7 things to investigate before you buy a franchise
What you should consider before buying a franchise
When you’re looking for new business ideas, it can be exciting and you can get a little ahead of yourself. Talking about business names and locations can be appealing. When you think about that, the idea of a franchise becomes even more interesting!
Buying into a franchise operation can be a great pathway to starting your own business! You can quickly reap the rewards of other peoples work and the established brand you’re buying into. It can be a great way to launch a business from the start! You also get the manuals and guides on how to run the business.
The flip side is that the franchise can limit the control you have on things, how you run your business and for how long you can run that business.
It’s always important to get the advise of a lawyer and accountant before starting anything. Here as some additional tips to consider.
1. Learn everything you can
You need to learn about franchising and it is highly recommended to get professional advice before you sign up to buy a franchise. You can learn more about franchising through FranchiseED’s free online courses:
It’s important to ask plenty of questions and make sure you understand how the franchise model could affect the way you do business.
2. Understand the Agreement
The franchise agreement is a contract you agree to for a set amount of time, often five years. It covers exactly where and how you will run your franchise – and it’s worth consulting a professional to make sure you understand your rights and responsibilities under every clause.
Once the franchise agreement ends, the franchisor has no obligation to renew your franchise, so the business and any goodwill you’ve built could go back to the franchisor
3. Read the disclosure statement
Franchising in Australia is regulated by the Franchising Code of Conduct. Before entering a franchising arrangement, you should be given certain documents including your franchise agreement, code of conduct and disclosure statement.
This disclosure document should list all the current franchisees within the business. Get in touch with some of them to find out about their experiences and any issues they might have faced with the business model or dealing with the franchisor. It’s worth contacting more than one franchisee and even past franchisees for a more balanced view.
It is also important to keep abreast of changes to the code of conduct and what these might mean for your franchise. The code is under regular review so keep informed by subscribing to the Australian Competition and Consumer Commission’s Franchising Information Network.
4. Financial Risks
Running a business will always come with financial risks, especially in relation to factors out of your control, such as competition and the state of the local, national and even global economy. There are certain risks to be aware of in franchising that might not apply to other types of business. In particular:
- You’ll need to have extra funds to cover unanticipated costs over the term of your franchise agreement. For example, your franchisor may change their systems or the look of their stores and you will usually be responsible for the cost of these changes.
- Consumer demand may not be the same in every geographical location. One type of franchise or location may perform well, while others don’t find the same success.
- You won’t necessarily have the choice of where you buy your stock. You might find cheaper products through another supplier but your franchisor may have long-term contracts in place with existing suppliers.
Before you commit to buying a franchise, you need to know whether you’re likely to be able to recover your upfront costs and make a profit during the term of your franchise agreement.
5. Know your territory
The territory of your business is the region within which you’re allow to trade, the area you can make money in. This may be a geographic region or a logical one depending on the type of business. For example, a mobile tyre replacement business may be restrained to particular postcodes or suburbs. Be aware of what your territory is and any overlap that may come from other franchisees OR from the franchisor themselves.
You’ll need to know how many territories the franchisor has, how many are available for sale, how many are planned for the future, whether other franchisees can compete within your territory and how online sales are managed within territories.
6. Be wary of restraint of trade
There is a clause that may prevent you from trading in other areas either during your franchise agreement or after it ends. Make sure you’re fully aware of what these restrictions are and whether you’re happy with them.
7. Ongoing Fees
Make sure you understand how your royalty fees work, when they are payable and how much is due. Understand too whether it’s a flat fee or whether it’s based on percentage of sales or profits.
If you’re looking for the perfect franchise business for you and your family, look no further than JAN-PRO.