10 Key questions to ask before buying a franchise
In response to the high unemployment rate, coupled with the tough economic environment, some aspiring entrepreneurs with a lump sum available or access to capital are considering buying a franchise as a way to get into business.
Morne Cronje, Head of Franchising at FNB Commercial says, while buying a franchise provides entrepreneurs with peace of mind knowing they are going with a tried and tested model, franchises are also sensitive to tough economic conditions. Therefore, it is essential for anyone considering this route to do their homework to avoid financial losses.
“Furthermore, the research has to be industry specific, given that every business has its own set of unique challenges,” adds Morne as he shares key questions that entrepreneurs should ask the franchisor before signing on the dotted line.
- What kind of support will I get?
Before entering into an agreement, you need to fully understand the type of support that the franchisor will provide you with to ensure that you succeed. Some of the key fundamental support that you need include training, technology, site selection, marketing, and advertising.
- Is there a restraint of trade?
If you are an entrepreneur looking to diversify your portfolio, you may constantly be on the lookout for other business opportunities. Therefore, it is important to ensure that the franchise agreement doesn’t have a clause that restrains you from investing in the same line of business as the current franchise.
- How do royalty fees work?
In most franchise agreements, franchisees pay royalty fees, therefore, you need to investigate whether the fees are fixed or are a percentage of your turnover. Moreover, you need to establish whether these are separate for marketing and advertising.
- What is the reputation of the franchise in the industry?
In business, reputation and customer service is important for growth and sustainability. While the franchise may appear successful, it is empirical that you conduct market research to understand how the business is viewed against its competitors. Platforms such as hellopeter and social media can help you understand how the market and consumers perceive the franchise.
- What is the vision of the franchise business?
While this may be easily overlooked by many people especially when looking at businesses that are booming, researching about the people behind the franchise operation will give you an idea of their clear vision and mission for the business. Although this may not be an easy task, it is worthwhile doing due diligence to better understand your future business associates.
- What is the financial status of the franchise business?
Covid-19 and the slow economic growth has brought serious challenges to businesses as consumers are financially stretched. Before making the final decision, investigate the financial status of the franchise business as that may have changed due to challenges brought about the pandemic and slow economic growth.
“Proper due diligence and asking the right questions is important when investigating a franchise opportunity to ensure that you invest in a business that will bring the desired returns. It is recommended to speak to existing franchisees to get their experience of owning the franchise brand that you would like to buy into and whether they would consider buying a second franchise” concludes Cronje.
