A franchise is nothing more than a small business. A business that supposedly has name recognition and/or a formatted business procedure that has a proven history of success. However, to my knowledge there are no franchises that provide a written guarantee of success. All of the sections in this manual apply to franchises in the same manner as they would to any other small business.
Why buy a franchise? Because it has a proven business concept that provides a history of duplicate or very similar operations and businesses that can demonstrate a consistent profit generation. However, you pay for this expertise and you will continue to pay for it throughout the life of the franchise period. As a franchise is generally based on a formatted business procedure it gives you little if any flexibility in what you do with your specific operation. For instance, if you acquired a submarine sandwich franchise and you believed, that your market would really like french fries with their subs you will most likely not be allowed to add it to your menu if it is not a standard part of the menu offered by that franchise!
One of the most important things to remember is that both franchisors and franchises have gone bankrupt.
Although a franchise is nothing more than a small business there are some additional items that one should be aware of and consider when looking at acquiring a business that is a franchise.
It is very important that you make a list of all the fees and or other expenses that you may face from the franchisor.
- When you purchase a franchise usually you are purchasing it for a specific term, five to ten years and at the end of that term if you still want to own that franchise you must purchase the franchise again.
- Besides an initial franchise fee, most franchisors require that you also pay a percentage of gross sales back to them. Part of this fee (or possibly an additional fee) will go towards regional and/or national advertising.
- You may be required to send staff to training schools at your expense.
- Some franchisors require that a minimum fee be paid on a weekly or monthly basis that is not based on sales.
- You loose the flexibility of determining how your business will operate. Franchisors are usually very strict about operating procedures that include everything from the products you sell and where you can buy them, operating hours, advertising, modifications to facilities, prices that you can charge, etc.
The large and very successful franchises such as fast food will detail your business structure and operations down to the smallest detail.
- You should perform some due diligence on the franchisor and if there is a master franchisee between you and the franchisor then you have another business that you should perform due diligence on. The amount of due diligence you do is relative to the identity of the franchiser. Be aware that franchisors and master franchisees, both large and small have gone bankrupt.
- Many franchises because of their size, number of franchisees, will have a “Franchisee Association”. The franchisee association will represent all of the owners of the franchises with respect to their combined relationship with the franchisor. The association may make suggestions to the franchisor with respect to advertising, marketing, products, hours or operation and any other matters that pertain to the franchisees as a group.
If their is in fact a franchise association for the franchise you are looking to acquire I would recommend that you make contact with them and discuss items such as the on-going relationship between the franchisees as a group and the franchisor. As an example it would be a very positive statement to find out that the franchisor usually undertakes to implement the recommendations of the association.
It would also be appropriate to know the costs involved in the association such as membership dues, annual or semi-annual meeting (travel), etc.