More Questions to Ask Before Buying a Franchise Business
Many successfully branded businesses are available worldwide as franchises. Although investment in a franchise is higher than an independent business, the risk (of failure) is much lower. The franchisor usually charges the franchisee royalties on gross sales in re- turn for management support and a share of marketing expenditure.
There are basically two types of franchise. Either the franchisee contracts directly with the original franchise owner or with a master franchisor. A master franchisor is able to promote sub-franchise agreements in their designated territory. For example a master franchise may cover Australia & New Zealand, so the master franchisor is allowed to sell franchises in any part of these countries. Generally franchisees experience less risk when contracting directly with the original franchisor.
Be realistic about your suitability as a franchisee. To be a successful franchisee you need to be a committed team player with sufficient funding for the business. Prior industry experience is less important than attitude and commitment. Some franchisors actually prefer their franchisees to have no directly relevant experience in the business because re-training “mature people” can be an arduous challenge.
Beyond the primary issues of personal suitability, investment requirements, business objectives, training, support, and franchisor agreements, here is a checklist of additional questions to ask while researching each franchise business:
How long has the franchisor been in this type of business, and when did they start fran- chising?
How many franchises do they operate and where?
How many of their outlets are owned by the original franchisor?
Is it possible to buy an existing store instead of starting a new business?
Can the franchise guarantee uniform quality throughout its franchise network?
Does the franchise have an Operational Procedures Manual to facilitate quality control and consistency throughout the franchise network?
What is the franchisors fee for the franchise license, and what does the fee include?
Is the franchise brand name registered with the Department of Trade and Industry? Would it be possible to meet the existing franchisees to discuss their business?
Is the franchise registered with The International Franchise Association (IFA)?
Does the franchise agreement allow the transfer of the franchise license, and if so, what is the transfer fee? Are there any other penalties for termination of the franchise license? Is the franchise ISO (International Standards Organization) registered?
What control procedures does the franchise have?
What promotional support is offered by the franchisor on and after opening the new store?
Does the franchisor offer exclusive territorial rights?
Which territories are available and which ones have been assigned?
Is it permissible to spend a few days observing the operations of an existing franchise?
What are the estimated costs of remodeling the premises, inventory and other working capital requirements?
How does the purchasing and stock control system operate?
Is the franchisee bound to procure all inventories from the franchisor? What royalties are payable to the franchisor, and when are they payable? What joint national marketing is organized by the franchisor and how is it charged to the franchisees?
What are the operating sales and profits of the stores and would it be possible to obtain financial statements?
Have any of the company’s franchisees failed, and if so, for what reasons? Does the franchisor offer any flexibility regarding the products and services offered for sale?
What is the term of the franchise agreement, and what is the fee for re- newal?
Are discounts available to franchisees who buy additional franchises?
Are referral fees offered to franchisees who introduce the business to other prospective franchisees?
What support does the franchisor offer in identifying suitable premises and remodeling the store?
Ask for a copy of the franchise agreement and the operations manual. Ask your lawyer to review the franchise agreement. Don’t forget the agreement must be equitable to both parties at all times otherwise the franchise will not be successful.
Consider, also, the level of saturation in your targeted market. For example, in Thailand there are currently around 10,000 convenience stores. Of these stores, 7-Eleven has 3,750 outlets, Family Mart has 650, V-Shop has 800 and Freshmart has 300 stores. The deputy managing director of C.P. Seven- Eleven, a subsidiary of the Charoen Pokphand Group, claims that the market will be saturated when there are 20,000 convenience stores in the country. 7-Eleven will limit their outlets in Thailand to 5,000.
Excerpted and adapted from the ebook “How to Arrive, Survive and Thrive in Paradise” by Chris Cummings.