When not to franchise

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When not to franchise

A franchise business opportunity can be an attractive way for budding entrepreneurs to become business owners. And itís easy to understand the appeal. A franchise company has a proven business model that can save you time, energy and money compared to starting your own business from scratch.

Although the good franchises outweigh the bad, you should still be cautious when you're assessing the best one for you. It's essential that you perform thorough due diligence before you sign a franchise agreement.

A franchise contract is a legally binding document, and so you should only invest in a franchise business opportunity if youíve done your homework and youíre happy that youíll receive all the training and support you need.

If youíre considering becoming a franchisee, then here are some tell-tale signs that the franchise may not be all it claims to be:

1. Lack of franchising experience

A well-established franchise has been tried and tested, both by the franchisor and other franchisees. The franchise model will have been developed and improved by the franchisor, so you don't have to make the same mistakes that they did to become a success.

There are many ways that you can check the track record of a franchise that you're interested in:

  • View its public accounts. If the franchisor is a company registered at Companies House, you should be able to view the latest accounts online. But if the franchisor is not a registered company, or hasnít filed any accounts yet, you should ask them to provide you with financial information. After all, if the franchisor wants you to invest, they should have no issues with sharing details about the franchise financials with you.
  • Ask for franchise pilot results. If the franchise is relatively new, they may not have a detailed financial history to share with you. If this is the case, then ask the franchisor for the results from the franchise pilot. Most franchisors will have run a pilot lasting between one and two years to prove the franchise concept. The data from the pilot should give you the information you need to make an informed decision.
  • Get in contact with existing franchisees. The best way to find out if the projected earnings being claimed by the franchisor are realistic is to ask franchisees that are already working with the company. They can tell you how profitable the franchise is and how well the franchisor supports its franchisees. If the franchisor has nothing to hide, then they should be happy to give you a list of franchisees to contact. If they refuse or attempt to cherry-pick the franchisees you speak to, they may have something to hide.
  • Check with the British British Franchise Association (BFA). This industry body is responsible for setting and maintaining standards in British franchising. If a franchisor is a member of the BFA, this indicates that theyíve had to meet strict criteria, including having a proven franchise concept and a successful trading history.

2. Inadequate franchise territory

Just as a grocer on a high street would struggle to compete with a supermarket next door, franchisees have problems when they are trading in the same areas as other franchisees from the same company.

This is why itís important to look out for the two different types of franchise territory that are typically offered by franchisors:

Exclusive franchise territory

The first type is known as an exclusive territory. This means that the franchisor is obliged not to open another franchise within your area.

Though you wonít end up in competition with the same brand, youíll still need to differentiate your franchise from other similar businesses in the area. Customers will side with the business that is offering the best value and the highest standard of customer service.

Non-exclusive franchise territory

The second type of territory is non-exclusive. In this case, the franchisor has the right to sell additional franchise units to other entrepreneurs in your area.

This is the key difference between these two franchise packages. What they both share is that both deals restrict you to a certain territory where you are permitted to sell your products and service.

Although this might not seem fair, you can see why it would make sense to the franchisor. By operating with non-exclusive franchise territories, the franchisor can increase the number of franchises in your area if they feel that more business can be sustained.

In a franchise business opportunity based on a non-exclusive territory, you have to have trust in the franchisor. You need to have faith in them not to overcrowd your territory to the point where youíre unable to generate an adequate return.

Always treat a franchisorís offer with scepticism

Again, this highlights the need for thorough research to be carried out before you sign the franchise agreement. You must fully understand exactly your obligations and restrictions when it comes to your territory.

The good news is that most franchisors are honest and reputable and focused on making a profit through royalty payments rather than by selling new franchises and risking cannibalising existing sales.

3. Lack of training and support

A comprehensive training programme is one of the most beneficial elements of the franchise model for many franchisees who are inexperienced as business owners. Itís the responsibility of the franchisor to provide you with sufficient training to enable you to run your business successfully.

The types of training and support a franchisor provides varies from one franchise to another depending on the industry and franchise system in place. Although the level of support you receive from a franchisor is no guarantee of success, it does provide a robust foundation for you to succeed.

Franchisee training programme key features

When reading up on the training programme that a franchisor offers to its franchisees, it pays to look out for the following things:

  • Extensive initial training
  • Classroom-based training combined with on-the-job learning
  • Business-related training including marketing, sales, recruitment and management
  • Detailed operations manuals
  • Ongoing training tailored to your needs
  • Regular franchisee events so that you can meet and share ideas, stories and problems with your peers

Communicate with existing franchisees

If you're concerned that the training and support that is being offered lacks in quantity or quality, then you should think twice about signing the franchise contract. Speak to existing franchisees to find out more about what the initial training was like and whether they believe that the ongoing support is adequate.

Youíre entitled to get the advice and guidance you need throughout your franchise journey and donít be scared to ask for it. After all, thatís why youíre paying a royalty fee and what probably made you choose to invest in a franchise in the first place.

4. No franchisee specification

It can be a bad sign if a franchisor doesnít mention any qualities that it expects from its franchisees. Even the most accessible of franchise opportunities will ask that its applicants can demonstrate basic entrepreneurial qualities.

When no characteristics are mentioned, there is a decent chance that the franchise is solely operating as a money-making scheme. Remember: as a potential franchisee, you are a customer that the franchisor is trying to sell to. If theyíre looking for nothing other than your money in return, you should be sceptical of what they have to offer.

But this is not to say that more accessible franchise opportunities, such as those that do not require prior industry experience, are operating as a racket. These franchisors are simply being open-minded about the talent that they recruit and believe that candidates from different backgrounds can bring a range of skills to the company.

To help you develop an eye for franchise scams, letís have a look at some of the basic qualities that all franchisors should have an interest in:

  • Entrepreneurial drive. Whether itís explicitly mentioned in the job specification itself, franchisors should be looking for this quality at some point in your application process. Without it, they canít expect a franchisee to build a business that is capable of sustaining healthy profits.
  • Commitment. All franchisors need franchisees that are committed to their brand. Thatís the quality that drives their business and allows them to allocate responsibility at an armís length. If a franchisor canít trust a partner to stay committed, then they are putting their customers and reputation at a serious risk.
  • Competence. Without a little bit of common sense, you arenít going to get anywhere in the business world. Recruiters of all kinds Ė whether they are franchisors, independent businesses or large corporations Ė need to know that you have the basic skills to do the job.

5. Franchisors that donít want to meet in person

Finally, the last warning sign that you need to keep an eye out for when choosing a franchisor to partner with is them not wanting to meet face to face. If they donít want to provide a representative for their brand that you can ask questions to, the likelihood is that they have something to hide. You need to stay clear of these franchisors if you want to make a safe investment.

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