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Ten questions to ask before you buy a franchise in 2016... Save yourself HUGE potential losses

by , 21 December 2015

Franchising isn't a short-cut to riches and fortune. It takes hard work, dedication and commitment to make a success of it - just as it does with any business idea.

And while it may be one of the easiest and safest ways to become your own boss, there are risks. So before you get started, here are ten important questions you must ask. If you don't, you could end up being burnt.

Question #1: Can I see the market research?
 
Many international companies come to South Africa with a view of setting up a nationwide chain of outlets, only to find that the country wasn’t ready for its products. So unless you’re opening a franchise for a group that’s been around for years, your first priority is to make sure the opportunity really is as good as it sounds.
 
Question #2: What type of franchise is it?
 
Franchises are split into “packages franchises” and “business-format franchises” – it’s essential to know which one you’re getting into before you sign the dotted line. Most fast-food restaurants and retail stores will fall into the first group. These opportunities come complete with a business model laid out by the parent company covering everything from the group’s financial controls to hiring guidelines.
 
The rest – including car dealerships and petrol stations – fall into the second group.
 
These franchises exist mainly to distribute the parent company’s goods and will give you more control over the way you run your business.
 
 
Question #3: How much money will I need to start?
 
This is the most important question to ask and no two opportunities will give you the same answer. Ensure the parent company explains exactly what’s covered in the “initial investment”. It’ll normally include the franchise fee for trading under the brand name, the cost of installing fixtures and equipment and other set up costs.
 
Question #4: How long will it take my new franchise to reach breakeven?
 
By asking the parent group the average time it took other franchise owners to start making money, you’ll know how much extra cash you’ll need to stay afloat.
 
Always factor for it to take slightly longer than average to play it safe.
 
Questions #5: What do I need to break even?
 
Unless you’re very lucky, you’re unlikely to have many customers on your first day in your new business, but you will have expenses from day one. Until your revenue grows enough to cover them, you’re going to have to feed additional cash into the business to pay the bills. Make sufficient allowance for this in your plans and, when in doubt, guess high.
 
Question #6: How is the lease agreement structured?
 
Protect yourself by ensuring your lease agreement runs for the same period as the franchise agreement – being unable to renew one while being bound to the other could lead to big problems.
 
Question #7: How many franchises does the organisation have?
 
A parent group with a large number of franchises is the sign of a successful, established business. Be careful though. If other franchises are located near yours, you could wind up competing with an identical business.
 
Question #8: How much will I have to pay in royalties?
 
Most parent companies charge their franchisees an ongoing royalty fee that’s calculated as a percentage of gross sales (between 3% and 6%), but some firms charge flat fees on an ongoing basis.
 
Question #9: What help will you give me?
 
A good parent company will help you select a site for your business, negotiate a lease, advertise for and interview prospective employees, get business licenses, finance the franchise fee or equipment cost and provide other services. Get this in writing!
 
Question #10: Is my profitability guaranteed?
 
Because franchises are obliged to sell products at a fixed price, while procuring stock at another, you’ll need to familiarise yourself with the mechanisms in place to ensure your business can sustain a healthy profit. This includes checking whether you can run your own promotional offers to attract customers.
 
So, if you want to buy a franchise in 2016, make sure you ask all the right questions… 

Let’s build your wealth together,
 
Aiden Sookdin
Editorial Director,
MoneyClub.co.za

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Ten questions to ask before you buy a franchise in 2016... Save yourself HUGE potential losses
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