6 Things to Know Before Starting a Franchise
A franchise is, in simple terms, a licensing relationship. A company like Baskins or Starbucks usually operates this way by licensing its brand and using systems for interested individuals. As such, the company gives you the right to sell their products, and in turn, you agree to pay a certain percentage of fees upfront and follow their conditions and guidelines. Examples of franchises are:
- Petrol kiosks
- Fast food restaurants
- Coffee houses
A franchise business based on a passive income stream can suit most people as it will depend primarily on the individual on how long and often they want to invest their time and effort into it. As such, one can balance their lifestyle and commitments to suit the needs of the franchise system. For example, one passive income franchise known as Xpresso Delight has over 150 franchisees, and the operators are anywhere between 20 to 60 years of age.
What are the things you should know before starting a franchise?
1. Learn about franchising
Read, explore and discover as much as you can about franchising. It’s always good to go into something with some information rather than no information. In today’s world, there are plenty of opportunities to learn.
This can be reading books and blogs, joining franchise webinars, speaking to franchisees and joining free or paid online courses. You can even join networking business dinners and sessions to talk to business owners or entrepreneurs and ask as many questions as possible.
2. Read and understand the FDD
The Financial Disclosure Document offers a gold mine of information for franchisees. It’s 50 pages or more, but it’s beneficial for anyone who wants to get into franchising.
It offers information on litigation involving companies, bankruptcy filings, training for franchisees, costs that may not seem obvious, special promotions and opening day expenses. If you need help understanding the guidelines, consult with a franchise lawyer for professional help.
3. Identify your financial risks
Businesses always come with financial risks. Whether it’s something within your control or out of your control, knowing what you’re up against will help you plan for competition and the state of the economy. There are certain risks to be aware of in franchising, and these are:
Funds to cover unanticipated costs
You need to make sure you have extra funds to cover costs over the term of your franchise agreement. For instance, your franchisor may change the look of their stores, and if this happens, the responsibility and costs for rebranding are on you.
Changes in consumer demand
You may need to localize your franchise based on your location. Consumer demand is very different across geographical areas, which means that while one product may work for one place, it may not enjoy the same success in a different location.
Purchasing from pre-existing suppliers
As a franchisee, you may not be able to choose the suppliers to work with. Becoming a franchise comes with a battalion of pre-ordered and pre-agreed suppliers. This is both good and bad, depending on how you look. The disadvantage of having pre-existing suppliers is that you won’t be able to manage your supplier costs even if you find lower prices from another supplier.
You also need to have funds to recover the upfront costs you invested in setting up shop because this will help you recover and make a profit faster during your franchise agreement.
4. Find out what the franchisor provides
Speaking about pre-existing benefits, find out what your chosen franchisor provides. When you take on a franchise, plenty of comforts come from the franchisor, such as branding, marketing, a tried-and-tested marketing plan, employee training, etc.
This ensures that branding is consistent across all the franchisor’s store locations. So make sure you know how much support you will get from the franchisor before your sign an agreement. This information will help you set up to make the process easier.
5. Know your territory
You need to know your area and the customers who live in your business territory. How many other businesses in your area offer similar products or services as you do?
You need competitors, but too many may prove too much for a new company operating in the area. Watch out for any overlaps that may cause significant issues with your business.
6. Do a cost & benefit analysis
After getting as much information as possible, you also need to do the old-fashioned cost and benefit analysis. State the benefits on one side of your ledger and then the costs and liabilities on the other side. Your benefits include an established brand, training, proven market, tried-and-tested formulas, staffing guidelines, and store design.
On the cost side, state the money you need to pay for merchandise, suppliers, ingredients, franchising fees, etc. You must also determine if marketing fees and other royalties must be paid.