When deciding whether to become a franchisee, most of the issues to be considered are similar to those that must be addressed by any self-employed person considering a new business venture. However, a crucial difference exists between an independent business and a franchise, namely the relationship between franchisor and franchisee.
Thorough investigation of a potential franchise is essential in order to find out whether the business on offer is right for the individual. Be sure that you understand the terms and conditions of the franchise contract, in particular the restrictions that you would be under regarding choice of suppliers, pricing, marketing and sales territory. Financial projections produced by the franchisor should be analysed with a particularly sceptical eye, largely because they are unlikely to undersell the potential profitability of the business!
If you are likely to require bank finance to set up your franchise, consult your bank business advisors early in the process. Banks often have access to additional corporate information about the franchisor that would not normally be available to an individual. These details could influence your decision one way or the other and help to avoid costly mistakes in the future. Many financial institutions have come to see well defined franchises as good business propositions and, in many cases, will be willing to lend more and on more favourable terms than they would for conventional new business start-ups.
Whether a loan is required or not, a comprehensive business plan, including cash flow forecasts, should be produced in order to ascertain the potential viability of the franchise operation.
If you intend to proceed with the venture, you should look at the details of the franchise agreement with a solicitor who has experience of franchising. Most franchise contracts are very rigidly defined, particularly when the franchisor operates on a nationwide or worldwide basis. Legal advice to identify all potential pitfalls and potentially serious restrictions is vital before a decision is made on whether to sign the contact and take on the franchise.
The most important points to be defined in the contract are the individual responsibilities, both financial and procedural, of the franchisor and the franchisee. These should cover all aspects of the business including:
initial franchise fee;
ongoing fees or royalties;
level of central administration provided;
advertising and marketing support;
choice of suppliers;
restrictions on products or services that can be provided;
rules on use of the brand;
rules regarding resale of the franchise.
A successful franchise operation depends on a good working relationship between franchisor and franchisee. The overall success of any franchise depends on both the hard work put in by the franchisees and the continuing support received from the franchisors. If this equilibrium is disturbed, then the business is likely to suffer.
The relationship between franchisor and franchisee is critical to the success of a franchise business;
the franchisee should be fully conversant with all aspects of any franchise agreement before it is signed;
many financial institutions are keen to fund franchised businesses and can often offer useful advice about particular franchises;
specialist legal advice is essential before any decision is made to take on a franchise.