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Franchise – Don’t Buy Without Asking These Critical Questions!

Why do people spend a fortune on a franchise and then find out it’s not all it’s made out to be.

This article spotlights the critical elements and questions you absolutely MUST ask before you purchase any franchise to ensure that your money is well spent.

These are the must ask questions regarding profitability.

How much profit does the franchise make?

How quickly can a “New Start-Up” make a profit?

How long will it take to cover the initial investment and the various set up costs?

Generally speaking the larger the investment the longer it will take to recover your investments.

What “Return on Investment”, called ROI can you expect.  

Too often franchisors don’t or won’t provide accurate information on the profitability for their new franchisees. It’s very different giving details about a franchisee that has been operating a franchise for a number of years, but how do these facts relate to the starting period of a new franchisee.

The first 1 to 3 years are your most critical years for any new business and so you must have information on such new franchisees. As an ex Finance Director of a franchise my experience of having communicated with many other franchisees is rarely if ever do the forecast profits provided by the franchisor look anything like the actual results you achieve when you start. So be warned.  

 It is essential to get these questions answered fully.

How Much Working Capital Do You Require?  After all Cash Flow Is King!

The facts are that most businesses go out of business not because they aren’t making a profit but because they literally run out of money. You could be making a profit on paper but if you simply don’t have sufficient cash reserves to meet your financial commitments you become insolvent. It is critically important that you have enough financial resources in terms of cash or funding options, not only to buy the franchise in the first place but also to cover all the set up costs as well as all your ongoing expenses until such times as you are generating sufficient cash through trading. 

Do you have the levels of working capital required available or will you need to finance this? 

Should you need to finance the purchase of the franchise will this be secured against your own assets, such as your home?

A Massive Investment May Be Required For Start Up Capital.

Franchises can cost anything from £5,000 / £10,000 to millions. However for the most part though you probably won’t be looking for a McDonald’s or BMW Franchise.

Nonetheless it will still set you back a reasonable investment. In addition to the actual franchise fee itself you should budget several other aspects of setting up a franchise. These may include fixtures, fittings, furniture, signage, equipment and stock etc. Many franchises charge you for training and legal fees as well.

On top of the initial investment and set up fees virtually all franchisors will require you to making continuing monthly and or annual fees. This is called by various names such as royalty payments on sales, admin fees, advertising etc just to name a few. 

It is critical to your success that you fully understand all your financial obligations.

As it is likely to take several years for you to recoup your investment you should know exactly what you are in for.  Make sure you prepare a detailed financial budget, which provides for contingencies in case you aren’t in profit as quickly as you planned.

Risk Business

What risks are associated with the franchise you are considering buying?

Is there a proven business model, will it last the test of time etc? Do you know what other franchisees have experienced? Your significant investment may equally mean you can have a significant risk attached to it. 

 What is the maximum exposure financially?

What external factors could affect the franchise? Are seasonal implications for instance? What risks are there associated with holding stock or staff contracts?

Is your home at risk as security? Many traditional franchises require long hours to be worked and possibly several staff. How many hours are you prepared to work? Are you prepared to work this like a JOB? What experience do you have of managing, supervising and training staff?  These factors are frequently overlooked but all need serious consideration. While I enjoy dealing with people, many people have ineffective interpersonal skills and staffing problem caused by poor communication can cause undue stress and bad health.

Summary

While buying a traditional franchise could be good for you, it can often prove to be a mill stone around your neck. Too often purchasers find they have purchased a very expensive JOB, are heavily constrained, have no freedom, are working far far longer hours than in the job they left to set up their own business,yet are making far less money, but have all the risks!  

To top it all they have staff to manage and may be legally committed to the franchise for a long period without sufficient get out clauses.     

Did You realise that there are far more effective Online Franchise Business Models available which literally coach and mentor you to success.  The investment in such online franchises is minimal compared to a traditional franchise yet they provide significantly greater income earning opportunities than a traditional franchise.

These Online Franchises have many advantageous over traditional franchises as follows.

Minimal Investment

Minimal risk Easier to set up

Greater success record for the average person

Quicker Profit Generation.

You can be in profit within your first month or even first week

Provide for a far higher Return On Your Investment – ROI

Do not require premises, stock or staff

Is more time efficient

Can be run from anywhere in the world

Get an honest review of how an Online Franchise can enable ordinary individuals JUST LIKE YOU to generate recession proof incomes.


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