What to consider when investing in a new franchise brand
“The dilemma of staying with the tried and trusted or going with something new that seems to offer great opportunities is something many potential franchisees face”, says Ethel Nyembe, Head of Small Enterprise at Standard Bank.
“However, if you are considering a start-up franchise operation, it is best to spend some time doing research and also asking a few probing questions,” advises Ms Nyembe.
The points to consider before signing a franchise agreement with a newly launched franchise are:
It is an opportunity to invest in a new concept and fresh products
The concept and products may excite you, but you need to look at both with a critical eye. For example, you need to know who you are targeting with your product, the size of the market (especially in the area in which you would like a franchise), whether the market is sustainable and growing, whether the product will be well-priced enough and who your competitors would be.
If the product is unique, you would be well-advised to do some of your own market research to see how it would be accepted in your area; ask friends and family for their opinions, and search the web to find out how it fared in other cities/countries.
Start-up costs will be lower
On the positive side, lower costs mean it will be easier for you to get into business. You will also have an opportunity to build the business and, if you should decide to sell later, you would make significant profit on your investment.
Against these positives you must balance several things. These include knowing exactly what your money is going to buy. If the start-up costs are low, check what you are getting for your money in the way of marketing, signage, decoration and merchandising support, and the levels of stock you will be supplied with.
Avoid making any decisions before you have fully answered these questions, otherwise you may face unexpected expenses for things that are not included or are hidden in the franchise contract’s fine print. Remember the business saying that if ‘something looks too good to be true, it probably is too good to be true’.
What the total running costs will be
Having decided that the start-up costs are attractive, it is time to dig deeper. Find out all you can about the royalty structure and what freedom you have when sourcing stock. If equipment or stock is supplied by the franchisor, find out how their prices compare to the market price for similar items.
Look for the unexpected in the contract. You may find that it is a requirement that premises are refurbished every few years and the franchisee pays the bill. Find out whether you are committing yourself to paying for ‘co-operative advertising’ in your area and have to contribute to the costs of national brand advertising.
What support are you being offered?
If you have never owned a business, it is important that your franchisor provides the training and support you require to get the business on a sound footing. Find out if there are training courses offered as part of the package, and check the type and level of support services. For instance, does the franchisor help with setting up proper HR procedures and training for staff? Do they have consultants ‘on standby’ to visit and advise you when you need help.
The location of your outlet and the size of your exclusive territory
If the new franchisor is intent on opening as many outlets as they can, you could find another outlet selling the same products opening up in your backyard. You will then have to compete for market share. Get the franchisor to set out the policy on this issue in writing.
The franchisor's business record
When a franchisor is selling franchise opportunities, they will present the brightest picture possible about their business acumen and the products they have developed. Investigate whether their claims are true.
Check whether the franchisor has joined a recognised franchise association and is therefore bound to a code of conduct. If the franchisor has not done this, ask why.
“Perhaps the most valuable investigation you can do is to find out where franchisees are already operating stores,” says Ms Nyembe. “Ask these people about their experiences with the franchisor, the support they receive and where problems exist. If you have the time, spend a day or two at different outlets. The strengths and weaknesses of the franchise will then become apparent.”
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