When opting to invest in a franchise, it is imperative that potential franchisees have a full knowledge of what they are investing in, as capital is not the only thing being invested. Essentially, they are investing a number of hard working years into a business that will need to be built on an ongoing basis. It is thus important to be 100% informed of what you are signing up for, to prevent investments being lost. Sandwich Baron Development Manager, Patrick Nebuloni shares more on the questions that need to be asked, and often overlooked when researching a franchise to invest in.
The process of buying a franchise needs to be a time consuming one and it is imperative that a franchisee does all the needed research beforehand to ensure all aspects of the process involved are understood and pursued carefully. As there are many factors to consider and many steps to take during the franchise-buying process it is important to start off by asking the questions that will enable you to make informed decisions. As much as a potential franchisee is being interviewed by the franchisor to establish their suitability, they need to also ‘interview’ the franchisor to establish their credibility as well as the sustainability of their business by asking questions that are less common but equally important.
Aside from ensuring that the business will be a good place to work in, a potential franchisee essentially needs to be assured of the fact that the financials and figures in the business are viable and that the franchise is in a growth phase and shows opportunity. This is why researching a franchise needs to involve asking questions, and more importantly, asking the right ones that aren’t often thought of.
Here is a basic list of the ‘often overlooked’ questions to determine if the franchise is the right fit:
- What happens if I don’t like the business?
- Can I sell the business at any stage?
- How long is a franchise term for?
- Does the franchise come with a right to renewal?
- What level of sales will I need to break even?
- What is the staffing structure and how many will I need?
- What percentage of the estimated turnover should my rental be?
- Does the business require it to be owner operated?
- As well as the purchase costs, what working capital do I need?
- What is the average gross profit margin?
- Can I see a similar store’s income statement?
- How important is site selection? – Will the proposed site be researched and will I be given a report detailing the demographics, captured market etc.?
- What is the expected own cash (unencumbered cash) investment into the business?
- Do you have recommended/linked financial institutions that assist with financing the purchase of the business?
These questions should invoke further conversation and assist an entrepreneur in delving deeper into the chosen franchise to determine if it is worth investing in. If there’s any hesitance on the franchisor’s side in providing details, entrepreneurs should take heed as it could be alarm bells sounding warning them to probe deeper.
Once a thorough ‘investigation’ has been conducted, it is also important to obtain legal and financial advice from a lawyer that specialises in franchising as well as an accountant to check the figures presented. An entrepreneur needs to be entirely satisfied that the franchise is the best fit for them before signing any agreements and this will only be possible if the business is analysed from all angles.