Top 10 things you should know before you become a franchisee

The decision to become a franchisee can be a no-brainer if you're a budding entrepreneur but don’t want to create a new business from scratch. It’s easy to understand the appeal; you buy into a model that has been tried and tested and has a proven track record of success. You’ll also have a ready-made customer base just waiting to spend their money on your brand.

But owning and operating a successful franchise can be much more complicated than just finding a brand you like and investing your hard-earned cash. Before you pay the franchise fee, you should be prepared for business ownership. Let us help you a little by sharing the top 10 things you should know before you sign on the dotted line.

Our top 10 traits of a successful franchisee

1. Assess your personality

Franchising isn't for everyone. Yes, it's a great business model, but it takes certain personality traits to master it. Before you start to look for a franchise to invest in, you should consider whether the model is right for you.

Firstly, you should be willing to relinquish control over some aspects of your franchise. The franchisor is ultimately in control of nearly every aspect of the business. This is because the overall success of the franchise depends on the consistency of the brand, products and services. However, if you're prepared to take advantage of running a well-established business according to strict, but necessary rules, franchising is should be perfect fit for you.

Next, you should give some thought to your appetite for risk. Although going down the franchise route can reduce the amount of risk you’re exposed to, starting any kind of business will have its dangers. Even after you’ve done extensive research into franchise brands and market demand, there’s no way of knowing whether a particular business will take off in a particular location. Specific regional differences and trends may just trip you up when you least expect it. Therefore, you should make sure you’re able to prepare against certain eventualities and quickly take action when you need to.

Finally, you need to understand that you’re going to have to work hard. The process of becoming a franchisee is by no means an easy ride – and it won’t be stress-free. Just like independent business owners, successful franchisees have to be dedicated, committed and hardworking.

2. Get your finances in order.

The franchise fee can vary from a few thousand pounds to over a million. However, when you're assessing your finances, you need to account for more than just the franchise fee. You should also consider the additional costs associated with setting up your franchise, such as rent for business premises, equipment, insurance and licences. You should discuss these fees thoroughly with the franchisor so that you’re clear about what the total investment is likely to be.

Once you're up and running, you’ll need to pay ongoing fees. It’s likely that you’ll pay royalty and marketing fees, which are calculated as a percentage of your gross sales. Take the time to understand your ongoing financial obligations, as this is crucial for the continuing financial health of your finance. For more information on the types of fees you can expect to pay, click here.

On top of these fees, you’ll need an element of working capital to fund the franchise until it breaks even and starts to turn a profit. This usually takes at least six months, so it’s recommended that you have enough working capital to cover this period. However, your franchisor will be able to give you a better idea of how long it will take you to cancel out your debts, as they’ll have financial information from previous franchisees.

3. Do your homework

The average term of a franchise agreement is five years, and there will probably be penalties for franchisees who want to terminate the agreement early. This means you should do plenty of research before you invest to make sure the opportunity you’ve chosen is right for you. Review the financials, learn who your competitors are and find out whether there is demand for the franchise in your area. The due diligence you commit to doing before you sign the franchise agreement will pay off in the long run.

4. Speak to existing franchisees

As part of your research, you should take the time to discuss the opportunity with franchisees who are already part of the network. Firstly, you’ll need to ask the franchisor if you can speak to some of their franchisees. A good franchisor will encourage this. It’s in their interest to make sure you’re making an informed decision, as a candidate who is ill-suited to the business or franchise model will only damage the brand in the long run.

Be wary if a franchisor refuses to give you details of their franchisees or attempts to cherry-pick the franchisees that you meet. This should serve as a warning sign, as it demonstrates that the franchisor has something to hide.

Prepare a list of questions to ask before you meet with any franchisees. You could, for example, ask them how long it took them to become profitable, or about the most challenging part of running the business and any support provided. The answers to your questions should help you decide whether the franchise is right for you.

5. Consult franchise professionals

Franchising is a unique business model, so you should always consult experts before you become a franchisee. Whether you talk to a financial advisor or a solicitor, you should always make sure they have expertise and experience in franchising to give you the best possible advice. Many banks have dedicated franchise departments and have dealt with numerous franchisees in the past. Identify which ones will be able to help you the most and approach them before you make any decisions.

6. Write a business plan

If you need funding from a bank to finance your franchise, you’ll need to have a robust business plan in place. This will not only help you secure funding. It’ll also lay out your ambitions for the business and help you understand the challenges and opportunities you may be faced with – before you’re faced with them. In short, it’s central to the success of your business.

The franchisor should be able to provide you with much of the detail you need to complete your business plan, with reference to previous franchisees. The franchisor may even be able to offer you a business plan template if you need it.

7. Understand what is expected of you

The franchise agreement can be a lengthy and complicated document, and it’s generally more favourable towards the franchisor. As it’s a legally binding document, you need to fully understand what you’re signing up to. As we’ve said, terminating the contract has its complications – and financial penalties – so make sure you know what will be expected of you before you sign on the dotted line.

There’s no shame in not understanding the franchise contract when you first read it; many prospective franchisees get in touch with a specialist franchise solicitor. This can be incredibly useful, as they’ll be able to review the document with you and highlight any areas for concern. After you’ve met with a solicitor – and resolved any issues with the franchisor – you’ll be able to sign the contract with confidence.

8. Make sure your family are on board

Running a franchise requires a lot of hard work. Being away from home can have its consequences, especially if you have young children, as they may struggle to understand why you’re not there. You may have to work long hours in the early stages, so make sure your loved ones know what will be expected of you before you join the franchise. It will be much easier for you to bring your franchise unit to profitability if you have an understanding family to support you.

If you’re working from home, take the time to explain your new venture to your children and ask them not to disturb you while you’re working. You may find it helpful to have a separate room as your ‘office’ if you can, as you’ll be able to concentrate better in a dedicated workspace.

9. Don’t grow too fast

When you become a successful franchisee, it can be tempting to try to expand your portfolio by purchasing additional franchise locations. Although this can be a lucrative venture, it can also have a negative impact on your existing franchise. It’s better to have one profitable franchise than two struggling outlets, so make sure your first franchise is established in the community and turning a decent profit before you start thinking about other franchise sites.

10. Plan to leave

It may seem strange, but before you've started your franchise, you should plan how you're going to leave it. Having an exit strategy in place makes the end of your franchising journey as smooth and uncomplicated as possible.

Alice Tuffery, Point Franchise ©