10 things to consider before buying into a franchise
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If you’re looking to be your own boss by becoming a business owner, there is a persuasive argument for buying into a franchise rather than striking out on your own – but it’s important to do your homework before signing on the dotted line.
Franchising has long been a popular route to entrepreneurial success in South Africa, with over 800 franchise systems operating through 48 000 outlets in the country. In a country rife with unemployment, the sector employees close to 500 000 people and its contribution to the local economy is equivalent to 14% of GDP, according to the latest FASA survey.
“While local franchising has strength in numbers, the sector struggled during the Covid-19 pandemic and is only now beginning to stabilise,” says Grant Smee, Managing Director of the Only Realty property franchise.
“Franchising has a significantly lower failure rate than that of independent businesses (as much as 5x less) but there are still significant risks involved when buying in to a franchise.”
Smee explains that the majority of these franchise-specific risks can be mitigated if a potential franchisee simply does their homework and thoroughly researches both the brand and the state of the market before buying in. “It’s also important to consider your personal strengths and what will be expected of you as a franchisee, as not everyone is suited to this journey,” he adds. He divides the Top 10 factors that every potential franchisee should consider into three categories:
1. Consider the market.
“It’s a tough time to be a business owner in South Africa so make sure that there is enough demand for your potential product or service before signing on.” Potential franchisees should conduct thorough research in terms of consumer trends, market demand and any risk factors.
“Luckily, access to market information and customer insights are some of the major advantages when joining a franchise, so potential franchisees should be able to access this data.”
2. Consider your competitors.
“Once you’ve determined if there’s a demand for the product or service that your franchise will offer, investigate how that demand is already being met by competitors.” Smee recommends having a frank discussion with a representative from the original franchise itself about what market advantages the franchisee can count on and whether they can realistically expect to outsell competitors in the area and why.
3. Consider the brand’s reputation.
“Reputation can make or break a business and in the case of franchising, reputation can be influenced by one bad actor and end up tainting the whole brand.” Smee suggests reading Google and Facebook reviews, speaking to customers, and finding out if there has been any negative media coverage around the brand in the last five years. “It’s crucial that franchisees be fully aware of the public perception around the franchise, and that this information comes from an objective source – don’t just trust what Head Office says.”
Once the initial research has been conducted it’s time to start thinking practically about what is required to get the franchise up and running.
4. Consider other franchisees’ success rates.
“Talk to other franchisee’s and ask them to be honest about their experiences – would they recommend joining the franchise to others? What have their success rates been like and what challenges have they experienced?” Looking at sales data and financial reports from other franchisees (and the company as a whole) can help round out this picture.
5. Consider the start-up costs involved.
There is an upfront cost to joining a franchise, as franchisees need to pay a licensing fee for the right to use the brand’s assets and resources. While this joining fee is an expected part of the process, Smee recommends asking what other initial costs will be required for budgeting purposes. “On the plus side, the franchise’s marketing resources and support – a major advantage of choosing the franchise model - should be included in this joining fee and will help with getting customer’s in the door once you’re ready to open.”
6. Consider what your earning potential will be.
“Once the business is up and running, it may still be several months before you start to break even. Find out the average amount of time it takes most franchisees to start turning a profit so that you can be financially prepared and have the liquid capital necessary to cover running costs. Make sure that you have the savings and resources to back you up over this period and remain conservative with your spending.”
7. Consider the franchise’s business model.
“Is the business model of the franchise designed to facilitate your success as a franchisee? Are there tried-and-tested systems in place to ensure the profitability of the business?” Analysing the business model of the franchise also involves taking into account the ongoing fees such as royalties that must be paid to the franchisor by the franchisor, as this could have a significant impact on profitability.
The final set of considerations a franchisee must take into account before joining a franchise relate to their own character and career expectations – do they align to the nature of franchising?
8. Consider what will be expected of you as a franchisee.
Becoming a franchisee carries many of the same responsibilities as being an independent business owner – you will be responsible for a staff and for the practical requirements of keeping a business running. “To be a successful franchisee you need to be a leader and this will require sacrifice and making hard decisions – before you take on this role it’s important that you are aware of what will be expected of you.”
9. Consider what resources are available to help you succeed.
Business mentorship is a major benefit of the franchise model, but not all franchises have systems in place to promote ongoing mentorship and support to their franchisees. “Choose a franchisor that has made mentorship a priority and that offers support and resources to their franchisees long after the initial training.”
10. Consider whether or not being a franchisee aligns to your passion and personal strengths.
Finally, Smee emphasises that not everyone is cut out to be a franchisee. “You have to be passionate about joining the franchise, and committed to its success even if it isn’t your name on the sign. You need to embrace hard work, responsibility and the pursuit of excellence if you start this journey,” he concludes.