There is less risk to buying a franchise business than starting a business from scratch because the business model has been tested.
As a franchise unit owner, you have a built-in advisory board in the management staff of the umbrella franchise organisation.
We must realize that owning your franchise can be a great way to start a small business without taking on the risks that are associated with starting from scratch.
Franchising form of business model is a popular and relatively low risk business opportunity for young entrepreneurs. It is a right granted to an individual or group to market a company’s goods or services within a certain territory or location. Today’s examples of franchises are: Mr. Biggs, Domino Plaza, L.G Stores etc.
In exchange for these rights and services, the franchisor receives an upfront fee for the right to a geographic area, as well as royalties based on sales.
There are two primary forms of franchising: product/trade name and business format franchising. In product/trade name franchising, franchisor owns the right to the name or trademark and sells that right to a franchisee. Soft drink industry is a typical example where a product is sold or distributed through a franchisee.
As for business format franchising is when the franchisor and franchisee have an ongoing relationship and franchisor provides full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
As a prospective entrepreneur who has decided to go into a particular business and intends to choose franchising as his business model, must follow these guiding principles.
Research the Franchisor: Once you have decided on business that you are interested in after conducing your market research, the next step is to research the franchisor.
To avoid losing significant amount of money, the business must be investigated before buying into it.
What to research about the franchise are:
- How long has the franchisor been in the industry?
- How many are currently operating in your area?
- What is the financial health of the franchisor?
- Are there any current or pending legal issues faced by the franchisor?
You must take time to talk to other franchisees to get a first-hand account of their experience with the franchisor.
Franchise Package: Franchise buyer must take a detailed look at the franchise package to see what is included:
- Are there licensing or other fees?
- Is a land or building purchase or lease required?
- What equipment is needed or provided?
- How long is the contract?
- What training is provided?
- What level of inventory is needed to get started?
- What other costs will need to be paid to the franchisor? Royalties, advertising, insurance?
The Franchise Disclosure Document:
Once you have identified a company that you are curious about, the next step is to request and read thoroughly the Franchise Disclosure Document.
This document defines what the franchisor will do for you and what is expected of you. Franchisor is legally required to provide this document to potential franchisees
Personal Assessment: Before investing in a franchise, you should first ask yourself a few important questions relating to your personal ambitions, goals, and needs.
In the course of assessing yourself, the following should be considered:
- What is your experience level?
- What are your abilities?
- What is your education level?
- What are your goals?
- What is your financial situation?
- Do you know how much you can invest?
Advice and Counseling: You should also consider seeking advice from franchise consultants, franchise attorneys, accountants and other business experts.
Note that each of these counselors offers unique services:
- Franchise consultant matches the needs, skill sets, and business objectives of the prospective franchisee with the right franchise and franchisor.
- A franchisee attorney helps to review the lease agreement and the incorporation documents as well as providing relevant legal advice.
- The franchise accountant will help by reviewing the franchisor’s financials
- A reliable lender will help secure the financing that best fits your business model
- A professional site locator is valuable in selecting and securing the right site for your franchise.
Choosing the right franchise requires the service of experts that can guide your every step before deciding to purchase a franchise.
Wishing you best of luck as you choose the right business model.