4 Key Things One Should Consider Before Buying a Franchise Business
Look For Buyer December 6, 2019
Studies show that franchises have a general success rate of approximately 90 percent as compared to only about 15 percent for businesses that are started from the ground up. All because Franchise provide a well-known brand, a loyal customer base, business expertise in operation, a system on hand for newbies etc. However, before you join or buy a Franchise business, it is important to be fully prepared for any challenges that might appear and understand if that fits you.
1. Do a thorough Research & find out what options available to enter the market?
When you are about to start a business, it is important to understand the supply and demand, entry barrier and competition landscape. By doing so, you can have a good sense whether franchise provide you a good avenue to enter the industry or should you strive for innovation on your own? Franchiser do provide a tested and proven model, but it somehow dictates how you run the business and limits room for creativity.
You should speak to other franchisees and study what does it take to run a successful franchise, yet visit the graveyard to understand why some of the franchisees have quit – is it due to the franchise system, poor location, weak marketing, staff issues or some other reasons? It’s also a good idea to understand the support franchiser provide and yet all terms and restrictions brought by the franchiser like product offerings, suppliers, operating hours, royalty and other conditions.
2. Understand the financial implication and build a business case
A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business’s (the franchiser) proprietary knowledge, processes, and trademarks to allow the party to sell a product or provide a service under the business’s name.
There is different type of costs that associated with the franchise license. On top of the one-off setup fee, franchisees usually require paying an ongoing royalty. This fee is normally expressed as a percentage of the gross revenue of the franchised business but can also be a fixed periodic amount regardless of revenue.
You need to identify all related cost & expenses, build a business case and see if it’s lucrative or not to buy a Franchise. In conventional business, normal break-even points are ranging from few months to 3 years. It is important to set a realistic revenue target, understand the cashflow requirement and limit financial strains. You should also read the franchiser’s annual report in its entirety. The document is very comprehensive, usually it can have more than 30 pages. But it does include litigation information, bankruptcy filings, hidden costs and so on. All this info will give you the insight you need into the ins and outs of this business for sale.
3. Are you the man for this venture and what is your exit strategy?
Before you buy a franchise, you really must figure out if you enjoy that niche, does it fit your personality or lifestyle and if you are ready to work in this business. On top of the amount of time and work it will take you, franchise also require a financial commitment with the risk of it not paying out in the end. It might be a good idea to have a talk with the people your change of lifestyle will affect before jumping in. There is a good chance that these people will be there for you and help you adjust. They might even be able to help you with the business. Involving people in your life will hold you accountable. When doing so, however, make sure you know where to draw the line between personal life and business.
You should understand financial costs of this venture, ideally you need some money for at least the next 6 months. This means you need to cover employee and raw material costs, not to mention any marketing costs. You should also know if you require business financing or not, as that is just as important.
As a business owners and investors, you need to ask yourself what your exit strategy is. Is it to you’re your business in the family, liquidate over time (i.e. owner extracts most of the profits out of the business over time rather than reinvesting them in the company for expansion) or eventually sell your business in open market like Lookforbuyer. All are viable options and you need to know what the Franchiser can offers to help when you want to exit.
4. Is it necessary to consult a specialist before buying a Franchise?
That depends on your knowledge. Hire a franchise consultant can be rather expensive, so unless you know nothing about the field, you can save money by not working with a consultant. Also, tax rules and even contracts related to a franchise can be very complicated. That’s the reason why we recommend you work closely with an attorney, especially one that has a lot of experience in the franchise law. He can easily review all the documents to ensure that there are no red flags or problems.
Is it worth it to buy a franchise nowadays? Yes & No. Franchise is established business and ready to go. You don’t need to start from the ground up, so take your time and study all the possible challenges that might appear before you join the Franchise. But in the end, you must study the current state of this business and see if it’s worth investing in it or not. Franchises can fail just like any other business, so acquiring one without clearly plan out can be a gamble at times. Yet if you better understand the answers to all the above questions, you are likely to pick the right choice for yourself that has the greatest potential.