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21 Jun 2017

franchise

People go into franchising for a number of reasons: a passion for a particular product or service, the freedom of owning your own business or as a lifestyle choice. However, too many prospective franchisees rush into buying a franchise without putting any real thought into what they are getting themselves into. Before you get into what could potentially be an expensive mistake, here are 9 SAQs (should ask questions) to consider.

  1. What are franchisees saying about the franchise?

When doing your due diligence make sure you get the names of current and past franchisees so that you can ask about their experiences. You can also look at what people are saying on social medial and online fora; a quick search of “[franchise name] sucks” will let you know if there’s any online chatter from dissatisfied franchisees.

  1. What’s the turnover rate?

How many franchises have been bought and sold over the past 12 months? If there are a lot of sales, it could be a bad sign, especially if the franchisor is buying up the units to prevent them from closing down.

  1. What’s the failure rate?

There could be any number of reasons for a high failure rate: market turn down, new competition, insufficient vetting of franchisees, for instance. However, if there are a large number of franchisees closing down, this should be seen as a red flag.

  1. Why did the franchisees fail?

Following on from the previous question, it’s important to find out why a franchise has failed. Was it due to a lack of support from the franchisor or the skills of the franchisee? Maybe it was due to external factors such as a downturn in economic conditions or increased competition. Either way, finding out why the business failed is an important question to ask yet many potential franchisees fail to do so.

  1. Would you still choose this franchise if you had to do it again?

Asking this question of current franchisees can reveal a lot about whether this business will help you to achieve your business and personal goals, or whether it will be more of a daily grind that you’ll only stick at because it’s too expensive to leave.

  1. What’s it really like to work in the business?

Many potential franchisees go into the process of starting a franchise with stars in their eyes thinking they’ll be able to run it successfully only working part-time and be able to swan in and out whenever they like. The reality can be quite different from this fantasy, especially in the early days of establishing the business. Taking the time to shadow a current franchisee for a few hours or even a day will give you a better idea of what’s actually involved.

  1. What percentage of the chain is franchised?

Ideally, the majority of business units will be owned by franchisees. If there are mostly, or a growing number of, company owned units, you should be concerned. A large number of company owned units may mean fewer resources for franchisees. You may even find yourself competing with company units in the same territory, putting your business at a disadvantage.

  1. What ongoing support is offered beyond the initial training?

Franchisors love to provide the ‘wow’ factor when they do presentations to prospective franchisees. The star treatment usually continues during the initial week or 2 of training but what happens next? Will the franchisor continue to provide support once you’re up and running or will you be left to fend for yourself? It’s important to know how much and what kind of ongoing support you will receive before you sign up.

  1. What is the business experience of the franchise management team?

Often business owners will see franchising as a way to rapidly grow their business, without taking the time to find out if the business model will work. Be particularly cautious if it’s a new franchise and conduct a thorough due diligence on the business experience of the franchisors.

Owning a franchise can be a great experience and many franchisees have gone on to be very successful. However, it does carry a certain degree of risk. In addition to the normal due diligence you should undertake before buying into any business, asking the above questions will ensure you know what you are getting into before you purchase a franchise. This is one of those situations where what you don’t know really could hurt you.

 


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