Everything you need to know before buying a franchise

The advent of Covid-19 has led to people losing their jobs and seeking ways of securing their financial future against the current disruptions.

Rather than waiting for employment opportunities, people are taking matters into their own hands.

But the idea of starting a new business from scratch, especially during a global economic downturn, can be intimidating.

To meet this balance, South Africans are opting for one of the most cost-effective businesses with the fewest barriers to entry: franchising. This is according to Marcel Strauss, Group COO of The Franchise Co.

But before you invest your life savings into a franchise, Strauss advises that you do your homework before becoming a franchisee.

Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of an established trademark, ongoing marketing, continued support from the franchisor, and the right to use the franchisor’s systems of doing business to sell its products or services.

“Franchisees must decide what franchise system they wish to be part of and then analyse their geographic area to see if there is a market for that type of business. Should a market exist, contacting the franchisor and asking them for information on their franchise opportunity in those fields, is the next logical step,” said Strauss.

“Once a potential franchisee has decided on a particular franchise after conducting preliminary research, they must interrogate the prospective opportunity to see if it is as good as it sounds. Next should follow the disclosure document, a regulatory document describing a franchise opportunity that prospective franchisees must receive before they pay any money, sign any papers or, in some cases, even meet with the franchisor. The disclosure document that we provide gives the prospective franchisee an overview of how the business is managed and what expectations fall on the franchisee,” said Strauss.

“While the disclosure document is useful in providing a glimpse of how the franchise operates, aspiring franchisees must further research the company they are considering investing in. This can include a news search on Google to find out how that brand or company is viewed in the media and the type of governance in place. It is also useful to conduct research interviews by reaching out to current and former franchisees of that brand and hearing what challenges they face and what support is provided by the franchisor.”

As a potential franchisee you also want to examine the following:
• The franchise agreement
• The franchisor’s audited financial statements
• Earnings-claim statement or sample unit income (profit-and-loss) statement
• Trade-area surveys
• List of current franchisees
• A list of the franchisor’s current assets and liabilities.

“The next item for consideration is capital. Banks and other lending facilities view franchises favourably as a business and are generally open to funding them. Before you select any franchise investment understand how much the upfront costs will amount to, and how well other franchisees are performing. As an investment, a franchise remains one of the most trusted businesses due to operating models having been tested before being rolled out. When franchisees partner with a franchise, they know what to anticipate and have access to support systems from a series of professionals and not a lot of businesses can claim that,” concludes Strauss.

Press release: PR Worx

Also Read: Support is Everything When Investing in a Franchise

Also Read: Fast food franchise employee robbed of R6 000