Want to buy a franchise? Ask these questions first
You must never blindly go into business. This is even more true when you buy a franchise with its own rules and ways.
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If you are considering buying a franchise, there are some questions you should ask first. Many consumers are thinking of buying a franchise in response to the high unemployment rate coupled with the tough economic environment.
“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,” Morne Cronje, head of franchising at FNB Commercial, says.
“Your research also has to be industry specific, given that every business has its own set of unique challenges.”
He says you should ask the franchisor these questions before signing any documents.
- What kind of support will I get?
You must fully understand the type of support that the franchisor will provide to ensure that you succeed before entering into an agreement. Some of the fundamental support that you need includes training, technology, site selection, marketing and advertising.
- Is there a restraint of trade?
If you are an entrepreneur who wants 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 does not have a clause that restrains you from investing in the same line of business as the current franchise.
- How do royalty fees work?
Most franchise agreements require franchisees to pay royalty fees. You need to investigate whether the fees are fixed or are a percentage of your turnover. You must also establish whether these are separate for marketing and advertising.
- Does the franchise have a good reputation in the industry?
Cronje says in business your reputation and customer service is important for growth and sustainability. “While the business may appear successful, it is important that you conduct market research to understand how the business is regarded 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?
It is easy to overlook this question especially when looking at businesses that are booming, Cronje says. “Researching 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, Cronje warns. “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.”
Cronje says 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.”