A critical success factor when buying a franchise business is ensuring that you do the maths! Spend time on the financial issues and be fully aware of the implications. These include:
- How much does the franchise cost?
- What is the upfront franchise fee? (usually not financed)
- How much is required for working capital?
- Are there any financial projections for the first 3 years?
- What are the ongoing royalty fees and advertising fees?
- Evaluate different scenarios e.g. slow growth/ rapid growth.
- What is the required deposit?
– It is important to note that the franchisor may not take a non-refundable deposit from you during the recruitment process.
Even if a potential franchisee is not successful they are entitled to receive their deposit back less direct costs borne by the franchisor.
A business can turn into a disastrous failure if there is not sufficient understanding of the financials. Franchisees must understand the cash flow cycle, manage business debts and keep detailed records or reconcile financial records on a regular basis.
One of the best advertisements for a franchise are the existing franchisees. The franchisor with a compliant Disclosure Document has the details of existing franchisees and you are well within your rights to contact them. Be sure to speak to them and ask the right questions, such as:
- Are they making a profit?
- Are they getting a good return on their investment?
- What unexpected capital was needed?
- How do they feel about the relationship that exists between franchisor and franchisee?
- Are they satisfied with the support being provided by the franchisor?
- If they knew then what they know now – would they buy the franchise?
There are many examples and statistics that quote the success rate of franchised businesses versus independent businesses. It must be understood that franchising is not fool proof. It is not guaranteed success and it does not alleviate personal commitment. Although there may be a proven business model it does not mean that the franchisor is going to provide everything on a platter for you. The success rate is largely dependent on the franchise that you buy into. However, this success comes from a combination of the support you receive from your franchisor, and the time and effort you as the owner-operator put into your business. Make sure you do your homework upfront and the best of luck in your endeavour.
Latest posts by Nicola Mare - Franchize Directions (see all)
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