Small Business for Dummies. Veechi Curtis
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of franchises. At this point, take care not to set your heart on any one franchise but, rather, research each one carefully. In particular, don’t automatically choose the franchise with the cheapest initial fee. This fee, when considered in isolation, is a poor indicator of the value of a franchise, and of the total ongoing costs (for more about fees, skip to the section ‘Doing your sums’, next in this chapter).
Here are some of the questions I suggest you ask about each potential franchise business:
Does the franchise pass the test of time? How many years has the group been established? When did the first franchise come in?
Are you a test bunny? How many franchisees are currently in operation? Ask for a list of existing franchise outlets, including names and addresses. If the franchise is newly imported from overseas, has it been market tested locally by careful and thorough pilot testing?
How does the franchise bear up to competition? What makes the business offering of this franchise different from others? How competitive is the market for the particular products or service?
How are other franchises performing? Ask salient questions regarding profitability, turnover and growth. If the franchisor is reticent, find out if any of the existing franchises are for sale. If so, arrange to visit the franchise as an interested buyer, and ask to look at the books.
Who hasn’t continued and why? The Franchising Code requires franchisors to provide details of all franchises terminated in the previous three years. Information about terminated franchises is helpful, but what you also want to ask is how many franchises have been sold, cancelled, not renewed or ceased operating. (Note: Be careful how you phrase this question in order to cover all possible scenarios!) Ask for the last-known contact details for these franchisees and find out why they didn’t continue. Then ask the franchisor, too — every story has two sides.
What are the fees? See ‘Doing your sums’ next in this chapter for details.
How much does getting started cost? Ask for assistance to work through a detailed budget, including legals, set-up costs, shop-fitting, signage, stock on hand and working capital.
How will the site be selected? For retail franchises, physical location is everything, and you need to have control over this element.
What are the restrictions? Are you restricted to certain areas, products or even suppliers? What are the competition clauses? In regards to your territory, are you guaranteed exclusive rights?
Are all brand names and intellectual property protected? Ask your solicitor for assistance with this research.
What is the term of the franchise, and what are the options on renewal? If a lease is involved, does the lease coincide with the franchise term? What conditions/fees will apply when you decide to sell the franchise? Both leases and franchises run out. You don’t want to be stuck with a franchise but without a lease, nor do you want to be saddled with a lease and no franchise agreement.
What training and support will be included? Don’t forget to check whether any fees will be charged for this training.
Is the franchisor technology-savvy? You’re looking for an excellent corporate website, online access to product manuals and sales guides, online inventory management, point-of-sale systems, email marketing software and up-to-date computer systems, and possible additional services such as online scheduling or accounting.
Above all, don’t be shy when asking questions — you have a right to know! Any reputable franchisor understands that making sure you’re properly informed serves their long-term best interests. If you can, spend a couple of weeks working in one of the franchises to get a proper insight into how everything works.
Over the years, I’ve come across a few franchisees who feel they paid too much for the initial purchase of their franchise. In every instance, these franchises were for small service-based businesses (such as bookkeeping and lawn mowing), where the nature of the business itself isn’t too tricky, and where word of mouth often plays a big part in building the business. These franchisees questioned whether the ‘system’ was really worth that much, and felt that the brand of their franchise didn’t warrant the initial price paid or the ongoing fees.
Before buying any franchise, find out what the initial fee pays for, and ask yourself whether you think this fee is worth it. Also, find out what the ongoing fees are and what they pay for. (Even lawn mowing franchises often provide web-based technology that helps with booking, scheduling, invoicing, credit control and so on, all aimed at maximising franchisees’ money-making time.)
How many people around you recognise the brand? Do you think the brand is essential to the success of the franchise? Do existing franchisees think the fees are worth it? If the brand isn’t well known, your money may be better spent researching your own business plan, finding out what successful competitors are doing and creating your own marketing materials and campaigns.
Doing your sums
The cost of buying into a franchise isn’t just the upfront purchase price. Almost all franchises also involve ongoing fees such as royalties on sales, marketing levies or fees for IT services. You also have to factor in all the regular start-up costs that any business start-up involves, such as legals, working capital and opening stock. Consider the following:
What’s included in the initial fee? Fees can vary from $0 to $700,000, not including shop fit-out or equipment, depending on the franchise. Find out whether this initial fee includes training, sample products, initial marketing materials and so on.
If not included in the quoted figure, how much are the additional start-up costs? Don’t underestimate how much starting up a new business costs, especially if you’re planning a retail franchise. Figure 3-2 shows an initial budget for a simple bookkeeping franchise — you can see how the costs for even a simple business such as this mount up. Retail franchises incur costs for additional big-ticket items such as specialist equipment, premises fit-out, vehicles and working capital.
How are ongoing royalties calculated? Find out whether royalty payments are fixed or variable. On the one hand, fixed royalties have the advantage that you know what you’re up for; on the other hand, variable royalties are easier going if business gets tough. If the rate is variable but substantial, ask yourself how sustainable this franchise model is likely to be in the long term.
How do marketing levies work? Almost two-thirds of franchisors charge ongoing marketing levies. The Franchising Code of Conduct requires that these levies are kept in a separate account and that franchisors provide audited statements to franchisees as to how this money is spent.
What other ongoing fees should you expect? Many franchisors charge ongoing fees for IT services, and some franchisors even charge ongoing fees for training. You need to factor any ongoing fees into your business plan and profitability models.
What about early termination fees? If things go belly-up, what are the consequences?