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Buying a Franchise? Ask the Real Questions

Posted on the 04 March 2011 by Alanhargreaves @RechargeToday

The real questions revolve around one issue: how much money can you make?

Yes, it is nice to be your own boss; and yes, it is good to work with an established brand; and yes, there are a bunch of other things that are good about franchising.

What is not good about franchises is when they don’t make any money. Or not enough.

So, when you’ve made the decision that you really want to do this, start drilling down on the serious matter of generating profits.

Creating value is a simple function of profit margin X volume. Look at each individually.

Your profit margin is determined by your price minus your costs. Will you be in control of those costs? You will be sourcing your product from the franchisor. What is the pricing policy? Do you get a discount if you sell more? Are your restricted on how you market it?

What about the price you can charge? Is that fixed? What if it is set for low -disposable income markets and you are in an up-market mall? Are you allowed to raise your prices, and therefore your profit margin?

And what about things like rent? If you are in a retail franchise, it is the franchisor that often negotiates the lease. Their primary goal might be getting more shops open rather than securing the best deal for your outlet. Once that is set, you won’t have much control over rental reviews, tenant rights and ongoing options.

The central challenge is this

Your rent, your input prices and your franchise overheads are pretty much set. If the price at which you can sell at is also set, then so is your profit margin. If it is inflexible and tight, one side of the wealth creation equation is already out of your hands.

Your only other option to create wealth is to boost your volume.

How well can you do that? What sort of marketing support does the franchisor offer? Are you in the right location or the right market? How much do you have to spend to get another customer? Have you got it to spare?

More customers will mean more staff. Luckily wages are something you usually have some control over. But that’s also why franchises are largely staffed by teenagers. It is not easy to get great staff when your only economic source of employees is young people on low wages. A lot of them are absolute gems, but there is a lot of management time spent between hiring and generating productivity.

Do real homework to avoid disappointment

Don’t stop when you’ve answered those woolly questions about commitment and being your own boss. Get out there and kick tyres.

Don’t fall in love with one brand and ignore everything else. Instead, fall in love with finding the best franchising opportunity. Acknowledge the essential conflict there is between franchisor and franchisee. A professional operator will have a policy to manage this. Find out how it works – and if it does.

Ask business brokers what brands have a lot of franchisees who want to sell. Talk to people who own them. Even better, talk to people who have sold them. Ask them why they did. Talk to other people in similar businesses or in the same mall and market space. What do they think? Beware of hidden agendas. Offset that by talking to a wide range of sources. 

The final question you should answer is this: how easy is it to sell one of these things?

One day you will want to.

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