Many people dream of owning their own business. Buying a franchise is one way to get there; some even say it’s the easiest way. Follow our 12-point franchise evaluation plan to find one that’s right for you.
1. Collect information.
Do your own research. No one is going to be as interested in the process as you are and if you want to become involved in the business you need to develop as much first-hand knowledge as you can anyway. One of the best ways to find out about the types of franchises available is to attend expos such as the Franchise & Business Opportunities Expo and International Franchise & Entrepreneurs Exhibition. Attending one of these shows is well worth your time. You can see what is available, ask lots of questions and collect information. The Internet is also an excellent source of information. Once you have decided which franchise you are interested in, you can move to step two.
2. Evaluate the industry.
First off, look at the industry in which the franchise operates. What are the other franchises in that sector? Is it a growing industry? What do the trends tell you? How does the franchise compare with its competitors? What do the trade magazines say?
3. Assess the brand.
If it’s a print shop say, or a laundromat, what differentiates it from its competitors – why would customers choose to go there as opposed to the competitor around the corner? This really goes to the core of the brand and the values and culture of the organisation and its positioning in the market. Look at how the brand is applied in terms of signage, logos, colour, uniforms and shop fitting.
Is the brand contemporary? In the US fast food restaurants only have to re-image about once every 20 years. In South Africa it’s once every five to eight years. People here like change and they like to try out new things.
4. Research the franchise organisation.
A big part of the challenge of looking into a franchise is getting your hands on information. Get access to information about the franchisor, the investment itself, the franchise system, and the rights and obligations of both the franchisor and the franchisee. A franchise idea is not worth pursuing unless the franchisor is willing to give you the investment information you need. Ask for the franchise’s disclosure document.
FASA prescribes that the disclosure document must be updated annually, or more frequently, should material changes within the franchisor’s business take place.
Read this document carefully and make sure you understand it. If you are in doubt about anything, or something in the document is unclear to you, don’t be afraid to ask.
5. Talk to the professionals.
If you like the idea and you want to pursue it further, take the contract to a franchise consultant or a good business lawyer. Let them look through it and explain each point to you in detail. You need to ensure you are comfortable with every detail of that contract.
6. Look at the numbers.
Take the financial statements to an accountant who can evaluate the numbers. You need answers to the following questions: Does the franchisor have the financial means to meet their commitments according to the franchise agreement? Does the franchisor have a solid business track record?
Request a check on the franchisor and the franchise system from Experian. Such a report will provide you with a company history, an overview of the staff, management and directors, a detailed assessment of the company’s potential risk, and any other information which may affect the creditworthiness of the franchisor.
7. Evaluate the contract.
Determine what fees you have to pay to the franchisor as a franchise owner, including the initial franchise fee, continuing royalty payments, advertising contributions and any other fees. Establish exactly what your total investment will be. What products and services can you buy and sell through your franchised business? Knowing this will enable you to understand the franchisor’s specifications, know who the approved suppliers are, and whether you’re required to purchase inventory from the franchisor. Does the franchisor source suppliers who offer competitive prices?
8. Establish your rights as a franchisee.
What intangible rights will you receive with your franchise package? These must include territory rights, trademarks, patents, copyrights and confidential information. Make sure you understand the territory rights. Is your territory exclusive? Can the franchisor or other franchisees compete with you in your territory? Make sure you understand the franchise agreement in terms of your rights to renewal, termination, transfer and dispute resolution. Ask the franchisor how much money a franchise makes. Find out about smaller and bigger stores and what they earn. Ask about the different locations. What are the differences between urban and rural locations, for example?
9. Find out what support the franchisor offers.
What are the obligations of the franchisor in terms of the franchise agreement before and after you buy a store. What does the training programme include? All good franchisors have a well established, comprehensive training programme. Training should be the biggest service you buy with your initial franchise fee; make sure you get your money’s worth.
10. Talk to past and present franchisees.
Ask how many franchisees joined the system in the last three to five years of the company and how many left. Contact current franchisees and those who left in the past year. Call as many franchisees as you can; get in your car and visit several as well. Ask them how they like being a part of the programme, how much money they grossed last year and whether they would make the same investment decision if they had it to do all over again. Ask whether the franchisor follows through on promises made.
11. Make sure there is a strong sense of law and order.
In a franchise system the alternative to order is chaos. The system must be consistent, and the franchise concept must be completely replicable. There must be no room for latitude in the business format.
12. Establish the strength of the leadership.
Without a powerful leader at the helm, you have no way of knowing what the future of the franchise system will be.
Find out about the business experience of the franchisor managers, whether they are involved in any disputes and whether they have ever been declared insolvent. Who heads marketing, finance, operations? Are there competent people in each of these areas? Are the areas themselves properly defined?
FASA’s Code of Ethics
The code of ethics and business practices of the Franchise Association of Southern Africa (FASA) lays down the minimum amount of information a disclosure document must provide:
- Full and traceable information about the franchisor company, including contact details and details of professional affiliations.
- Details of qualifications and business experience of the franchisor and their officers in the type of business being offered as a franchise.
- Details of criminal or civil action against the franchisor or his officers, either taken during the past three years or pending.
- Full details of the franchise offer and the underlying business.
- Full details of the obligations of the franchisor vis-à-vis the franchisee.
- Full details of the obligations of the franchisee vis-à-vis the franchisor.
- An explanation of the most important clauses of the franchise agreement, including restrictions placed on the franchisee.
- Financial projections for at least two years and an explanation of the basis on which these projections were calculated.
- Full details of all payments, initial and ongoing, the franchisee will be expected to make, and what they can expect to receive in return for these payments.
- A list of existing franchisees and their contact details.
- An auditor’s certificate certifying that the franchisor’s business is a going concern and able to meet its obligations as they fall due.
- A statement by the franchisor to the effect that to their best knowledge and belief, the financial situation of the franchise company has not deteriorated since the day the auditor’s certificate was issued.
For further information, call FASA on +27 11 615 0359 / 58 / 78 or visit www.fasa.co.za