Becoming a Franchise owner or as called these days “Be your own Boss” has a certain appeal. Nevertheless, for many franchisees’ it could be scary to own a franchise storefront. Mainly because of investment involved or navigating a legal framework.
Some advantages of being an owner in a franchise mean; immediate brand recognition (think Pizza Hut) and following a proven process to set up. Though the downside is losing some control and of course, you have to work within the franchise agreement framework. This may feel like stifling innovation or reduced autonomy. However, it’s a small price to pay when you are getting associated with a brand of high equity.
How to start rolling the franchise ownership process? Here is a beginner’s guide to franchise ownership.
Research Well
Even with a reputed brand, the chances of failure are quite high. As per the latest statistics, 20% of the franchise businesses fail within five years; and yes we are talking about global brands.
A profitable and successful brand doesn’t guarantee success. The homework involves tons of research and patience. As true for any other business even franchising is full of risks and pitfalls, but good planning can help to reduce risks.
Seek answers to the most critical parameters:
What are the chances of success of this typical franchise idea? To give some stats more than 30% of F&B Franchise close within 1 year. The same is true for both proven F&B franchises as well new F&B retailers. Similarly, a major global Sports Franchise is globally ranking 16th; however more than 60% of its franchisees have defaulted or closed. The selection of a franchise with a high success rate is directly linked to demography, demand, and spending habit in your selected geography.
The finances – positive cash flow is like a lifeline to any business. Do the backend calculations to see if the projected revenue covers your investment and working capital as per a feasible financial ratio. Your credit history, inventory management skills, and accounting acumen will all be put to test. We’ll discuss more on financing later however preparing projected revenue Vs. The cost sheet should be the beginning to become a franchise owner.
Is your location suitable for the franchise idea you have in mind? The research to simulate customer traffic, competition, ease of access, parking, and how the area may develop in the next 3-5 years has a direct implication on the franchise revenues.
How passionate you are to be your own boss? Most people have a jobber mentality, wherein they are comfortable with guaranteed monthly income (salary). In business there is no guaranteed income; plus it requires tons of hard work and long hours.
For example, if you are not passionate about education; opening an education franchise just because it is a global franchise may not work for you. It is important to understand that your interest should align with your franchise idea. Else no matter how much money you invest, it is bound to fail.
A proactive approach such as discussing with accounting experts, subject matter experts, and especially other franchise owners within your chosen field is a must.
Company Structure
Let’s say you start an f&b franchise; a misfortunate event such as food poisoning may lead to litigation costs beyond your capabilities. Similarly, tax breaks and advantages are also tied to company structure. For most franchisors incorporating an LLC (Limited Liability Company) is the best way to go. This gives ample space to plan structure around tax requirements and unseen liabilities.
A franchise consultant (such as Selloverseas.com) is in a better position to evaluate the regulatory environment and suggest the most suited company structure.
It may be a little bit expensive to seek consultation; however in the long run it will be the decision you will value the most. A franchise consultant can answer not only specific queries but will also give you a holistic view of the franchise owner.
Application for Franchisor ownership
Once the company is established and has the necessary infrastructure in place. It’s time to put your idea into action and start searching for probable franchisors. The formal application can be submitted mostly through the franchisor’s website these days; however, they do ask for financial due diligence before moving forward. For example, McDonald’s FAQ section clearly asks for proof of funds to see the liquid assets and initial franchise fee before starting the online application procedure for franchisees.
Most brands looking for franchises have specialized companies like At radius or Coface to run credit checks on each applicant. They do ask for additional proof and a source of funds to meet compliance requirements.
Once all the initial documentation formalities are completed it is followed by a face-to-face meeting. This meeting could be very intense and a lot of beforehand preparation is required. An experienced franchise consultant can give you a heads up.
Once all process is completed; you may get the franchise agreement indicating rights, scopes, and responsibilities of each party. It is important to review all clauses along with an expert legal consultancy on each and every aspect before signing.
Arranging Finance to own a franchise
Before the franchise agreement is signed and closed; just make sure the funds are available to take off the project. Normally all franchise agreements come with a gestation period after which the delay penalties may apply. The best way is to plan and arrange the financing you need to cover on an immediate basis beforehand. These costs could include start-up fees, location lease contracts, etc.
Also, check with the franchisor; if they can help with favorable terms to obtain bank loans. Major franchise Yum Brands have a well-established relationship with financing institutions and can arrange a loan at favorable terms.
There are many govt. schemes are also available, which offer small businesses and micro enterprises to stand on their own.
Once the financing is in place then only sign the agreement. This is to ensure any legal issues from arising or starting on the wrong foot with the franchisor.
Conclusion
Signing the franchise agreement is just the beginning of your new journey as a franchise owner. With a sound plan with all initial steps as indicated above-taken care of, you will be in a great position to succeed.
Just remember operating a franchise is a complete business in itself. This includes manpower management, stocking, operational issues, and following franchisor and govt. regulations
The success of any franchise owner depends on three pillars. The first one is positioning among similar services offered within the targeted geography.
The second is how well you manage cash flow. The focus should be on profitability and a solid balance sheet.
The third pillar is about working culture; to attract the best talent. Only these three parameters critical to business will determine whether a franchise owner is a leader or a laggard.
