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10 Things to Consider Before Buying a Franchise

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05 / Aug / 2015

McDonald's Restaurant Sign

A franchise can be an excellent business model, especially for those who are new to running a business. It’s an opportunity to buy an operation with an already established brand and a proven system of operation.

But not all franchises are created equal and not all franchises will suit your skills, experience and personality. We look at ten key areas of consideration and encourage you to undertake extensive due diligence (with the help of your accountant) before investing in any franchise.

1. Am I prepared to take on the risk?

A franchise may well be less risky than starting out of your own, but any business venture involves a high degree of risk. Don’t make the mistake of thinking a franchise agreement comes with a guarantee of success. Make sure you have the confidence to risk losing your capital.

2. Does a franchise fit my ego?

You have to play by the rules with a franchise operation. Your success is based on your willingness to work within a pre-existing system, helping to add value to a bigger brand. You have to be honest about your own ego. If you like to do things your own way, or fancy yourself a creative entrepreneur – franchising may not be for you.

3. Is this the right industry for me?

Franchising opportunities extend far beyond MacDonald’s and Jim’s Mowing. You will find franchising opportunities in mortgage broking, salons, fitness, hotels and the list goes on.

Once you own a franchise you are going to be immersed in that industry 24/7 – so make sure it’s something that interests and excites you. Also consider the prospects for the industry as a whole. Is this a growth market? How competitive is the industry?

4. What are the real costs of the franchise?

Once you start looking at specific franchise opportunities, it is important to familiarise yourself with all the costs associated with running the business.

The franchise fee is the cost to buy the business system and trademark for a specified period of time. But there are also likely to be monthly equipment leases, advertising fees and royalty payments. If you are buying a retail franchise, the franchisor may want you to build the store according to their specifications, which may have cost implications.

Make sure you review all costs in detail with your accountant so you know exactly what you are getting yourself in for.

5. What are the supply arrangements?

Many franchise agreements specify your lines of supply. If a franchisor demands that you purchase directly from them or through authorised dealers this may have a significant impact on your competitiveness. Make sure the current cost of supply is competitive. Understand the agreements between the franchisor and key suppliers and how this may impact you. If supply is being sourced from outside Australia then you may be subject to the vagaries of the exchange rate, increasing your risks. You might even want to ask yourself whether an “authorised supplier” could bypass the franchisor and set up a competitive franchise.

6. How big is my exclusive territory?

A franchise agreement will specify the limitations of your exclusive territory. This defines the limits of your growth potential, so you want to pay careful attention. Be clear about the exact limitations, how long the franchisor commits to those limitations and whether or not you have an option for any new franchises in the area.

7. What is the strength of the brand?

A big part of what you are buying is the brand name itself – so you want to make sure you are buying a brand with a solid reputation. Google and social media are great resources to find out what customers have to say about the brand. Spend some time online!

Overseas success is not always a guarantee locally. If you are buying into a brand that is strong overseas, find out if any local market testing has been done and consider doing some yourself before investing.

8. Are the systems thoroughly proven in practice?

The other big thing you are buying with a franchise is the business systems and training. Do not take it on face value that the systems and training will actually make you money.

Your best resource here is current and past franchisees. You should be able to get information about other franchisees in the Franchise Disclosure Document (see below). Call them all!! Ask about the quality and frequency of the training. Ask about the support provided by the franchisor? Most importantly, ask about whether the business model is delivering the expected returns.

9. How solid is the franchisor’s business?

Explore the background the franchise owners. Do they have the knowledge and experience needed for success in the industry? Most important, understand the financial position of the franchisor. Is this a stable, financially sound enterprise that you would expect to continue well into the future?

10. What are the terms of renewal?

A franchise agreement is really a licence to use a brand and business system for a specified period of time. It is very important to understand the terms for renewing that agreement. Make sure you know any conditions and fees involved with renewing. The last thing you want to do is invest yourself in building a business that could be taken out from under your feet.

If you are considering investing in a franchise business, please contact us and we would be happy to guide you through the process.

 

Some Other Franchise Resources to Explore

Franchise Disclosure Document (FDD)

The Franchising Code of Conduct is the primary law that regulates franchising in Australia. The code requires that a Franchise Disclosure Document (FDD) be given to any potential franchisee at least 14 days before signing. The FDD is going to provide you with much of the background and detailed information you need in order to properly assess the issues listed above. So make sure that you ask for the FDD as soon as possible when considering a franchise opportunity.

Franchise Council of Australia (FCA)

The FCA is the peak body for the franchise sector in Australia, representing franchisees, franchisors and service providers to the sector. They can provide advice and resources to help your decision making process, as well as a directory of Australian franchises and a listing of franchises for sale.

Also check out our podcast The Benefits of a Franchise  and our customer interview Franchise versus Start Up.

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