Buying a franchise should be undertaken with the same care and diligence that you would undertake with any business decision. However, the information you require when buying a franchise differs significantly from other purchases which you need to be aware of.
Your decision to purchase a franchise should be based upon two broad understandings:
First: You should have an understanding of the advantages and disadvantages of franchising.
Second: You should have an understanding of the franchise you want, and how to evaluate it.
Franchisors, having survived their mistakes while developing the franchise and operating their prototype locations, can guide their franchisees so they do not make the same mistakes.
Upon joining an established franchisor, franchisees receive comprehensive initial training in the operation of the franchise system and in its product, services and methodologies.
The franchisee benefits from the operations manual, site selection, store design and continuing system support which would not be available had they started independently.
They not only have their franchisor as an experienced partner from whom they can get answers, they also have the network of other franchisees that can provide added assistance in the continuing operation of their business.
In essence, many of the major stumbling blocks which could lead to failure are removed by a good franchisor. These franchisors prepare their franchisees for the business and then continue to support them.
A statistic often cited about small-business failure estimates that over 80 percent of independent small businesses fail in the first three to five years. A recent study conducted by Edith Cowan University in Western Australia shows that franchisees are 2.5 times less likely to fail than independent small businesses.
“Failure,” as commonly used in franchising, must be carefully understood by the prospective franchisee. Business failure refers to the closing of the location’s doors, on a permanent basis.
In a franchise system, statistics on failures do not include franchised locations which are repurchased by the franchisor, and continue in operation as a company-owned location, or as a location resold and operated by a new franchisee, at times with a financial return to the original franchisee.
Franchisors will often acquire locations for strategic reasons, which may include a desire to operate more company-owned locations or because a franchisee is not performing to standards.
Instead of terminating the relationship through litigation, the repurchase of a franchise may be the most attractive route. On the other hand, franchisees often sell or abandon their businesses because they have not received the rewards they expected, or for other reasons including retirement or the desire to change their life patterns.
Therefore, it is important when discussing failure rates with any franchisor that you ask about reacquisitions and transfers. Request the names of those franchisees involved in the transactions and determine for yourself why the businesses were sold.
Facing critical decisions
Ensuring that you have enough working capital to sustain you in the start-up period is crucial, and poses a major risk for new businesses.
Will the location selected provide the business with sufficient customers? Is the size of the location too large or too small? Is the rent too high? How many employees are required, at what times of the day, and how much should they be paid? Is the equipment selected the best for the operation and is the price for the equipment fair?
These and hundreds of other questions must be considered and answered.
Well-developed franchisors have experience in starting and operating the business the franchisees are going to operate.
They can guide their franchisees as they make these critical decisions. That experience lessens the franchisee’s chances of making mistakes, helps them to avoid underestimating their capital needs and, therefore, reduces their risk of failure.
The difference in failure rates between franchises and independent businesses is an impressive factor to consider. Bear in mind though, that independent businesses do not fail solely because of poor-quality products or services.
They often fail because they could not anticipate their capital requirements, and do not have the experience or resources to fully analyze the risks they face.
Franchising pros and cons
Franchising is not a perfect vehicle and has advantages as well as disadvantages.
It is important for new franchisees to recognise that many apparent disadvantages inherent in franchising may, however, also be advantages.
One factor that is often seen as a disadvantage is the public’s perception of the system as a chain. When they receive great service at one location, they assume they will get great service at all locations.
The reverse is also true. You will be judged not only by your performance but also by the performance of all of the other franchisees.
Therefore, when evaluating a franchise, make certain that the franchisor has the right in the agreement to enforce the system’s standards and has strongly exercised those rights.
You need assurance that performance standards will be enforced and enforced uniformly.
Limitations on territorial rights may restrict your market and income, but they allow other franchisees to contribute, as you will, to the system’s advertising fund and provide the critical mass needed for the system to compete effectively against the competition.
The possibility of being terminated for failure to follow the system, and the franchisor’s right to approve the people to whom you may want to sell your business, protects you from other franchisees who may not perform as well as you and to whom your success is tied.
Therefore, some of the restrictions placed on a franchisee can also constitute an advantage for the franchisee.
A prospective franchisee needs to have realistic financial expectations. Having unrealistic expectations is the greatest potential disadvantage of starting any new business, not just a franchise.
