7 Things you need to know before Franchising
Franchising is one of the business I have been involved at, I’ve been at both ends, as a Franchisor and as a Franchisee. It is truly a great type of way for businesses to expand without too much capital and it is great for investors to get a chance to own a branch of a brand that is well known. However, franchising isn’t all sunshines and rainbows, you really need to understand it well in order to be successful at it. Based on my experience, here are some of the things that you need to know before diving into the world of franchising:
Franchising Tip #1: Background
Like any business, the background is very important before you choose to franchise. Are they legit? Or are they a scam? There are numerous scam artists out there selling franchises so make sure to do your homework well. Know their mission and vision for the business, as this will affect you, as a franchisee, imagine decisions and directions of the company which you’ll be subjected to as part of the franchise family of the brand (remember you’re a franchisee and subject to rules and regulations of your franchisor). You have to align with the company for you to franchise and operate the business smoothly.
Franchising Tip #2: Relationship with Franchisor & Rules
Like any human relationship, there are many rules and regulations that we all have to follow and the same goes for franchising. Before franchising, you would be subjected to sign a set of contract and operations manual to tell you how you should run and what the rules are for the brand. The main reason is to protect the brand and to ensure a good working relationship between the franchisor and franchisee. The more transparent and clear it is the better.
Franchising Tip #3: Financial Statement
Not a lot of business would show their Financial Statement unless you sign an NDA or confidentiality agreement or pay a certain deposit (normally non-refundable and deductible from franchise fee if you choose to franchise.). This will give you an idea as to how much sales does a certain branch can earn and how much expense do you expect yourself paying (with the Profit and loss). While the Cash flow, could give you an idea as to how the money would rotate around your franchise. Also, ask for the percentage (if they have) for fees that you have to pay monthly:
- National / Local Advertising
- Any other fees?
But more importantly, it tells you whether the brand is doing great (not because a brand is popular and famous, means it is profitable) or not and do your homework to really check and verify the Financial Statement figures before franchising.
Franchising Tip #4: Support
Every Franchise is different, each one with their own support structure when franchising. Some companies provides advertising support (national / local advertising monthly fee), operational support, training, manpower etc., it is important that you study the business carefully and assess where you’ll need support. Look for it in the operations manual that they give you, and if it’s not written, do ask the franchisor to put it into writing to make it official.
Franchising Tip #5: Supply
For you to operate smoothly, supply is very essential. Normally, franchisors would need franchisees to source all supplies from them but there are also some that don’t. Make sure that it would be there when you need it and delivered on time (Ask about order and deliver schedules). The last thing you want is a lot of customers looking to buy at your store but you don’t have the stocks. I have heard stories of franchisee stores closing down as there are no supplies to sell, so make sure that there’s always enough for your customers and a continuous stream of supply when needed when franchising.
Franchising Tip #6: Start-up Capital & Return on Investment
Different franchise costs differently, for example, restaurants might require some high tech equipments which costs a lot. You probably seen franchises selling for around P100,000 and some at P8 – P20 million! Ask for a breakdown of costs to help you understand better, ensure that you’re paying the right amount (but do understand that there might be some markup as it is a revenue source for a franchisor). Return on Investment (ROI) is the most important question that you’ll need to ask, you need to know when you’re going to earn all the capital you’ve invested in the franchise are going to be returned to you. This will involve projections on your financial statements (make sure you do this rather than just asking for a number, anyone can tell you that they can return your money in less time!), some might be conservative while others are over-the-top unrealistic (they can give you the projections based on their strongest store), so do make sure that you work it with your franchisor before franchising.
Franchising Tip #7: Exit Strategy
Let’s face it, at the end of the day, there’s always a risk of it not working. Franchising has a risk, but it is somehow reduced as it is supposedly a working business model. So if things don’t workout what then? You need to discuss this with the franchisor as to what happens when you want to stop the business. Do they buy it out? Can you sell the store right? This is something that needs to be discussed with the franchisor before franchising.
Any other tips on Franchising?