Buying a Franchise
What Are the Experience and Achievements of the Manager and the Key People? How Long Have They Served the Company and the Business?
History often repeats itself. What is important to you is whether the people behind the business are winners. Ideally they should have enough experience and not gain it at your expense and at the same time be hungry enough not to rest on their laurels.
Perspectives
Are There Changes Coming to the Company Any Time Soon?
Changes could affect management, ownership or the overall culture of the organization. Are there plans for the introduction of new products and services or for expansion into a neighboring country? Taken by themselves, changes are neither negative nor positive. But if business is bad and management is jumping ship, it is unlikely many new passengers will be getting on.
How Do You See the Future of the Company?
The answers here follow two main directions: how does the company intend to cover a given territory with new outlets and how will it perfect work within the franchise chain in terms of procedures, product placement, software etc. Try and judge your interlocutor’s enthusiasm for the future, but also the extent to which their plans and perspectives for development are realistic and not chimeras.
Financial Issues
What Is My Profit Going to Be From a Single Outlet?
Try and figure out what turnover will help you break even and how long it will take for you to recoup your investment. Ask if the final figure is less the salary of a manager because good business does not mean doing everything yourself and then getting a reasonable salary for your efforts. Good business means paying someone to design a website for you, paying someone else to attract customers, to draw up a contract, to perform a service, to collect the money, to do the accounts, to handle the interest on the credit, to clean up at the end of the day and finally, someone to organize it all. Entrepreneurial profit is what remains at the end of the whole process.
Where Will My Money Go: Expenditure and Investment
Know what your fixed expenditure is: rent, salaries, medical and social security outlays, utilities, raw materials etc. Will there be associated costs such as permits, licenses, compulsory insurance? How often will you have to freshen up the premises and change the furniture? What is the resale value of your equipment should you need to let go of it? Will the franchisor buy it off you at a certain price? Do the numbers once, twice, as many times you need to make sure you are in the know. Do not forget to include the cut benefits (current earnings lost while you establish your new business) as well as money you will need to keep yourself afloat. Make sure you set aside emergency funds as a cushion against business failure and unforeseen expenses.
Do You Offer Financing or Leasing?
Some franchisors may agree to partly finance the construction of your outlet or to negotiate leasing with equipment suppliers. Try to negotiate a discount or a deferred payment on your initial franchise fee.
What Income May I Expect?
Naturally, your turnover in the initial period of growth will differ from the one after the business is fully developed. Find out if the business is seasonal and what the income dynamics are for each month. Also, ask what good and services are the most profitable and which attract the highest volume of trade.
How Are Prices Formed?
Some chains determine prices centrally while others let the franchisee exercise their judgment. The same approach is valid for discounts. If it is the former, the question you must not omit to ask is whether the prices you will be operating with are higher or lower than those of the competitors.
Franchisees
How Many Existing Outlets Are There?
How many of them are owned by the company? The ratio of wholly owned versus franchised outlets is important insofar as it gives you an idea of the development strategy for the franchise system. Find out how many new outlets opened recently and how many closed down last year. What were the reasons for their failure? Ask for the names and phone numbers of people who left the franchise. In theUSand elsewhere where this business is regulated the law requires the franchisor to oblige you.
What Is the Profile of the Franchisees?
It is likely that the franchisor will have a profile of the ideal franchisee. If you do not fit into this model you may not fit the business model later. Inquire after the approval process your candidature will undergo and what the criteria will be in judging your suitability for the business.
How Will the Business of Franchisees Develop?
Can you obtain information on the average turnover of currently active franchises? Does turnover differ for outlets managed by franchisees and those managed by the franchisor? Ask for permission to do a couple of weeks’ work in an existing outlet in order to gauge the business and your suitability/liking for it. Find out how many new franchises are acquired by successful franchisees as their second or third ventures.
Operations
Must I Manage the Business Personally or Can I Appoint a Manager?
This is a question the franchisor should be very clear about right from the word go. Some franchises not only require the franchisee to run the business hands-on but also forbid him/her from owning shares in other businesses. If you are set on running the business yourself this should not be an impediment. If your business expands however such limitation could prove a significant obstacle to your future development.
What Are the Likeliest Problems I Am to Face?
All sorts: altercations with clients, suppliers and employees. You are the one who needs to sort these out and that is why it is important to be able to forecast and come up with contingency plans for such emergencies. Ask what the commonest issues are between franchisors and franchises are and how they were dealt with in the past.
