How to Research a Franchise
Once you have decided that owning and operating a franchise is the right business route for you, you have to set about choosing the right kind of franchise. In this regard, conducting comprehensive research on the franchise companies in question can seriously lower your financial risk.
The first step would be to investigate the various industries in which you are interested and then determining which of those has the greatest growth potential. Once you have narrowed down the industries to those most suitable, you should then analyse the geographical area in which you want to operate and determine whether there is a market for that type of business.
There are various tools available to you to undertake the research process. Websites such as www.whichfranchise.co.za is an invaluable source of information and provides the ideal platform to conduct a comparative study of franchise opportunities offered.
But, you also need to do further detective work by finding all the magazine and newspaper articles you can about the companies you are considering.
You can also approach industry associations’ such as the Franchise Association of South Africa (FASA) to find out whether any serious problems have been experienced with the companies you have identified. This will include information about any lawsuits, insolvencies, etc.
Other information which you need to determine independently is the companies’ financial standing, and the rate at which they pays bills, etc. It is also a good idea to verify whether there have been any complaints against the companies with consumer bodies such as the National Consumer Forum.
Franchisors may try to dazzle you with their glossy brochures and slick presentations. However, you will need to look beyond the promotional material to find the hard facts and the answers to the vital questions you need to ask.
The best way to achieve this is by requesting and thoroughly reading the Franchise Disclosure Document (FDD). Make sure that you fully understand the contents of the FDD otherwise consult a franchise consultancy (www.franchisingplus.co.za) or franchise attorney.
Having progressed this far with your research, it is now time to start talking to franchisors. Here are three very important questions to ask:
- What is your company’s primary focus? The answer should preferably be: “the success of our franchisees.”
- What are the reasons for franchisees getting in trouble? Try to identify exactly what is going wrong for troubled franchisees.
- How do you resolve conflicts? Ask for the details of a recent conflict with a franchisee and how it was resolved.
Speak to franchisees
Try to spend a full day with at least one franchisee. This is the only way to get an accurate idea of how franchisees spend their time and what they are doing to make them successful. In this way you can build a relationship with the franchisee which will allow you to get more honest and detailed answers.
Here are some important aspects to quiz franchisees on:
- How well prepared were you when you opened? If a franchisees experienced unpleasant surprises and unexpected problems it normally points to weaknesses in the support received from the franchisor. It could also reflect on the thoroughness of the franchisor’s training programme.
- Do the marketing programmes generate customers? Many franchisors will tell you about the brand building that is done through marketing programmes. However, what is important is whether these campaigns bring customers through your doors who will spend money in your outlet.
- Finances. Find out as many financial details from franchisees as you can. You need to know how much it really costs to open a unit, how soon you will start making money, etc. You will only be able to get the real picture by speaking to franchisees.
When spending time with franchisees you must, however, consider their particular standpoint. For instance if you are talking to a franchisee who is located in the same area as your prospective franchise, he may tell you business is bad because he does not want competition. In the final analysis, you should use your gut instinct to guide you in these issues.
Ultimately, what you want to find out from the franchisees is: “what does the franchisor do to make it worth the fees that you pay to him.”
Franchise trade shows
Franchise trade shows are a great way to gather a lot of preliminary information and survey the industry in a short period of time.
However, when visiting these shows it is important to remember that the companies exhibiting only represent a small segment of the franchise opportunities available. But, you should still take full advantage of the information available.
You should leave your contact details with the companies you are interested in. Also remember to ask detailed questions and listen carefully to the answers. Collect as many brochures and other handouts, while at the same time taking your own notes.
Use impartial experts
Once you have found a franchise opportunity that is right for you; you should pay for expert advice. Here are some of the franchise professionals you should approach:
A franchise consultant.
A franchise attorney. You will need an attorney to go through the Franchise Disclosure Document with you before you sign the franchise agreement.
An accountant who is familiar with small business start-ups and taxation.
You will need to draw up an excellent business plan so that you can apply for financing with confidence.
The Consumer Protection Act
The Consumer Protection Act has recently been added to South African law and is aimed at protecting consumers. It has also been revolutionary to franchising as this Act is also applicable to the relationship between franchisees and their franchisors. This includes a franchisee having the rights of a consumer as well as validity requirements applicable to the franchise agreement and disclosure document. There are also certain waiting periods and cooling off periods during the franchise recruitment process, which need to be adhered to in order to allow you as a potential franchisee enough time to consider the disclosure document and franchise agreement, as well as to have your attorney or professional advisors review the documents and consult with you on them. This allows you to make an informed decision when deciding to purchase a franchise.