Franchising: Five things to consider
If considering a franchise, it's important to do your research as even though you are buy your own business, you are agreeing to operate by someone else's rules. Here's five things to think carefully about:
1. Talk to other franchisees
By law, a full list of franchisees must be provided by the franchisor as part of the disclosure information. Consult widely, contacting those around the location you are considering and those in geographically similar areas.
They should be happy to share.
2. Location, location, location
If you are considering a new territory franchise, rather than an existing one – research the area. You may be buying into a successful brand but the basic rules still apply:
- Is there a market?
- Who are your competitors?
3. Ask an expert
Studies indicate franchisees spend an average of $2500-$2700 on due diligence. This is higher than those buying an independent business ($1500-$2290), but still relatively low.
It is essential you seek advice not just from legal and accounting experts, but those who have extensive and specific franchising experience.
There are many different franchising models and professionals are best placed to assess the stability of the model you are looking at, and whether is suits your needs.
4. Plan for problems
Even profitable businesses can run into cash flow problems if customers fail to pay on time. A lack of working capital is one of the major reasons for business failures and this can apply equally to franchises that fail to set aside contingency funds.
5. Look for disruptors
Could the product or service you will be selling be vulnerable to an Uber-style disruptor? Five years – the average term of a franchise agreement – can be a long time in business.
Check how emerging technology could impact your business. Some franchises fail because they cannot adapt quickly to changing markets.
You need to be comfortable your business opportunities will expand, not contract.