Do Business Well

A franchise arrangement occurs when the business rights for a particular business, as well as the knowledge, procedures, expertise and goodwill necessary to run it, are sold to a number of people, who are called franchisees.

Franchising is a popular way of starting a small business. In the USA in 1988, there were over 2 000 different franchises, operating over 500 000 outlets, with sales of $640-billion. The South African Franchise Association has 84 members.

In many cases, operating a franchise is a relatively safe and easy way of starting out on your own. A good franchise can certainly reduce the risk of failure. Many of the uncertainties encountered in starting a new business have already been overcome, and the business idea has been tested and shown to be profitable. This means that the franchisee is buying, not only an established name, but also a ‘way of doing things’ which is likely to be effective. This may include an accounting system, marketing techniques, store or restaurant design and development, management consulting and a personnel system. Of course, the franchisee still has to put in a lot of hard work, and will certainly be faced with all sorts of problems that have not been anticipated by the franchisor. It is important to note that even the best franchise cannot guarantee success, but the risk can be minimised by choosing a good one. To help you to distinguish a good franchise from a fly-by-night operation, a framework for evaluating franchise opportunities is presented below.

Four aspects of the franchise need to be investigated: the franchisor, the product, the franchise agreement, and the return on investment.

The franchisor

Ask other franchisees about the operation. Are they satisfied with the arrangement? Are they making a profit?

• What is the the franchisor’s reputation in the business community? Speak to chambers of commerce, banks, small-business agencies and credit agencies.
• Inspect a certified profit and loss statement for the business.

Beware of high-pressure selling and promises of huge profits with minimal effort.

• Try to find out about the franchisor’s career. Has there been a previous involvement with a failed franchise or other business? How did the present franchise get started?

The product

• Has market research indicated a need for the product or service?
• Can it make a profit? How difficult will it be to achieve the projected volumes and margins, and to keep the expenses at the level anticipated in the plan?
• Are there equivalent or better competitive products on the market?
• How many other franchises are already operating? How many are projected for the future? Is there a danger of market saturation?
• Is the market growing, stagnant or shrinking? How large is it at present? Does this leave scope for growth?
• Who manufactures the product or supplies the materials? How is quality, pricing and a continual supply guaranteed?

The franchise agreement

• Have the agreement inspected by your attorney.

The provisions regarding termination, transfer, expansion and renewal of the franchise must be very carefully examined. For example, how much control do you have over termination of the franchise? How difficult is it for you to challenge the validity of the franchise agreement in court?

How much freedom do you have to do things in your own way? This applies to factors such as pricing, opening hours, location, and product modifications.

Examine the provisions regarding marketing and promotion. Are advertising expenses borne by the franchisor or shared among franchisees? Or is this the responsibility of the individual franchisee? How rigidly is advertising controlled by the franchisor?

Are the franchisor’s duties to the franchisee clear? This may apply to training, advertising, quality control, purchasing, distribution, insurance, equipment, and negotiations with suppliers, buyers and authorities.

• Does the agreement prevent you from starting additional franchise outlets at a later date? Does it prevent you from starting a similar business later on?
• Are the territorial boundaries specified in the contract? Does the territory offer a comparable profit potential to those of other franchisees?
• Does the agreement prevent the franchisor from starting additional outlets in the territory at a later date?

Possibly related posts: (automatically generated)
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• The return you expecting on your investment
• Some Franchise Terminology
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• Relationship Franchise Agreement - Operations Manual
• Selling the Franchise
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• Business format franchise
• Modern-day Franchising Part 2
• Modern-day Franchising Part 1

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