Let us get the terminology right. In the franchise business, a franchisor is the one who permits a franchisee to use franchisor’s trademark, licenses and any other proprietary material for a predefined time. For example, if you set up a McDonald’s or KFC outlet, then you become a franchisee of KFC/McDonald, franchisor.
Franchising has become an eternal fad. Franchising is a risky proposition. Rules are in favor of the franchisors. If you don’t do your home work before you shell out your money to a franchisor, then you are in for a rough ride. Let us look at the things to consider before you become a franchisee:
Selection of Franchise Business:
This is the crucial thing to consider. There are a lot of franchisors out there, good, bad and the ugly. First, you have to like the franchisor’s brand and product/service. Don’t assume that if you become a franchisee of a popular brand, then you will automatically succeed. Unless, you have some personal connection with the product/service, you will find it hard to sail through difficult times. If you like toys, you are better off owning a toy store than a pizza outlet.
Homework before Buying Franchise Business:
Go around and ask the current franchisees about the following:
- Their experiences with the franchisor and the customers.
- The set-up equipment provided by franchisor.
- Training or support provided by franchisor.
- Renewal/hidden fees charged by the franchisor.
- Approximate revenues and profits of their outlet.
- How much they are spending on promoting their franchise locally?
- What kind of locations/demographics should be targeted for success of new franchisees. (This will help you in finalizing the territory you will apply for.)
Before you sign-up with the franchisor, ask them about the following:
- For the territory you are applying, are they planning to give licenses to others also in the future? (If you open a franchise outlet in a territory, where other outlets of the same brand will come up, then there will be revenue split, which is not ideal if the franchise owners are different.)
- Have they cancelled the agreements of the franchisees in the last one year? What were the reasons?
- What are the health and safety standards franchisors expect from franchisees?
- Is there any litigation pending against the franchisors?
- Will there be any franchising help from the franchisors?
- Any other details you can ask as per the franchise trade rules of your country.
Capital Availability for Franchise Business:
After doing the home work as described above, it is time to check the purse before signing on the dotted line with your favorite franchisor. You should have enough working capital for at least the next 12 months. You should also plan to pay for rent, equipment repairs or replacements, local marketing, employees, utilities, supply/distribution vehicles and any other minor contingencies.