Is the franchising price right?

With well over 1,000 franchise models available in the market and different levels of activity in different franchises, there are a huge number of franchised businesses being offered for sale. They may come from a glossy brochure or a website that explains the features and benefits of the business. They typically belong to different industry sectors, have different operating models, and require different levels of investment.

One thing common to all of these franchises, however, is that they come with a price tag. And, at the end of the day, when you purchase a franchise, you need to be comfortable that the price you are paying not only gives you entrance into the franchise, but also represents a reasonable investment.

In the typical franchise model there are, in reality, two levels of price being asked for the franchise. The first is the upfront amount that you pay to acquire the business or establish your franchise. This is typically the purchase price, and covers your initial investment in the goodwill, plant and equipment, fit out, and perhaps trading stock of the business.

The upfront purchase price

This is where most people will concentrate their initial focus. How much am I being asked to pay for this business?

This upfront purchase price typically covers your purchase of goodwill or franchise rights, the amount required for plant and equipment, fit out (where necessary) and also an initial level of trading stock, if required.

It’s important, with any franchise, to thoroughly read the franchise agreement to understand what all the financial commitments are, and then to have a look at how these financial commitments work out in your financial forecast.

It’s also important to understand that when you buy a franchise you are, in fact, buying into someone else’s business model. Arguably, they have done much of the hard work for you. They are providing you with systems, expertise and experience, brand value and marketing support.

These are all costs that most businesses incur in some form or another. The upside with a good franchise is that they are all provided for you, and provided at the level of an experienced operator. The downside is that you have little or no discretion over the cost item. Like anything else, if those costs are delivering value at a reasonable price, then this should only add to your bottom line. The warning signs are where the costs are fixed and certain. However, what is being delivered is either of marginal value or cannot be readily identified.

Can there be any hidden traps?

There are risks in any business transaction. And, when you’re signing what could be a lengthy legal agreement, the risks only increase.

You need to allow enough time to obtain a thorough understanding of the agreement. This will most likely require some good commercial legal advice to explain all of the different parts to the agreement.

It’s too easy to allow your eyes to glaze over when it gets to fine print and think that none of this will apply to you. Incidentally, this is normally the area that will cause the greatest problems or come back to bite you.

For those wishing to investigate franchising further, a good starting point would be the buying a franchise and running a franchise pages.