Franchise or Not?

A Four Point Checklist to Help You Determine Whether or Not to Buy a Franchise

You’re definitely ready to start your own business, and you want a strong, identifiable product/service to cover in your area. Buying a franchise is an obvious case in point to achieve the goal of sure sales. Selecting the franchise that best suites you is a big task, and you need to be sure that franchising is actually the best path for you to take. Here are four points to carefully examine to help you determine whether or not to franchise.

1) Do the Market Research. Is this product or service needed in your community or territory that you want to develop? Is this business unique and filling a void? Or would you be over-saturating the market? Are you taking into account customer differentiation? That is, are the customers in your area typical of other areas where this franchise has proven successful? According to a recent Harvard Business School study, customers respond with different behaviors to the same business model spread along different markets.* What is the possibility of encroachment on your business? Are there other similar franchises that could potentially
open for business next door to you?

2) Conduct a Legal Investigation. Consult with a professional to review the Franchise Disclosure Documents. Ensure that the franchise you want to buy is free from any litigation. Ask for references, and survey other franchisees within the system. Understand your legal recourse as a franchisee in the event something goes wrong. Often times, documents are organized in favor of the franchisor. Make sure you are protected from wrong-doing, as well. Be comfortable with any non-competition clause. It’s understandable that a franchisor will want to protect their brand, so be certain that you are capable of abiding by any free market terms. You’ll also want to know and negotiate up-front any termination policies and process for reselling the franchise.

3) Perform a Financial Analysis. The franchisor can help provide you with an accurate start-up cost, which will include the franchise fee, real estate acquisition and other start-up supplies. Take into account all operating expenses, such as rent and utilities, insurance, taxes and licenses, inventory, training and wages, advertising, and royalty payments. Next, you can determine your ability to invest and acquire  financing to make your business run.

4) Make a Personal Assessment. Realize that franchises are subject to some uniformity. In buying a successful business plan, your will also accept the standardization of franchising. You might have to relinquish some creative control. Also key to franchising is quality control, often maintained through purchasing supplies from specific vendors. The franchisor is also giving up some control by entering a new market, but open communication is needed to  find common ground for each operation. Interview with the franchisor. Does the pair of you have a good working relationship? Is there a suitable franchisor/franchisee dynamic? You’d be be entering into a strategic partnership with the franchisor.  Make sure you’re comfortable with the person and the situation.

*Hanna, Julia. “Making the Decision to Franchise (or not).” Working Knowledge. 28 July 2008 <http://hbswk.hbs.edu/item/5962.html>