If you're thinking about starting your own business, buying into a franchise can seem like a good option. Being part of a franchise means you will be part of an established brand with name recognition, group marketing strategies, and business plans.
The advantages that come with buying into a franchise come at a cost. In addition to the purchase price, you will have business set up costs, marketing fees, and training fees to pay. You will also have obligations to the franchisor to run your business in line with the franchisor’s brand, its image, and its processes.
Things to consider when buying into a franchise
When deciding whether to buy into a franchise, you will need to look at whether you have the technical skills, ability, and industry understanding to make the franchise work. You will also need to consider whether you have the ability to implement your own marketing strategy and business plan, which must align with the franchisor's brand and image – if you’re operating outside the terms of the franchise agreement, the franchisor may step in.
What will the business really cost
You also need to work out what the business is really going to cost you and how much it's going to make. Some franchise agreements require you to pay for ongoing marketing, training, and products. These additional costs really add up so it's important to conduct a business health check – and stress test it – as part of your due diligence. If your business is going through a bit of a tough patch, you may end up in a position where paying rent and franchise fees does not leave enough for your business to get by.
Get advice early on
If you are a franchisee and your business is in financial trouble, or it may be heading that way, it is important that you get advice early. Not only do you need to consider whether you are breaching your director’s duties by continuing to trade, you also need to consider the consequences of insolvency under the franchise agreement.
If you think the problem is the franchise fees and that a hive down of your business might be the easy answer, think again. It's unlikely to be that simple. Most franchise agreements contain restraint of trade clauses that will stop you from leaving the franchise then immediately setting up in direct competition with the franchise. Some franchisors hold the leases for the franchisee’s premises, which could allow the franchisor to put another franchisee in the premises. Some franchisors hold the supply agreements with suppliers and act as a middle man in the supply chain. Some franchise agreements allow the franchisor to step in if the franchisee becomes insolvent. Most limit the franchisee’s ability to on-sell the franchise to a third party without the franchisor’s approval.
Know what you are getting into
Buying into a franchise can be a great idea but it's really important to know what you're getting into. If you’re starting out, your franchise isn’t going to make anywhere near what the established top performing franchisees are making. It is important that you work out what the business is going to cost you to run and how much money it’s likely to make in both the short term and the long term. Only then can you decide whether you can make it work. Once you’re in, you need to monitor how your business is doing and whether you’re on track.
If you're thinking about buying into a franchise or you’re worried about your existing franchise, give us a call. We can help. You can also head to read more helpful articles on our website.