Top Tips for Buying a Franchise: Ask Loads of Questions and Be Wary
A great brand, a good location, ongoing training – these are some of the factors behind every franchise network success story.
However, many prospective buyers seem altogether too trusting when it comes to buying. Buying a franchise, whether a new outlet or an existing one, is a decision fraught with risks. Despite being one of the most important decisions a businessperson can make, many aspiring entrepreneurs fail to ask the critical and even most obvious questions before agreeing to a purchase. They seem to gullibly assume the seller is their friend.
Distilling the advice of experienced franchisors, each experienced in opening franchise outlets and interviewing applicants, the down-to-earth advice is to be wary of all verbal promises, get all such promises in writing, and speak to franchisees.
The following are proven tips that prospective franchise buyers should follow in order to select a franchise model that suits them:
Don’t just be money motivated
If you’re going to succeed as a franchisee, you first need to purchase a franchise in an industry, and offering a lifestyle, you will enjoy. In most instances, you are going to be spending every day in that shop. For instance, in the case of a food franchise your primary motivation has to be passion for food and particularly for the franchise’s menu. Without that passion, a franchisee is unlikely to have the discipline to work in the store each day, sometimes six days a week. Experience suggests that unless owners are regularly in the shop, the business has a higher risk of failure.
Meet the franchisor!
It is amazing how many people buy a franchise without ever meeting the franchisor. One of the most overlooked elements in franchising is the relationship between franchisee and franchisor. Sadly, tensions between these two parties are rampant and often get in the way of business success. It’s not uncommon to hear statements like these in the franchising sector: “When I started in this business my franchisor treated me like royalty, now all they care about is royalties!”
It is the franchisor the buyer will ultimately have the core relationship with, so establish a direct connection from the outset. It sometimes happens that a prospective buyer is introduced through an agent or intermediary, and meeting the franchisor is omitted until the deal is done.
Agents have been known to make false statements, empty promises or stretch the truth to crush-sell a deal. Remember, in the case of a resale the seller has his reasons for wanting to get out, and may not be too keen on revealing them. Therefore, be extra careful before accepting what they say. Try delve into the reasons why they are selling, and certainly explore the possibility of unpaid suppliers, or whether the business has problems with location or a tough lifestyle. If you’re selecting a franchise, talk to existing franchisees about the level of support they receive, if they’re happy and if their business is profitable. If it isn’t profitable, they’re unlikely to be happy.
When you buy a franchise, what you’re buying is proven systems and processes. However, don’t fall for this false sense of security. There have been franchises in categories like pubs and fast food which grew too rapidly and ultimately failed. Often, this is because the owner himself had never run a store. This is one more reason to have a direct interview with the franchisor and quiz him or her on exactly what experience he has in personally running a store. After all, the trusted systems should be based on a successful business.
Check the agreement details
Once a buyer has isolated a particular franchise that appeals to him, there are still a number of details to consider.
- For instance, check if it is a turnkey operation which includes all the equipment, systems and training. If not, find out all additional expenses: a franchise agreement may require the purchase of top-of-the-range equipment and fittings, which you may find unaffordable; or have a clause requiring expensive subsequent renovations. The costs of owning a franchise vary from one to the other.
- Depending on the franchise model, training may or may not be included. You should ideally expect a month’s intense training at another store or head office, followed by a month’s supervision of your new staff to manage any teething problems. A franchisee left to figure out the pieces on their own, will have a higher risk of failure. Many franchisors don’t offer business management training. It’s essential for franchisees to learn the basics of running a small business, even if they have business degrees, as the it’s the nitty gritty of cash flow management that often get franchisees in trouble. If your franchisor doesn’t offer this, consider booking yourself on a course like the one run by Franchising Plus.
- Further security is provided when you buy into a franchise affiliated to FASA (Franchising Association of South Africa), although this is still not a failsafe guarantee of success. FASA requires members to adhere to their Code of Ethics and also to give franchisees a Disclosure Document which lists the history of all stores bought and sold. A disclosure document should be offered by all franchises regardless of FASA membership as it’s a legal requirement by the Consumer Protection Act (CPA) when selling a franchise. Again, this doesn’t replace your own research, but does offer greater transparency.
Most purchasing mistakes get made by taking a person’s word on something. If it isn’t written in the agreement, you cannot subsequently insist upon it. Don’t blindly trust a franchisor. Adopt an attitude of wariness and question everything and everybody.