Starting a business can be risky and buying a good franchise can be an effective way of minimising the risk. However, there is still a substantial amount of risk involved in buying a franchise and there are a number of very important things you need to understand BEFORE you buy a franchise:
You are not the master of your own destiny. You have to follow the franchisor’s rules and procedures, buy from them or their specified suppliers and do things their way which means that effectively, the franchisor is very much in control. If, of course, the franchisor’s own business is stupendously successful you wouldn’t worry about that (isn’t that why you were interested in buying the franchise?) but on the other hand, if the franchisor’s business is a dud or if you are entrepreneurial being trapped in a franchise is not going to be much fun.
You will have a limited geographical area. Your franchise will only be able to operate in a limited geographical area which may actually be reduced later on. This may seem obvious but in twin-cities Hawkes Bay this can cause problems. Imagine too how you would feel if you’d worked hard to build your business only to have half or part of your area ripped away from you later on!
It may be temporary. With a franchise you are not buying a business outright but just paying for the right to operate the franchise for a temporary period. It could be that the franchise won’t be renewed after the initial franchise period or you could have the franchise taken off you if you don’t follow the rules or perform to their satisfaction and get no money back. Many franchisees have lost everything despite doing their best.
A lot of your profit will go to the franchisor. The cost of your franchise is not just the up-front fee, you’ll be paying a percentage of your turnover too. In addition, if you’re obliged to purchase materials, goods or packaging you might be paying over the odds for those too. What this means is that your franchise needs to be very profitable so that there’s enough left over for you!
Brand is everything. Yes, you may get systems and (hopefully) a proven, successful business model but unless it’s a well-known brand the value of the franchise is going to be limited. Why would you pay up to $300,000 for a franchise no one has ever heard of?
You cannot change the franchise agreement. The franchise agreement is not a customised document drawn up for each and every franchisee it is a universal agreement designed to be used nationwide and any changes at all would devalue the goodwill value of the franchise. In consequence, don’t expect the franchisor to accommodate your desire for any tweaks to your agreement, it’s not going to happen!
Always seek advice from an experienced lawyer and an honest accountant who puts his reputation before short-term fee-gain before you buy a franchise. You owe it to yourself and your family! If you need help looking at a franchise call Nick today on 021 225 6425 or email.