Many people who are buying or setting up a business look at the possibility purchasing a franchise. If you are looking for a business to buy, franchise opportunities can help to reduce the risks associated with a new business. They can:
- Give you access to a proven business model. If you use your own new idea for a business start-up there is always a risk that the concept may prove to be unprofitable, however confident you are that your idea is sound. With an established franchise, you can see evidence of the profit potential of the ideas.
- Be a great way of getting the training and support which you need to ensure the success of your business. Many of the most reputable franchise businesses offer comprehensive training and support packages.
- Help you raise the money which you need to get started. In making a lending decision banks tend to look more favourably on borrowing to finance a franchise business with a good track record rather than an unproven idea.
Franchise opportunities come in all sizes and shapes. Whether you are looking for a small lifestyle business or a major investment, you will probably have lots of options from which to choose. As with any new venture, however, there are pitfalls and traps to avoid. The first few potential pitfalls listed below relate to choosing the right franchise opportunity and checking its terms.
The next batch turn the spotlight on you as the franchisee. To make a success of any franchise business, you need to play to your strengths. Buying a franchise business is not the ideal opportunity for everyone. Asking some tough questions up-front could help you to avoid making a costly mistake.
Finally, there are a three pitfalls to avoid when you are taking decisions relating to your purchase of the franchise.
Pitfall 1 - An Unproven Franchise Opportunity
A major benefit of a franchise opportunity is that the concept is proven. With high quality franchises, you will be able to see that the initial business or pilot scheme set up by the franchisor was profitable and that there are already successful franchisees. Some franchisors, however, take short cuts and start looking for franchisees before the concept is has been proven successful. In such cases, you, as franchisee, would be taking the risk that the basic idea behind the franchise is unsound or that the profits forecast in the business model cannot be achieved.
Protect yourself by speaking to people who have already been signed up by the franchisor and checking that their franchises are performing in line with expectations. If at all possible, speak to a cross-section of franchisees rather than just the showcase examples chosen by the franchisor.
Pitfall 2 - Buying a Poor Territory
Even if the quality of the franchise is high, some territories may be better than others. One of the risks when buying a franchise business is the risk that you buy a poor quality territory. If you are relying on the success of other franchisees, check that your proposed territory is comparable in terms of population density, size and the profile (e.g. age, average earnings etc) of the population.
Pitfall 3 – Restricting Expansion
If you set up a small business in a city such as Bath, you may find that after a few years you want to expand. You could, for example, set up a new outlet in nearby Bristol.
With a franchise business, you may not have this opportunity if the territories around you have been purchased. Also, you may need to pay another substantial start up fee to the franchisor to buy a second territory. This may restrict your opportunity for expansion.
Ask your franchisor about the possibilities for furture expansion and the costs associated with it.
Pitfall 4 – Selling Your Franchise
At some point you may want to sell or transfer your franchise business. Selling a successful franchise business can provide a sizeable lump sum that may help you to fund your next business or boost your pension fund.
Your ability to sell your franchise is something which you need to check out before you buy. Restrictions imposed by the franchisor on when you can sell your franchise or the person to whom you can sell it can substantially reduce the sale price and increase the time which it takes to find a purchaser.
Check also whether the franchisee will be expecting to receive a percentage of the sale fee. It may not be unreasonable for the franchisor to include a charge for training and support for a new franchisee but you need to be sure that the charges are not excessive.
Pitfall 5 - Treating the Franchise as a Job
Whether you buy an existing business, set up a new one or take on a franchise, the responsibility for the success or otherwise of the business will rest on your shoulders. Some new business owners enjoy this responsibility and relish the challenge. Others find it hard to accept that the buck stops with them. Even if your business is a franchise, the success of the business will be your responsibility. This is not just a question of putting in the hard work, it is the acceptance that when the going gets tough, the buck stops with you.
A good franchisor will offer help and advice – it is in their interests to do so, but it will be your business and you will be the key person in determining how well your business does. The ability to “step up to the mark” when necessary is critical.
Pitfall 6 - Independent Spirit
Franchise packages usually place obligations on the franchisee to conform to the business model created by the franchisor. This ensures that a consistent service or product is provided across all of the franchises and that high standards are maintained. If you run a business which is not part of a franchise, you may be able to implement new ideas and changes almost immediately. With a franchise, the process may be much slower and the franchisor may even veto an idea which you think is really good.
To avoid this pitfall, you need to be confident that you will be comfortable working within the constraints of your franchise. Check how much control the franchisor will exert and ask other franchisees how any ideas which they have had for change and innovation have been handled. Getting input from your family, friends and colleagues about whether they would expect you to be able to cope with the need to conform may also help you to evaluate your suitability for running a franchise business.
Pitfall 7 - No Business Expertise
Buying a franchise opportunity can be an excellent option for someone who is skilled at their job and wants to earn money for themselves rather than their boss. Being a good electrician or landscape designer is not, however, enough. You need to have or acquire the expertise to run your own business. As a franchisee, you may be offered training and support by your franchisor but it will usually be up to you to ensure that:
- you comply with all Health & Safety legislation
- your accounts are accurate and up-to-date
- you manage your staff effectively
Failure in any of these areas (and, indeed, many others) could lead to the failure of your business even if you are providing your customers with an outstanding service.
Either make sure that you can deal with these aspects of running your own business or find someone who can support you.
Pitfall 8 - Overstretching Yourself
This pitfall could apply any number of ways but a major issue is overstretching yourself financially. Setting up a new business is stressful. To have overstretched yourself financially can multiply the stress levels. Worrying about the possibility of losing your home can make it hard to focus on running your business effectivelyl.
To minimise the chances of overstretching yourself it is critical that the assumptions in your business plan are as robust as possible. Many of the figures in your plan will come probably from your franchisor so check whether other new franchisees found the figures to be accurate when they started.
It is also wise to make sure that you have a substantial contingency fund to help you if something unexpected goes wrong e.g. a dynamic new competitor comes onto the scene, any buildings you have need more repairs than you anticipated, a customer goes bust owing you money or your business expands more rapidly than expected and you need more money to meet demand. Obviously you should try to anticipate these risks in advance but, having access to the money to deal with them if they do, can be the difference between your businesses thriving and failing. Even good businesses will become insolvent if they run out of cash.
Pitfall 9 - Partner Problems
It can be great to go into business with a member of your family or a friend and there are many examples of successful business partnerships. In other cases, buying a franchise with a partner can add to the stresses and strains of running your own business. There are bound to be times when you cannot agree on the best way forward – consider whether you would be able to cope with this. Combining business relations with family relationships or friendships can be a recipe for disaster.
Carefully size up the advantages and disadvantages of working with a partner before you buy a franchise jointly and make sure that you have discussed the implications of working together and tried to anticipate problems before you start.
Pitfall 10 - Saving Money on Advice
Advice on buying a business from business advisors, accountants and solicitors can be expensive. Whilst you want to spend your money wisely, getting legal advice on the franchise documents is really important. A lawyer can make sure that you are legally entitled to all of the things which you think that you are buying from the franchisor.
It is also really helpful to get someone independent give you a view on the viability of the franchise business which you are buying. An accountant may be able to help you with this. Alternatively contact your local branch of Business Link who may be able to offer free advice.
If you are now ready to consider the options to buy, franchise opportunities are featured on many sites. The top UK sites include:
This site is exclusively affiliated to the British Franchise Association. It contains a large number of interesting articles.
This site includes a helpful 5 Minute UK Franchise Matching Service
Although primarily focussing on UK franchises, this site features a number of international master franchises.
Franinfo is a comprehensive source of franchising information, offering invaluable help and advice to potential franchisees and franchisors and up-to-the-minute information about the franchise industry.
Includes some well known brands amongst its franchisors e.g. McDonalds and Rosemary Conley
This site includes a range of franchising videos which can help you to decide which franchise to buy. Franchise Opportunities on this site include Prontaprint and Muffin break.
This site offers an e-newsletter to help keep you up to date.
