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Buying a Franchise
If it ain't broke don't fix it so the popular saying goes.
In effect that's what a franchise is - a business model that has proved to work. The risk of setting up a new business has been taken away - this business will likely work as it is a proven business. Of course there is no guarantees in business - franchises generally require the franchisee (that's you) to work really hard at it - you will also usually be paying top dollar in fees and for the products you'll require - as the franchisor (the person you bought the franchise from) has to obviously make a profit from all the people under his or her wings.
Okay so lets get back to basics - what exactly is a franchise?
In short it is a licence given by the main business owner (franchisor) for you (franchisee) that lets you trade under name of the main business.
The obvious example of a franchise is McDonald's.
Clearly there is a symbiotic relationship between the franchisor and the franchisee - the franchisee will pay for a licence to trade each month / quarter / year - whatever the agreement is. They will also buy the products to sell from the franchosor and sell it at a good mark-up. Obviously the more that is sold will result in benefit for both franchisor and the franchisee - a symbiotic relationship.
A franchisor offers the following to someone wanting to start-up:
- knowledge of the business (training)
- marketing
- best business principals
- customer base - customers in the area will be given to the nearest franchisee
- products
- continous support
- reduced competition
In return the franchisor will usually get an up-front licence fee, ongoing payments to keep trading under the name, percentages of turnover or mark up on the products being sold.
It is important if you are looking to buy into a franchise that the head company is a legitimate company - not a company that is selling bomb finding machines which can in reality only find golf balls!
Obviously one of the hurdles to setting up your own business is finding the initial capital - a good company should assist you in helping you with the finance.
The disadvantages of buying into a franchise are the initial start-up costs can actually be a lot higher than if you started your own business in the same field as well as the running costs. In short you have to weigh up the pros and cons of going your own way or going with a franchise.
You will need to pay for solicitor's and accountant's fees for advice and consultancy on the franchise agreement.
The franchise agreement is a business agreement between you (the franchisee) and them (the franchisor). They will usually be pretty much the same for wherever you set up. The contract should stipulate what products and services you are going to be provided and what products and services you are allowed to sell. It will say what training is going to be given, the amount of marketing, help in setting up the business, how much it is going to cost initially and what the running costs are going to be and what the prices are going to be up to a given date. It should also state how long the contract is for...usually a few years as the costs setting up are can be high - but again this is dependent on the type of franchise it is.
In addition to the costs of buying into the franchise and the ongoing payments that have to be paid to the franchisor, you will have to cover all the running costs of the business, including rent, rates, wages, repairs, equipment, vehicles, tax, National Insurance and VAT, local marketing costs and so on.
Obviously before going ahead you should talk to other franchise owners both current and past to see what the head's up is.
When seeking to finance your purchase of a franchise you should consider:
What kind of franchise can you afford?
Have you accounted for both the costs of the initial franchise fee and also the working capital needed when establishing your franchise? Do you need any bank or loan finance? Many franchisors provide lending facilities and most banks offer specialist services for franchises.
Examples of Franchises are:
- Avis
- Baskin-Robbins
- Blockbuster Video
- Burger King
- Cartridge World
- Dunkin' Donuts
- Hilton Hotels
- McDonald's
- Papa Johns
- Pizza Hut
- Subway
- TGI Friday's
As you will have noticed most of these companies are food outlets of one description or another.
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