For many people interested in entering the retail sector, a franchise may seem like a good option. You have the advantage of buying into a well-known brand with established national marketing campaigns, marketing strategies, and business plans.
Investing in a franchise seems like a safe bet for a viable business. These benefits come at a price. For franchisees who are not aware of or don’t understand the extent of the ongoing franchise costs they are agreeing to when they sign up to the franchise, these ongoing costs can get lead to serious financial trouble.
Ongoing Franchise Costs That Can Really Add Up
Buying into a franchise can be a great business decision. Before you dive in, it’s important to get professional advice. With a professional advisor by your side, you can set your business up for success.
You can find our article Thinking About Buying into a Franchise? on our website. For more general information on franchises, check out What Happens When a Franchise Changes Hands and 10 Things Every Franchise Owner Should Know.
In this global, brand driven world, name recognition is influential in driving a business’ success. In many cases, brand recognition can make or break a business.
The franchise model offers the advantage of a known brand together with systems and processes that have helped many business owners build successful businesses.
Of course, you need to do your homework before you commit to buying into a franchise (we have written blogs on due diligence, leaving the franchise, and ongoing financial obligations for franchisees). You also need to consider whether being a franchisee is the right move for you. People often jump into a franchise without making a careful assessment of how becoming a franchisee will affect their lifestyle. If you don’t honestly assess whether you’re prepared to be a franchisee, you could be in for a big shock, after you’ve committed yourself to the franchise.
Your Knowledge and Skills: When choosing a brand to invest in and become a part of, most people are best to pick a business that compliments their existing skill set and knowledge. If you buy into a franchise without understanding the industry in which it operates, the franchisor’s assistance is not going to be enough to make up for your lack of skill and knowledge.
Time Commitment: It’s important to ensure you can dedicate the time required to make your business a success. Many franchise agreements set the business’ opening hours, which can be significant (for example, McDonalds). You will also need to be able to pick the right staff for your business and manage them well. In short, you will need to keep the doors open when the franchisor says and devote time to staff training while you’re establishing the business.
Degree of Control: Being a franchisee means you have less freedom than you would if you were running your own business. Everything from store layout to marketing and pricing are set by the franchisor, based on the franchisor’s experience and business model. While a franchise enables you to hit the ground running, the business model is inflexible. If you’re not willing to follow the franchisor’s lead, buying into a franchise is probably not the right decision for you – you’re more likely to be happier in the long term building your own brand.
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When considering any business venture, you need to plan for all eventualities. Once you’ve got the business up and running, you may find you’re not happy so you might want to sell up and move on. Alternatively, if your circumstances change, you may need to terminate the franchise agreement before the end of the term. Either way, you will need to understand all of the termination related clauses in the franchise agreement (another important reason to get legal advice before signing the franchise agreement).
The franchise agreement should set out:
If you signed a lease for the premises, leases for any equipment, and/or any fixed term supply agreements while operating your franchise business, you will also need to understand the termination related clauses in those documents.
If you do your homework and get professional advice, buying into a franchise can be a great decision. Once you’re signed up, if you hit a speed bump or you’re concerned about any aspect of your business, business advisors and turn around experts are there to help. All you have to do is ask.
Some potential business owners believe that buying into a franchise offers a degree of security. For some, it does. For others, it doesn’t. At McDonald Vague, we have seen our share of clients who have bought into a franchise believing they had a fool proof plan for success but have ended up in trouble. In many instances, the reason they’re in trouble is because they didn’t do their homework before signing up to be a franchisee.
If you’re considering buying into a franchise, it’s important that you look into every aspect of the business. After all, you’re buying into the brand and the franchisor’s ethos and you’re agreeing to follow the franchisor’s model. If there is a misalignment in values, you could get into trouble. If you can, talk to other franchisees about their experiences so you can get some idea of what it will be like to be part of that franchise and how members of the public view the brand. A Google search of the brand name can also provide people’s views about the brand, current and former franchisees, and the franchisor.
Financial Viability: While the franchisor will probably give you some financial information to work with, it’s important that you do your number crunching. It’s also a good idea to have an account or business advisor look over your numbers. A couple of high performing stores can skew the numbers and make the investment seem very attractive. It’s important you’re confident that you can make your business successful based on your projections, which must take into account the intended location of your store, that neighbourhood’s business and population demographics, and socioeconomic make up of the neighbourhoods near your store.
Ongoing Costs: When you become part of a franchise, you’re agreeing to pay more than just a one off joining fee. Franchise agreements contain ongoing financial obligations in the form of royalties, marketing, and training (you can find our blog on ongoing franchise costs here). If you don’t take these ongoing costs into account when carrying out your due diligence, you could be in for a big surprise, once you start running your business and it might be difficult to leave the franchise (you can find our blog on leaving a franchise here).
Get Advice: You need to understand all your obligation under the franchise agreement. For this reason, we strongly recommend that you have the proposed franchise agreement looked at by a lawyer and that you get legal advice on the proposed franchise agreement before you sign anything. We also recommend you consider how being a franchisee will affect your lifestyle (you can find our blog on preparing yourself for being a franchisee here). Once you sign that agreement, you’re in.
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