Top 10 Ways To Evaluate A Franchise Opportunity
Possibility, the most important consideration when evaluating franchise investment opportunities, is whether youíre cut out to be a franchisee. Yes, there are many benefits to starting a franchise, but there are also restrictions and guidelines to follow and obligations to fulfil. If you have a strong entrepreneurial spirit, then it may be worth considering other routes to business ownership.
Franchise business opportunity
Once youíve completed a self-assessment you can proceed with confidence that a franchise with a proven business system that has been tried and tested is the right model for you. For the next step in your franchising journey the spotlight is turned on to your shortlisted franchise opportunities. But how do you make sure that you choose the best franchises to buy?
Hereís 10 elements you should review carefully that can be found in the franchise business plan, disclosure document and franchise agreement.
1. The market
To completely understand whether franchise investment opportunities are worth considering, youíll need to carry out market research to determine their feasibility, and therefore profitability. Identify who the target market is, where theyíre located and what kind of competition already exists in your area.
2. The company
The length of time that a franchise has been in business is not a guarantee of success, but many years of experience gives an indication that things are going good. If the franchisor has been in business for many years, itís likely that the business model has been polished and perfected over time. This is not to say that newer franchises should be discounted, you just need to review the financial projections in a bit more detail as theyíll have less actuals to disclose.
3. The financials
The best franchises to buy are those that make you happy at the same time as making money. The franchisor will have included financial projections in the franchise business plan, and the franchise disclosure document (if they have one). Make sure you review the numbers carefully, but donít just rely on the figures that youíve been given.
Buying into a franchise is a significant investment and so youíll want to conduct your own financial projections of the initial costs, ongoing costs and potential profit available. For the opportunity to make commercial sense, you must be able to make an adequate return on your investment.
4. The total investment
Remember that part of a financial assessment includes how much you can afford to invest. Itís pointless working out the projected earnings if youíre unable to fund a portion of the initial franchise fee in the first place.
As well as having to make a personal contribution to the franchise fee, most franchise investment opportunities will require you to have a certain amount of working capital. This will enable you to fund your franchise while itís in its infancy. Underestimating the amount of money needed to start up and successfully run a franchise is one of the biggest reasons that franchisees fail. Donít fall into this trap; be honest about what you can invest without compromising other elements of your life.
5. The ongoing fees
Your initial payment to the franchisor will be the franchise fee. This is to cover the cost of recruiting and training so the franchisor doesnít profit from this payment. The way that the franchisor makes money is by charging franchiseesí a regular royalty fee. This is generally charged as a percentage of the gross sales (profit generated from the sale of services, goods, and any other products or merchandise).
Much of these fees are reinvested into the franchise to enable it to develop and grow, but everybody is in business to make money and the franchisor is no exception. If the franchisor canít make a satisfactory profit from the franchise, they may simply walk away from the business. And a franchisee without a franchisor just doesnít work.
6. The training
When considering the best franchises to buy check out those that invest heavily in the development of their franchisees. Look for training programmes that are comprehensive, not just limited to product and service training, but that contain lessons in improving business skills too.
Although the initial training offered is crucial to bring you up to speed with the way the franchise is run, equally as important is the ongoing support offered. As you build your franchise youíll encounter challenges that you may need help with. Knowing that the franchisor has ongoing training and support systems in place will provide you with peace of mind from the outset.
7. The culture
An element of your evaluation that canít be gleaned from the franchise business plan, is what the culture is like. Consider your initial contact with the franchisor and how you felt during the Discovery Day. Did you get a sense of an open, development-orientated, and supportive business? If the answer is no, then this may not be the franchise for you.
8. The fit
Once youíve understood the franchise culture, you need to make an honest assessment of whether you are suitable for this business. After all, a franchise agreement typically lasts for a minimum of five years. Can you see yourself working as part of the franchise for that amount of time?
Your gut feel will play a big part in answering this question. Trust your instincts on this one. Itís one thing to own a profitable franchise, but quite another to do so in a business that you donít respect or enjoy.
The franchise agreement will include lots of restrictions, limitations, rules and guidelines about what you, as a franchisee, can and canít do once youíve signed the contract. These may seem daunting at first, but theyíre in place to protect the brand and its consistency across the franchise system.
Make sure you consult a solicitor that specialises in franchising to review the franchise agreement with you so you donít sign up to any unrealistic restrictions. Good franchisors will present fair franchise contracts, but itís worth getting a professional to confirm that you wonít be hit any surprises further down the line.
10. The exit
It may seem strange to evaluate your exit strategy before youíve even invested in a franchise, but itís an important consideration thatís often overlooked. Review the costs and restrictions involved in leaving the franchise just in case personal circumstances force you to do so.
The Editorial Team, Point Franchise ©
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