Franchising Pitfalls

FRANCHISING YES OR NO?

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks. It is not a golden road to riches.

Advantages

Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
You can use a recognized brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the "franchisor".
The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same region, though there will be competition from other businesses.
Financing the business may be easier. Banks are sometimes more likely to lend money to a franchise with a good reputation.
Risk is reduced and is shared by the franchisor.

Disadvantages

Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchisor.
The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
The franchisor might go out of business, or change the way they do things.
Other franchisees could give the brand a bad reputation.
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
Reduced risk means you might not generate vast profits.
Am I suited to franchising?
As with any new business venture, you need to carefully consider whether you have got the right skills and attitude to run a successful franchise. Analyzing your own temperament can also help you decide which type of franchise would be right for you.

Assess yourself

You must be prepared to sell. A franchise gives you a business blueprint - but it won't give you customers.
You'll need to work hard, probably for long hours. Do you have the necessary stamina?
Running your own business can be stressful. Think how you react to pressure.
You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.
The right franchise for you
Do you like office work? Or would you prefer a business that involves physical labor?
Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?
Find out about possible franchises
You can find out about possible franchise opportunities from a range of sources.
details of members who may be offering new franchises
details of members who may be offering existing franchises for resale

Franchises are advertised and written about in various national newspapers and in trade publications
You can find other listings using a search engine and employing search terms such as franchise opportunity or franchise directory.
Attending a franchise exhibition can also be a good way of finding out what's available in franchise opportunities - particularly multi-level marketing schemes - can be untried, dishonest or even illegal. Assess the franchise opportunity carefully
Assess a franchise opportunity
To assess whether a franchise represents a sound business opportunity, you'll need to consider:
what the business is and how it operates
the location of the franchise
the success of the franchise concept - the number of franchises in the UK and how financially successful they are
the strength of competition from other businesses
how long the franchisor - the company offering the franchise - has been in business and how financially secure it is
levels of initial and ongoing costs
how much training and support you'll get in setting up and running the business
conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew
The franchisor will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims.
Visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones.
Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers such as Business Link, your solicitor or your accountant.
How a business plan can help
Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance.

The costs of a franchise

When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.
Initial costs
The franchisor - the company which sells you the franchise - usually charges an upfront fee. This should be a relatively low administration fee. Good franchisors make most of their profits from continuing royalties.

Your largest initial costs are usually your investment in:

premises
equipment
initial stock

Continuing costs

You usually pay a royalty - a percentage of sales - to the franchisor. Alternatively you may pay a management fee of some kind.
Under the terms of the franchise agreement, you may have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.
You also have to pay the usual business costs - for example, rental on premises, utilities or the costs of any employees you take on. Again, check whether anything you pay for through the franchisor has a realistic cost.
Check too whether the agreement includes additional charges. For example, you may be required to pay for training, or contribute to the cost of national advertising campaigns.
How to purchase a franchise
There are a number of key things you should and shouldn't do when planning to purchase a franchise.

Do:

Assess yourself to see what kind of franchise, if any, will suit you.
Find out what franchises are available.
Assess franchise opportunities carefully, ask questions and talk to other franchisees.
Investigate the financial prospects for the business.
If you'll need to raise bank finance, ask your bank if it will consider a loan for the type of franchise you're considering.
Do your own market research into customers and competitors in your area.
Draw up a business plan.
Check the franchise agreement and get professional advice.

Don't:

Take up the first opportunity before investigating alternatives.
Allow yourself to be hurried into making a decision.
Pay any non-refundable deposit.
Commit yourself before you're completely satisfied.
Assume a business will work in your area just because it works elsewhere.
Rely on the forecasts provided by the company selling you the franchise.
Sign any agreement without legal advice.

Tips on franchise agreements

The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. Get a specimen contract for them to review.

Areas covered by a typical agreement

Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
Fees - what initial fee will you pay? What royalties will you pay on sales? Will you pay a regular management fee? Will you have to pay other costs? How are the costs worked out?
Support - how much help will you get starting the business? What continuing support will you get?
Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
Exit - what happens if you can't continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?

OUR NEXT ARTICLE WILL BE ON WHY COMPANIES SHOULD OR SHOULD NOT BE A FRANCHISOR