How to buy a franchise

Introduction

When you buy a franchise you buy a business that is part of an existing chain of businesses. You, the "franchisee", will have the use of the franchise source's intellectual property - for example, a trademark or brand name together with know-how and other ideas - and the chance to sell a reliable product or service. You'll have the support of a franchisor who will already have experienced success in the business and will have advertising resources that would be beyond a sole trader starting up an entirely new business. In return for this you pay fees to the franchisor.

What are the main elements of a franchise?

Typically a franchise has the following elements:

  • There is a contractual agreement between the franchisor and the franchisee.
  • The franchisor grants a right or licence to the franchisee to carry on a particular business under or using a specific name that belongs to or is associated with the franchisor.
  • The franchisee is usually required to operate the business in accordance with the marketing, business or technical plan that the franchisor specifies. In other words, the franchisor is entitled to exercise continuing control.
  • The franchisor is required to provide ongoing marketing, business or technical assistance.
  • The franchisee pays the franchisor a fee for the rights and the services that the franchisee obtains from the franchisor.

The franchise package: Factors to consider

In assessing the package offered by the franchisor, you should consider:

  • the franchisor's track record and reputation
  • where the business outlet is located
  • the franchisor's advertising budget
  • the back-up that the franchisor is offering
  • the up-front fees that you'll have to pay the franchisor
  • whether you can use other sources for supply
  • the length of the franchise period
  • any restraint of trade provisions

You should also find out about the franchisor's strategic plan and about whether there is a Franchise Operations Manual.

What are the advantages of buying a franchise?

You, the franchisee, get advantages from operating as part of a closely related group instead of conducting business alone. These advantages include:

  • Less risk - Ideally the franchisor will already have several years' trading history of operating outlets similar to those to be franchised. During this time the franchisor will have encountered and overcome many of the difficulties that a new business is likely to face. This experience will be passed on to you, the franchisee, so that you'll usually need less capital than if you were setting up business on your own.
  • Your own business - You have the incentive of owning your own business with the additional benefit of continuing assistance from the franchisor.
  • Access to bulk-buying - A franchise system usually involves many outlets, and it's likely that the franchisor will be able to arrange for the bulk-buying of many products used by the franchisees' businesses. You'll get the advantage of the reduced purchase prices associated with bulk-buying.
  • Co-operative marketing strength - You'll benefit from the ability of the franchise system to undertake wider and more effective marketing of the franchise.
  • Strong public image - You'll benefit from the strong public image that the franchise system is able to develop for the supply of its particular products or services.
  • Ongoing product development - The franchisor will usually carry out ongoing product development. A vital factor in the long-term success of any business is its ability to develop products to meet future needs. Ongoing product development enables the business to adapt as the demands of the market change, and to expand by adding to its range of products and services. Few individual business owners are able to free themselves from the day-to-day running of their business in order to give sufficient attention to product development.
  • Financial support and access to lending sources - If you're seeking finance to buy a business, banks and other financial institutions are more likely to lend to you if the business is part of a well-structured and successful franchise system.
  • Management advice and training - Perhaps the greatest advantage to you as franchisee is the management advice and training that you'll receive from the franchisor. This will help to overcome your lack of specialised knowledge and experience.

What are the advantages to the franchisor?

The advantages to the franchisor include:

  • Rapid expansion - Franchising enables an existing business to rapidly expand the number of outlets for its products without excessive capital investment or hands-on managerial pressures. It allows the franchisor to exploit geographical areas that would not otherwise be within reach.
  • Motivated operators - An owner-operator of a business will normally be more motivated to ensure the success of the business than an employee-manager. The motivation and enthusiasm of the people operating a business is crucial in determining its level of success.
  • Reduced capital commitment - You, the franchisee, will usually be required to pay for setting up and operating the outlet. This will usually include the cost of fixtures and fittings together with working capital relating to stock, rent, wages and other operating expenses. As well as relieving the franchisor of the burden of introducing the capital for new outlets, this arrangement also increases the franchisees' commitment to their businesses.
  • Reduced middle management and related costs - Franchising enables a franchisor to keep a compact organisation, consisting of a few highly specialised managers in the various aspects of the business, and support staff. Without franchising, the owners of a business would need to employ additional management staff once the business grew beyond two or three outlets, to deal with purchasing, debtors, strategic planning, marketing, head office and so on. By franchising the franchisor reduces the need for middle-management staff and the associated costs.
  • Increased market strength - One aspect of being able to expand a business and increase its sales is that the business as a whole acquires "market strength". This increased market strength has a number of advantages, including access to bulk-buying from suppliers of products and services.
  • Higher return on investment - The franchisor obtains a higher return on investment through being able to concentrate resources in expanding the business, rather than in investing in additional plant, equipment and overheads. With franchising, all or most of these costs are met by the franchisees.
  • Conversion of existing outlets - A business with multiple outlets can raise capital by selling off some or all of the existing outlets and entering into franchise agreements for the future operation of those outlets.
Cautionary notes
  • Beware of franchisors who suggest big profits made rapidly from a small investment: a fast-growing business does not necessarily indicate long-term success.
  • Talk to other franchisees in the network before you make a decision.
  • It's important to get legal and accounting advice before buying a franchise.


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