What to Consider before Franchising?

If your goal is to purchase a franchise, choosing the right franchise brand to invest in is one of the most important decisions to make as a business owner. It is not just about finding a company with a proven track record, but also finding one that fits your persona. Your first step, is knowing what to look for when you’re evaluating potential franchises and what to consider before franchising.

Basic key points to consider before franchising include:

• The type of experience required in the franchised business;
• The hours and personal commitment necessary to run the business;
• The track record of the franchisor, and the business experience of its officers and directors;
• How other franchisees in the same system are doing;
• How much it will cost to get into the franchise;
• How much you’re going to pay for the continuing right to operate the business;
• If there are any products or services you need to purchase from the franchisor and suppliers;
• The terms and conditions under which the franchise relationship can be terminated or renewed; and
• The financial condition of the franchisor and its system.

More in-depth factors to consider for franchise opportunities include:

Initial Investment

The initial investment is the total amount of money you will need to establish your franchise and open for business. Initial investments vary widely between franchises types.

Royalties and Marketing Fees

Once you open for business, you will need to pay royalty and marketing fees to your franchisor on an ongoing basis. Most franchisors calculate their royalties and marketing fees as a percentage of gross revenue and require franchisees to pay on a monthly basis. However, there are some exceptions, and you will need to carefully review the Franchise Disclosure Document (FDD) to determine the ongoing fees associated with the franchise opportunity you are considering.

Franchisors are free to charge whatever they believe their franchisees will be willing to pay. Some franchisors charge minimum fees as well, which means that you must pay a certain amount regardless of your franchise’s revenue for the month. In addition, some franchisors require their franchisees to pay “lost future royalties,” which means that if your franchise does not succeed, you must still pay what you would have owed had your franchise been successful.

Territory Rights

Most franchises come with some sort of territory. What it means to be granted a territory as a franchisee depends on the specific terms of the franchise agreement. Some franchisors offer “exclusive” territories within which no other franchisees are permitted to sell their goods or services (although franchisors generally reserve the right to sell in their franchisees’ territories from company-owned locations). Others, simply restrict the geographic area in which franchisees can spend their marketing Rands.

Initial Term and Renewals

When you buy a franchise, your rights are not unlimited in duration. The franchise agreement will specify an initial term, and it will provide a list of conditions that you will need to satisfy to renew your franchise agreement when the initial term expires.

Operational Restrictions and Support

When you buy a franchise, in most cases, you are paying for two things. This includes the right to use the franchisor’s trademarks and the right to use the franchisor’s business system and receive operational support as a franchisee.

Another factor to consider before franchising is the extent to which each franchisor restricts its franchisees’ operations. You can get a sense of this by reviewing the FDD, and also by speaking to current and former franchisees of each system. While you want to know that your franchisor will offer and enforce system-wide standards in order to establish uniformity and foster customer loyalty, you also need to make sure that you will have the flexibility you need to run a successful business.

System Size and Growth

While bigger is not necessarily better in franchising, there is certainly something to be said for a franchisor who is able to build and manage a nationwide system with franchisees that are able to remain in business for multiple years. At the same time, there can be advantages to joining a fledgling franchise system as well, as long as the franchisor has the personnel and financial resources needed in order to grow the system effectively.

When comparing franchise opportunities, it is a good idea to review the section in the FDD that describes franchisee signings, openings, closings, and terminations.

Post-termination Covenants

As a prospective franchisee, it is also important to be aware of any other post-termination covenants in your franchise agreement. These can vary widely from one franchise system to the next, so you want to carefully review the termination provisions of the franchise agreement for each franchise opportunity you are considering.

Non-competition and non-solicitation covenants are both fairly standard, although some franchisors attempt to impose restrictions that are far more stringent than others. You can also expect to have to stop using the franchisor’s system and trademarks promptly, although you may be able to find some short-term leeway here as well.

Do your Due Diligence

Lastly, before choosing a franchise and signing a franchise agreement, it is critical to conduct a thorough due diligence and reach a sound decision that is based on your personal belief in your ability to succeed.

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