Starting a franchise can be a good business decision. But deciding which company to work with can get confusing. There are a number of factors to consider and it is difficult to make a prediction about the volume of sales that you can expect in the territory that the franchisor is considering to allocate.Before entering into a tie-up with a company, take out time to understand how its franchise operation functions. These are some of the areas that you need to concentrate on:
1. Will it be profitable?
The business will require a substantial investment on your part. It is likely that you will be putting up a major portion of your life's savings into the initial fees, equipment purchases and a host of other expenses that are incurred when you start a new venture.
In addition to your equity, you would take on a significant amount of debt to finance franchise operations.
It is important that you carry out a detailed budgeting and planning exercise to estimate your earnings. Get professional help from an accountant if you think that you are not up to the task of preparing financial projections.
If you find that the returns from franchise operations do not justify the investment, it is advisable to look for another franchisor.
2. Study the franchise disclosure document
It is mandatory for the company offering you a franchise to furnish detailed information on a range of issues connected with the proposed business opportunity.
The franchise disclosure document will reveal the fees that you can be charged, the initial investment that is needed, the territory that is being allotted to you and information on the revenue that the franchisor will generate through sales to you.
Details of litigation that the franchisor is engaged in will also be furnished. If there are a large number of on-going matters in court, you may want to understand the reason before finalizing your franchise.
3. Visit existing franchise locations
Go to an operating location and see how well it is doing. What is the number of customers? Are sales brisk? What is the average transaction size? It may not be possible to get exact details but you will get an impression based on which you can take a decision. 4. What is the territory allotted to you?
Will you be given an exclusive territory? Or is the franchisor within its rights to appoint additional franchisees in your area of operations? The answers to these questions will determine your success or failure to a large extent.
Study the agreement carefully to understand this issue. If the franchisor is within its legal rights to do so, it may appoint multiple franchisees in your vicinity to maximize its sales. But this could impact your business and profitability.
Take your time
Negotiate with at least two franchisors and compare what they have to offer. Above all, remember that you will be spending eight hours or more a day on your new business. Ask yourself if you are comfortable with the product or service that you will be selling.
Take your time to decide which company to select. Once you make the initial payment to the franchisor, you are committed for the long term. Make sure that the decision you take is well thought out and not one that is rushed by the franchisor.