5 people you must talk to before buying a franchise
For inspired entrepreneur-types, the lure of a streamlined business venture with set structures can seem like a perfect fit. Provided you chose the right model, opportunity and location, buying a franchise can be just that, but it isn’t a decision you should take lightly.
As with any business venture, franchising represents an element of risk and significant financial investment.
You may feel overwhelmed, but fear not, starting a franchise is a multi-faceted undertaking. You aren’t expected to understand all elements, however it is your responsibility to seek clarification on the sections that seem foreign.
Whether you are considering a low-cost mobile option, or multi-million retail opportunity, it pays to have some key advisors in your corner.
Remember, the future success of your business depends on the decisions you make, don’t be afraid to ask questions.
So, who has the information to help put your mind at ease? Inside Franchise Business put together this list of the five most important people to talk to before buying a franchise.
Before you even consider a franchise opportunity, it is pivotal you take a look at your financial stability.
How much can you afford, what costs are associated with your potential venture and how much will you need to make in order to stay afloat are questions an audit of your finances could help answer.
It isn’t enough just to speak to the family accountant. Franchise models are unique opportunities that present a series of sector-specific challenges. For this reason, it is imperative that you visit an accountant with franchise experience before buying a franchise.
As you launch your business, this relationship becomes all the more important. Avoid the temptation to conduct book-keeping yourself, a franchise-specific accountant who has been there from the start will be able to look over the business growth and determine issues before they arise.
When you first receive the franchise agreement and disclosure document, you may find yourself overwhelmed.
These documents are expansive, detailed and often filled with legal jargon that may confuse the average reader. Take the documents to a franchise-specific lawyer with experience negotiating contracts.
While a franchise lawyer can help alleviate any concerns you may have over your chosen model, they can also provide a wealth of information on the sector as a whole.
If you are unsure as to how the Franchising Code of Conduct applies and protects you, or what documents you can expect to receive, consult your franchise lawyer.
Ling Hsu from LegalVision said that having a franchise lawyer overlook important documents can reveal hidden costs or traps that otherwise would have gone unnoticed.
“One sign that a franchise system may not deliver desired results is the franchise agreement containing limited franchisor obligations,” Hing said.
“Franchisors should be prepared to commit contractually to some minimum support obligations to their franchisees to ensure they are best equipped for success.”
The franchise advisor reiterated that professional advice should be considered an investment rather than a cost.
“Before you commit to purchasing a franchise, it is important to understand the key protections and requirements contained in the Code,” she said. “An experienced franchise lawyer will be able to advise you on whether the franchisor’s documents or commercial practice is ‘standard’.”
One of the most revealing and informative conversations any prospective franchisee can have is with the franchisor themselves.
Prior to buying a franchise, arrange a meeting with your franchisor and assess the relationship in regard to a long-term investment.
Does this franchisor seem friendly? Inviting? Flexible? Most importantly, you should quiz the franchisor over support structures.
Identify if support and training is ongoing, or just part of the initial on-boarding process. This will ultimately reveal the franchisor’s long-term goals.
Regardless of the business you have in mind, the issue of funding will inevitably arise. Will you self-fund the venture? Will you get a business loan? If so, will you seek an alternative lender?
The amount of money that each franchisee will need to launch their operation will different from model to model, based on location, brand and fit-out.
Some lenders will require a guarantee from the franchisor, and in some cases a certain level of your own equity.
Here are some key points to consider if you do end up getting a loan
- The investment cost
- The ongoing costs
- The term of the loan
The most important person to question is yourself!
Have a think about the opportunity. Why are you looking to get into business for yourself? Is it a question self-fulfilment or monetary gain?
If you are motivated by financial gain, you must remember that like all businesses, franchises take time to develop and mature. Don’t expect to turn a massive profit within the first 12 months.
Similarly, think about what kind of franchise you would be willing to work in every day. The most successful franchisees are those who commit to being present, particularly in the early days.
Certainly, there are a number of franchise models that lend themselves well to the silent owner structure, however staffing, payroll and training costs can stack up.
Set clear business objectives before buying a franchise and be sure to target your operation towards these goals. Pick an industry you are passionate about and refine your business identity.
Importance of due diligence before buying a franchise
These conversations will be lengthy, often uncomfortable but wholly essential. If you don’t understand certain aspects of your proposed franchise venture now, you can be sure that they will rear their ugly heads some time down the track.
Have the hard conversation and get your business started off on the right foot.
Remember, this list isn’t the be all and end all, but it’s a great start in your due diligence process.