What to research when purchasing a franchise
We’re in a recession, right? Wrong! We were in a recession. The great thing about economic data is that it is historical, and frankly nobody needed the economic data to confirm what everyone knew: things were bad. However, there’s already a feeling we’re climbing out of recession and economists still expect the year as a whole to produce 1% GDP growth. That means an uptick in economic activity, and we’re already a month into it.
It also means more people are likely to be infused with greater optimism and to opt to open their own franchise business. What makes franchising so popular is that franchisees get to run their own businesses without having to do the essential ground work of product development and brand building.
It bears repeating that there are some vital steps to include when considering such a step:
Franchisees are required to pay the set-up costs for their outlet, joining fees and various ongoing fees such as monthly marketing fees (as a percentage of turnover in most instances) and royalty fees. Prospective franchisees need to ask about these fees so they don’t later come as a shock. Location is important, and so the rent may be high: it is therefore imperative to seek as low a rental as possible in a viable location when taking on premises, bearing in mind the rental will escalate by 5% to 8% thereafter each year. Other monthly costs of operations will include wages, equipment and possibly vehicle hire purchase.
FASA estimates the average marketing fee for franchises at 2.3% of monthly turnover – so an aspiring franchisee should verify that a particular franchisor’s fees are not out of line. Franchise owners should also expect – and may be obligated in terms of the agreement – to undertake local marketing among the community around their store to increase public awareness.
When acquiring a store in a particular location, franchisees should be aware of the potential for territorial conflict
in the event that franchisors may seek to cannibalise their network for greater profit. Franchise agreements usually allocated franchisees a specific geographic radius within which to conduct business. The actual size and location may dependent on factors such as population density, sub-sectors and brand rules. The franchisee should either have exclusivity within that area or first right of refusal should a new store be proposed. Franchisees should ensure they fully understand all the repercussions of this to avoid future disputes where outlets are too close to each other.
Purchasing a franchise for most people is a major decision, and legal advice should certainly be sought for franchise agreements, as well as for lease agreements, supplier agreements and shareholder agreements. These are all legally-binding agreements and in particular the franchise agreement covers vital issues such as intellectual property, protection of personal information, trademarks, restraints of trade and consumer rights. A legal opinion will ensure the terms of the franchise agreement are fair and beneficial for the franchisee.
The franchisor is responsible for providing start-up training and sometimes the ongoing skills development of franchisees and their staff. This ideally covers management training as well as on-the-job practical training, including compliance matters such as occupational health and safety. Training can be the difference between success or failure. It is essential to ensure that the franchisor places the correct emphasis on this aspect of the business.