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

  • Royalty payments:  Most franchisors require royalty payments for use of the franchisor’s brand name and intellectual property.
  • Marketing costs:  Most franchisors will charge regular marketing fees for the benefits the franchisees received from the franchisor’s marketing campaigns.
    • Training costs:  Most franchisors require their franchisee to attend an initial franchisee training course and to send at least some of their staff on franchise specific training programmes.  Some franchisors also require their franchisees to attend quarterly or annual conferences.  Usually, you will need to pay for you and your staff to attend these programmes and conferences.
    • Product sales margin:  If you buy and sell a product line supplied exclusively to the franchise, you are likely to have little or no control over what products you stock, the minimum quantity of stock you must purchase, the price you must pay to purchase the stock, and the retail price you must charge for those products.
    • Updates to systems and technology:  Generally, all franchisees are required to operate the same systems, software, and other technologies, which means the franchisor will dictate when you need to update systems and software and when you need to upgrade or replace things like your plant and machinery.  These upgrades are usually done at your own expense.
    • Updates to Fit Out and Fixtures:  In order to keep their brand looking fresh, most franchisors require their franchisees to regularly update their fixtures and fittings, which is costly.  Depending on the franchisor, you could be committing to refitting your business every two to five years.
    • Cost to exit:  If you terminate your franchise agreement before the end of the term, you may be required to pay royalty payments to the end of the fixed term, rent to the landlord for all or part of the remaining lease term, and/or early termination fees.  When the franchise agreement comes to an end, you will also need to consider the impact of any restraint of trade provisions, which will place restrictions on you for a period of time after you leave the franchise.

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.

If you want more insights on running your own business, you can follow us on LinkedIn and follow our blog.

Wednesday, 23 November 2016 08:38

Are You Prepared for Being a Franchisee?

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 diligenceleaving 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.

If you’re looking at buying into a franchise but want to talk it over first, feel free to get in touch

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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:

  • when you can terminate the franchise agreement
  • how to terminate the franchise agreement
  • the termination notice period
  • any restrictions on terminating the franchise agreement before the end of the contract term
  • the fees/penalties for early termination
  • how you can dispose of your business
  • who owns the client database you have built
  • what restrictions are placed on you (competing with the franchisor’s business, dealing with suppliers and customers, dealing with staff) when the franchise comes to an end and how long those restrictions will be in place

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.

If you’re thinking about buying a franchise and want to talk it through, email us and one of the friendly team at McDonald Vague will get in touch with you.

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