Things you should know before buying a franchise

Things you should know before buying a franchise

Buying a franchise presents an attractive investment opportunity for entrepreneurs, and can offer various benefits, Jeremy Lang, Business Partners Limited regional GM, said last week in Johannesburg, South Africa.

“Franchises have the advantage of owning an established product or service that is already familiar to the public, as well as a pre-sold consumer base and household brand-name recognition,” Lang explained.

However, he urged entrepreneurs to do in-depth research before investing in a franchise. “The key to finding a franchise that will generate returns requires insight as to what is being purchased,” he said.

Due diligence should be conducted in the same manner when purchasing a franchise, as when opening any new business, he added.

Lang offers the following tips to potential franchisees:

• Know the industry:

Choose a franchise in an industry that you are familiar with, in which you have some previous experience, and that suits your background and can help you succeed.

• Choose within your budget:

Calculate what you are able to afford, including the finances you are able to raise, save and will be able to borrow. When calculating the budget, keep the following factors in mind: firstly, too much finance can ruin a venture, so be wary of overburdening your business with too much borrowed capital.

Secondly, calculate the entire investment required, including set-up costs and working capital. Do not limit your funding to include only the franchise fee.

• Review and investigate the franchisor:

Look over the documentation the group provides, but also find out as much as you are able to about the reputation and financial help of the franchise.

• Speak to franchisees and ex-franchisees:

This is probably the most important exercise in the process. A franchisor should be able to give you a fully updated list of franchisees and ex-franchisees, as well as their contact details.

If you are interested in purchasing an outlet or a franchise group, test all the assertions with the franchisees before making a decision. Comparing their levels of support, the quality of their training, the profitability of the business, and the integrity of the franchisor’s business dealings, will give you a better understanding of your potential purchase.

• Investigate the location:

Suitability of the location of your outlet, or, in the case of non-retail franchises, the area in which you are going to operate in, is key.

An in-depth knowledge of the surrounding market is vital to the success of your business.
Make use of expert marketers or neighbouring franchisors for advice, but also do your own independent research to help ascertain your market.

• Get the value calculation right:

Ensure that you are not overpaying for the franchise outlet that you have in mind, whether it is a new or existing one. After conducting your research make a concerted effort to consult an accountant to check your financial projections and value calculations. Although they are costly, industry specialists are an asset for any business.

• Get legal advice and knowledge:

The franchise agreement the franchisor will give you to sign is a crucial document detailing the rights and obligations of you and the franchisor.

Ensure that a lawyer, preferably one with knowledge about the franchising sector, goes through the document with you, not only to make sure that it is fair to you, but also to explain any clause that you may not understand.

• In the end, it depends on you:

The strongest franchise brand can still fail, but with the correct leadership and management this can be avoided.  Just like any other business, operational and cash-flow management needs to be realistic.

Bear in mind that a hands-on management approach is also required. If you are an experienced independent business owner, and this is your first attempt at franchising, it is also important to remember that you will need to become accustomed to operating according to the rules of the group.

The South African franchising industry is growing faster. There are currently 400 franchise systems and close to 23 000 franchise outlets in South Africa, according to figures released last week by Franchise South Africa.

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