Businesses For Sale
10 Key Factors In Selecting A Franchise
Before buying a franchise business there are a great number of things to consider. This article provides you with 10 factors you should look for from a franchise business that will help you avoid some of the major pitfalls. The article is also known as Avoiding a RIYOT, the acronym RIYOT stands for REPENT IN YOUR OWN TIME. The point being, that if you pick the wrong franchise in haste you could be regretting the decision for a long time to come. We hope by reading this article we can stop at least a few people making a very costly error of judgement. Hope you find this useful.
This list has been compiled by a very experienced franchisee. All the information here is based on direct experience, near misses and the stories we have heard from the “trenches”. - How would your franchise business be affected by economic cycles? (eg for example during a general economic downturn or worse a longer term recession). All economies are cyclical and as you will be aware from experience there are times of prosperity (that can last many years) and there are times when global, national and local factors result in economic slowdowns (which can also last many years). What impact will a change in the economy have on your prospective business? Typically luxury products and services, non-essential services and goods will suffer more than those seen as cost saving or essential items or services.
- How dependent is the franchise on area/socio-economic mix? Most franchises start from a single business in a single area. The success of that initial operation and perhaps a subsequent pilot are often the basis for the entire franchise operation. However the area the business started in and the area you will operate the franchise in are likely to be different (different mix of houses to businesses, blue collar to white collar workers, high income to low income, different levels of competition etc). Evaluate the impact of these differences on the earning potential. - Will the franchise operation as a whole survive if there is a change of ownership or change of management? Some franchise operations only succeed due to the influence of the founder or the current owners or management team. What would be the impact of a change in the owner, manager of the business? Do you think the product and operating model would work equally well regardless of whom owned/operated the franchise group? A change of management may well have the effect of turning a well run business into a poorly run business. - Does the franchisor have the right management structure in place to be proactive in developing the business? New ideas and approaches to business are an essential and necessary function of the franchisors remit for the long term survival of the franchise. Ask about their experiences and how they intend to keep competitive over the long term? What ideas have they got for product/service growth? What flexibility will you have as a franchisee to change the product mix, marketing or pricing strategies? - Profit margins must be high and above the normal levels if you are going to be able to pay the franchise fees as well as yourself. When reviewing financial forecasts for the business you will need to establish the net profit after any franchise fees are paid. Often numbers are quoted that look great, but do not include the franchise fees you will be paying out monthly.
Depending on the franchise these can include both fixed amounts and percentage fees based on turnover. - The products or services on offer from the franchisor should have some element of uniqueness about them which is exclusive to the franchisor and ideally patented. If your franchisor is not offering a unique product or service, then it is highly likely you will already have or will shortly be getting direct competition from other franchises, independent retailers and chain stores. Open a franchise magazine and you will see that many industries already have many franchise businesses in them (eg lawncare, property rental, food outlets etc) and they offer very similar products or services. Factor this in when looking at the income levels quoted by your franchisor, if a competitor opens next week will your income potential halve? - Supermarkets are a great idea for most of us but you do not want to be in competition against them. Supermarkets and big chain stores will reach into markets and niches that have a high degree of profitability and/or will build their customer numbers (eg photo processing, dry cleaning, newspapers, books, DVD’s etc). If there is enough profit supermarkets will look at any business opportunity and will often have the resources to enter the market. Many small businesses have closed due to the power of the supermarkets. Could this happen to your franchise? - A good franchisor will permit you to speak to any of the franchisees he has up and running. A good franchisor will give you a list of all franchises currently operating and you choose the people you wish to speak to.
Due to the pressures of running a business, not all existing franchisees will be willing to see every potential new franchisee. Bear this in mind, but do try and speak to as many as possible ideally 5 or 6. - Piloted and fully audited franchise operations give the best chance of success. You can further help mitigate the risks of buying and operating a franchise by looking at BFA accredited franchises. For more details on membership status, please see the BFA website (http://www.thebfa.org/standards.asp). However this does not guarantee success and conversely less proven franchises can work very well. Furthermore the more established a franchise is the more of a premium you will have to pay for it.
- A good franchisor will encourage you to visit their HQ, they will encourage you to work with them for a day and they will give you all the information you ask for and will not pester you for a decision. Ideally however your franchisor will go a stage further. If they truly want you to succeed they will vet your suitability as a franchisee (not just checking you have the money!!). We would suggest you to have a credit agency check out the Directors / Franchisor / key financial staff. Please NOTE. This not an exhaustive list of the factors that make a good franchise, but should give you some key areas to look at. Take your time, take care and take advice (avoid a Riyot !!).
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