be on a rollercoaster of emotions. But don't let your feelings cloud your judgement or lead you to rush into a decision before you're ready to do so.
Due diligence is not just a list of tasks you have to tick off before signing a franchise contract. Itís a process that takes as long as it takes. You shouldnít consider the job done until youíre confident youíre making a fully informed decision.
Don't set a time limit on your research and don't feel pressured into agreeing to anything before you're ready to. If a franchisor is insisting you make a payment or sign the agreement before youíve completed your due diligence, this should act as a red flag. It's in the franchisors' interests that you only become a franchisee if youíre absolutely certain that itís the right move for you. If youíre feeling pressured, then proceed with caution.
Finding out further down the line that the business isnít right for you can have disastrous consequences. Not only do you risk losing your investment capital and wasting days, weeks or even months of your time, but you damage the reputation of the entire franchise.
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2. Don't take the franchisor's word for it
When a franchisor presents you with financials, you shouldnít be afraid to ask them how they have arrived at these figures. Make sure they prove the franchisorís claims, rather than disprove them. Also, you should remember that any projections provided should only serve as guiding statistics for you to develop your business plan and forecasts on.
You donít just have to rely on the numbers the franchisor gives you; you can find copies of filed accounts for the business. These are documents that can be viewed by the public and theyíll provide you with an accurate picture of the financial status of the company. If youíre not familiar with financial documentation of this kind, you should consult an accountant who specialises in franchising to help you understand the figures.
Of course, the amount of money you can make isnít the only factor to consider when buying a franchise, but it does play an essential part in your decision-making process. You donít want to buy into products or services that donít sell. However, you should also consider job satisfaction, flexibility and support, which is why it's vital to back up the franchisors' claims with your own findings.
To find out more about the experience of running a franchise within a business, you should talk to existing franchisees. They have no reason to lie to you, and should be able to give you a better idea of whether the franchisorís claims live up to reality. If they tell you they received inadequate training or are disappointed by their profit margin, you should be wary of the franchisorís assertions.
If the franchisor tries to avoid giving you their franchiseesí contact details or tries to steer you towards particular franchisees, this is a clear indication that something is wrong. The chances are, theyíre trying to hide something, so you should walk away and find a better franchise opportunity.
3. Donít spend more than you can afford
Many people believe that franchises cost a lot to buy. Itís a common myth but, with over 900 franchise brands operating in the UK today, there is bound to be a franchise opportunity that suits almost every budget. Needless to say, if you want to invest in a McDonald's or a Starbucks franchise unit, you'll need to have a lot of capital, but there are many affordable franchises available too.
To find out how much you can afford to invest in a franchise, you should start by listing your assets and your liabilities. The difference between the two is known as your net worth. Most franchisors set a minimum requirement when it comes to your net worth, so bear this in mind when reviewing franchise options.
Itís unlikely your franchise will be profitable immediately, so you should make sure you have enough capital to operate until your business starts to make a profit. Running a new business is challenging enough as it is, without the added stress of not having enough money. The most important thing is to avoid investing in a franchise where you may be undercapitalised.
By choosing one of the more affordable franchises available, you can achieve profitability sooner than if you select a business with a high initial fee and many overheads.
4. Don't keep quiet
Starting a franchise can be daunting. There will be parts of the contract and the business model you donít understand, but you shouldnít feel embarrassed to ask questions. Franchisors and other franchising professionals wonít expect you to know everything there is to know when you first enter their world. Thereís no shame in asking people to explain elements of the franchise operations, processes or documentation to you.
The franchisor has a wealth of experience, so prepare a list of questions for them before you meet. Once again, if the franchisor can't answer all your questions, take the time to speak to existing franchisees from within the network. They will give you an honest opinion about what the franchise is like to be a part of and can help you fill in any gaps in your knowledge.
Also, take advantage of all the opportunities you have to find out more about the franchise model and particular businesses. By attending franchise exhibitions and business discovery days, you can prepare yourself well. Discovery days are particularly useful, as they enable you to immerse yourself in the culture of the business to gain insight you wouldnít get if you simply met with the franchisor.
You shouldnít sign up to buy a franchise without fully comprehending what your responsibilities will be as a franchisee. Consider consulting a solicitor that has franchising expertise to help you understand the terms of the franchise disclosure document and the franchise agreement. Work with them to question any terms you deem to be unfair, as there may be some room for negotiation with the franchisor. The initial cost of hiring a solicitor may seem expensive, but your investment will pay off in the long run, when youíre the happy and successful franchisee of a profitable franchise unit.
5. Don't think you need to know it all
The franchise model is ideal for aspiring franchisees who donít have any previous experience of business ownership. This is because you get access to all the training and support you need to be able to own and operate your franchise. Embrace this and take every opportunity to learn.
The franchisor will have spent years developing and improving their business model, making mistakes along the way. Thankfully, you donít have to make the same mistakes; you just benefit from the knowledge they gained. Although it may seem demeaning, it can be incredibly helpful to accept that the franchisor has all the know-how and expertise needed to run a successful franchise. Take on their advice earnestly and be willing to learn as much as you can. Youíve paid the franchise fee, so get the most you can out of the opportunity.
You donít just have to learn from the franchisor, though. If theyíre diligent, theyíll organise regular franchise conferences and meet-ups. This gives you the chance to get together with other franchisees in the network and share insight. In the first few months of your business venture, this can be invaluable.
Unlike the franchisor, the people you meet will have been in the same position youíre in now, so theyíll probably be able to offer useful advice. This is likely to be useful not only for your business, but for your emotional wellbeing too. By forming bonds with like-minded business owners, you can share your concerns or troubles with people who will probably respond with compassion and understanding.
Alice Tuffery, Point Franchise ©
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