Business Buyer Resource

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What Should I Look Out For When Buying a Franchise?

With more than 1000 franchise brands, Australia is the most franchised nation on earth per capita. This means that there is a franchise operating in almost every type of business category with varying levels of complexity and cost. If you’re contemplating buying a franchise there’s a lot of choice and a great deal to consider ensuring that you make the right decision for you. You need to consider all the issues you would when purchasing any type of business, PLUS the specific issues of franchising.

6 key features to look for when evaluating any franchise business.

  1. Stable industry.

    You need to look at an investment that can ride the waves of the economy. What is going to be profitable regardless of what is happening in the economic environment? If possible, it is best to choose a product or service that people are willing to pay for at any time because they are time-poor, unable to create the product or undertake the task themselves, or is a necessity in their lives. Steer clear from unpredictable fads; these are unwise investments for the future.

  2. Market potential versus the competition.

    Consider franchises that have little or no competition from other established franchises that offer a similar product or service – particularly within the location you are looking. The ideal situation is to choose a franchise where the main competition are small independent or pop up stores. This provides the opportunity for the franchise to dominate due to its size and brand recognition.

  3. The leader in its category.

    Teaming with a leader in the category you are planning on entering will help with your potential success as a Franchisee. If there is an option between two or more franchises in the same product or service, investment outlay versus potential return is going to be greater with the leader than the followers.

  4. A dominant brand.

    Brand recognition is a major reason to invest in a franchise in the first place. So choosing a brand that is strong and established in the marketplace is more likely to provide a more solid, stable investment than a lesser known brand yet to entrench itself into potential customer’s awareness.

  5. A strong business model

    A market leader needs to have a sound, proven business model that works to support both the Franchise and the Franchisee. Support for marketing and operational aspects of the business is key to buying into a franchise and these need to work for both parties to give the competitive advantage needed to succeed. (See below for more on the Franchise Model).

  6. Growth Opportunities.

    This is a little more difficult to define but it is the potential for you to grow and develop with the franchise. The best indicators of growth opportunities are that the franchise is thriving and has future expansion plans and activities in progress. There are also internal opportunities being offered by the Franchise to Franchisees including increasing numbers of outlets, become an area manager/developer or further entrenching yourself into the Franchise hierarchy.

Now you have narrowed it down to a few options, here are some tips on what to look for at a Franchise Level.

  1. Franchise Model

    This encompasses all of the elements that set this particular franchise apart from another. The aim of these components is to add value at every process and business activity to work towards the success of the venture for both parties.

    The model is focused on the product or service marketed by the franchise. When the franchise is subject to change due to technology, competitive forces or government regulation, you will need to ensure that there are contingency plans and strategic programs in place to allow for this change.

    The best way to get a full understanding of the franchise model and relationship with the Franchisee is to obtain a copy of the Franchise Guide of the particular company you’re considering. Be sure you receive and evaluate all disclosure material before and during the application process.

  2. Franchise Systems

    Unique to each franchise, this provides the framework for which the business model runs. It not only includes the Franchisor and Franchisee manuals but all systems, procedures, management tools and resources for the operation of the franchise.

    This also includes the key areas of marketing and promotions for the group as well as initial and ongoing training at all levels. This is the key interface between the Franchisor and Franchisee.

    You need a clear understanding of each party’s level of input, areas of responsibility, commitments (financial and physical) and performance indicators in each component from the outset. To fully informed, you should ask a lot of questions, particularly regarding upfront costs, ongoing fees, regional protection, success rates and exit clauses.

Key Features of Franchisors to look out for

  • When considering a franchise, the following are considered to be 10 key features of best practice for Franchisors:
  • Consistent execution of the fundamentals
  • Well-defined KPIs, benchmarking and financial reporting
  • Comprehensive compliance management
  • Field staff as coaches, not auditors
  • A focus on the value of intellectual property
  • Real marketing and advertising muscle
  • Continual innovation
  • Supply chain management
  • Sound two-way communication
  • Induction and ongoing training

For more information, read up on DC Strategy’s The 10 Key Features of the Best Practice Franchisors.

Finally, DO YOUR HOMEWORK! Research, research, research. It’s a big decision and information is power.

Then, be sure you receive legal and accounting advice from lawyers and accountants with franchise experience before making any final commitment. Use the cooling-off period to check your facts and figures and determine if you still want to proceed.

Good Luck!