Guest Article
If you are looking into franchising you must do your homework. A franchise provides you with market intelligence regarding the finances and operations of your business, as well as accounting, recruitment and staff selection and marketing. It can be extremely difficult to get up and running with a business when you don’t have any help. Franchising is not a foolproof way to start a business of course, and there are some things you have to be wary of before you start. Here are the five crucial considerations before buying into a franchise.
1. Know Your Liquid Capital and Net Worth
Before you can buy into a franchise, your finances need to be in a healthy state. Although being part of a franchise brings a major competitive edge when compared to starting from scratch, it is still important to make sure you have the finances necessary to support a franchise. It is also worth knowing that having liquid cash is more attractive than your wealth being tied up in assets. Some franchise opportunities may also have a minimum net worth requirement for buy-in, so make sure you do a financial audit to see what you are really worth.
2. Beware Of Very High and Very Low Franchise Fees
Big brands that do well come with high fees; that is to be expected, but newer brands that are less established should not be charging exorbitant franchise fees. If the fees are too low, it should also start alarm bells, and you should investigate further before handing any money over. If you ever feel that you are being charged more than is necessary, find out why.
3. Conduct Interviews
After you have read the franchise marketing material you will need to do your own research to find more objective and modest accounts of what you could expect if you did invest. Ask to speak to other franchise owners, but make sure you also speak to those who failed. The franchise should be more than happy to put you in contact with these people, with a view to helping you avoid making the same mistakes.
4. Read All the Documentation
It should go without saying that all the reference material you are provided with should be read, and re-read to ensure you understand it. There is a lot of information that can be gleaned from official franchise documents, so take the time to go through all the materials thoroughly.
5. Check What Percentage of Profit the Franchise Will Take
It’s most likely that you will be charged an upfront fee to buy into the franchise as well as marketing and support charges as a percentage of the revenue you generate. This can range from as little as 1 per cent to over 10 per cent, so make sure you are clear on the earning potential as well as what you will need to pay over to the franchise.
One last thought, make sure you hire a lawyer that specializes in franchise agreements to represent you in your negotiation, a general attorney will not be able to advise your properly.
Do you have any more suggestions to consider in franchising?
“Analyzing Business Documents” courtesy of ddpavumba / www.freedigitalphotos.net
About the Author: Christopher Palumbo holds degrees in Industrial Design, Economics, as well as an MBA in Industrial Administration from Carnegie Mellon University. Palumbo and his team launched the elements™ fitness and lifestyle brand in 2006 – one offshoot, The BalanceDiet Company has gone on to develop as one of the fastest-growing weight loss brands in America.
While I think franchising can be a good opportunity for some, beware of the hidden costs and compliance requirements. A franchiser’s end goal is to have consistent product offerings any time a customer comes in contact with their brand. Normal cost cutting opportunities for small businesses may not be an option. This is the purpose of ensuring franchise owners are well funded.