Franchising 101: 6 Things to Know Before Becoming a Franchisee
If youíre wondering how to become a franchisee, itís important you uncover the hidden truths about the world of franchising. From bad opportunities to disaster plans to passive investments, here are six things everyone should know before they start a franchise.
Becoming a franchisee might seem like a no-brainer if you're a budding entrepreneur but donít want to create a new business from scratch. Itís easy to understand the appeal; you buy into a model that has been tried and tested and has a proven track record of success. Youíll also have a ready-made customer base just waiting to spend their money on your brand.
However, there are lots of misconceptions and hidden facts about franchises that many people donít know about. And if you truly want to succeed in the world of franchising, knowledge is going to be your best weapon. Here are six things you need to about how to become a franchisee.
1. Not all franchises were created equal
While itís a big misconception that franchises are similar to MLMs (Multi Level Marketing) or Pyramid Schemes, not every franchise is worth investing in. You wouldnít plough all your money into shares without carrying out thorough research into a companyís viability and potential for future success, so why would you for a franchise? And even though most franchises are legitimate, the potential financial returns and opportunity for growth will vary wildly.
Thereís a franchise out there for every entrepreneur, no matter how risk-averse, time-poor or cash-hungry you are. Even though youíre probably keen to get started as soon as possible, investing time in the research process is vital as it will save you from committing to the wrong franchise.
Before you begin your hunt for the perfect franchise, have a think about your expectations. Are you in it for the money or for the flexibility (or potentially both)? If youíre looking to make serious cash, a part-time franchise or one with modest profit potential probably wonít suit you. However, the most lucrative franchises often require a big investment. Is that something you can realistically afford? On the other hand, if youíre drawn to franchising as something you can fit around family and other business commitments or are looking for something that is equivalent to part-time hours, a hands-on restaurant franchise, for example, isnít going to give you the flexibility you crave.
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2. Your franchisor wonít tell you everything
In all the excitement, you might think that the information your potential franchisor offers you about their opportunity is all you need to know. Many franchisors will go above and beyond to make sure youíve got lots of information about running a location of their franchise, from franchisee testimonials to financial snapshots and projections to example marketing materials, that is both accurate and realistic. But, not doing your own research could turn your franchising dream into a nightmare.
The British Franchise Association (bfa) is a great place to start your research. In the absence of an official government body to regulate franchises, the bfa was founded by some of the UKís largest franchises (including KFC and Holiday Inn) to set legitimate opportunities apart from scams. Now, itís grown into the countryís most respected self-regulatory body on all things franchising. Check if the franchise youíre interested in has achieved full bfa membership. Franchises must go through a rigorous application process and prove they are up to the associationís exacting standards to be awarded full membership, so itís a good indicator of worthwhile opportunities.
Younger franchises might not meet the criteria yet, so check if theyíre a member of the Approved Franchise Association (AFA) or the Quality Franchise Association (QFA). These associations are smaller and welcome a wider range of franchises, but are still respected voluntary bodies designed to weed out the bad opportunities.
Donít be afraid to ask your franchisor if you can double check their claims either. A worthwhile franchise will happily put you in touch directly with existing franchisees, provide extra financial information and answer other reasonable queries before you agree to sign. Trust your instincts Ė if a franchisor seems hesitant, pushy or downright refuses to show you more information without good reason, itís best to walk away.
3. Youíll need to plan for the worst
While no franchisee plans to jump ship in the middle of their franchise agreement, life doesnít always happen the way we want it to. Check the length of your franchise agreement (the average is five years) and investigate the cost of terminating the agreement early. This means you should do plenty of research before you invest to make sure the opportunity youíve 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 as well. The due diligence you commit to doing before you sign the franchise agreement will pay off in the long run.
Make sure you also look at how recession-proof your chosen franchise is. While any investment is a risk that is never 100% guaranteed to pay off, some franchises are safer bets than others. If the economy is uncertain, or you have a family relying on your business, there are plenty of opportunities that see constant customer demand, no matter whatís going on in the world around you. Before taking the plunge, make sure you have a good safety net of savings and, if possible, other sources of income to support you if times get tough.
4. You donít always need to get your hands dirty
Many franchisees are new to the world of business ownership and are heavily involved in the day-to-day running of their operations. However, there are also franchise opportunities that are ideal for passive or low-commitment investors. You could enlist a team of employees to handle the day-to-day running as you focus on other opportunities, or look for an opportunity that you can devote very little time to and make an income from.
Be warned, though Ė a passive franchise can be an expensive venture, as youíll generally need to pay staff to look after the business for you. Doing so could eat into your profits and, unless you appoint an experienced and trustworthy manager who knows how to run the business, leave your business in disorganised chaos. Therefore, itís not ideal for inexperienced franchisees with neither the money or know-how to make it work for them.
5. Youíll need professional help
Franchising is a supported route to business ownership, but thereís still a lot to think about. You should always consult experts before you become a franchisee, particularly if youíve never run your own business before (franchised or not). If you can, run the franchiseís financial projections past an accountant or bank to check that theyíre legitimate. Many high street banks, like HSBC, Barclays and NatWest, have dedicated, bfa-approved franchise departments and have dealt with hundreds of franchisees in the past, so theyíll quickly identify any red flags or problems with your new venture.
Even if you donít do that, itís vital to enlist the help of a solicitor with experience in franchise law. They will comb through the franchise agreement with you and point out any clauses that need to be queried, amended or removed altogether. If you choose not to get a solicitor, you run the risk of missing any loopholes in the franchise agreement that could negatively impact you, or you may just not understand the full extent of what youíre signing up for.
You could also speak to a Qualified Franchise Professional (QFP) such as a franchise consultant. This is a good option if youíre in the market for a franchise resale or have previous experience as a franchisee. All QFPs have gone through an intensive training course with the bfa and will have a good understanding of the franchising world, so they have plenty of handy advice to offer.
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6. You should always plan to leave your franchise
A franchise can be a lifelong investment, bringing you financial and professional satisfaction until youíre ready for retirement (and beyond). You might have a genuine passion for the sector your franchise is in and want to spend all your time working on it. Other entrepreneurs use franchises as an investment tool, spending a set period building and developing the business before moving on to a new challenge.
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. Do you have a set time frame in mind? Is there a family member that could take over your business, or will you sell it once itís time to retire? Would you prefer a franchise with a shorter, rolling franchise agreement, or are you in it for the long haul? Asking these kinds of questions will also help you find the ideal opportunity for you.
Dispelling the Myths
So there you have it Ė six more pearls of wisdom to consider before taking the plunge and starting a franchise. If youíd like to learn more about becoming a franchisee, or how to be a great franchisor, check out our articles. Or, browse our UK franchise directory if youíre ready to begin your search.
Sophie Cole, Point Franchise ©
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