Questions to Ask Before Investing in a Franchise

August 12, 2023 admin

Rather than starting from scratch by creating their own company, more and more people are opting to purchase franchises.

Investing in a franchise allows you to capitalize on a successful company’s name recognition and customer base. You, the “franchisee,” are purchasing a right to sell and market the “franchisor’s” goods and services with the help of the franchisor’s “franchise support systems.” This permit is typically valid for a specified period and region. One major drawback of franchises is that you never truly control the company.

Depending on the franchise’s structure, a franchisee may be required to pay an upfront fee, continuing management fees, a percentage of sales, or some combination thereof.

Most franchise businesses are sole proprietorships, partnerships, or limited liability corporations. In any case, the franchise agreement will constrain the franchisee’s ability to run the firm as they see fit.

Visit the British Franchise Association’s webpage if you want to learn more about franchise opportunities.

Table of Contents

Should you put your money into a business franchise?

Yes, that’s the short answer. However, before investing in a business franchise, there are some precautions you should take.

Data suggest substantial expansion in the franchise business, which is fantastic news. NatWest Bank surveyed the UK franchise market in 2007 and found staggering economic growth within the industry. Business franchises generate an estimated £10.8 billion a year in revenue. Even more intriguing is that 93% of Business franchises are profitable. The percentage of franchisees making a profit rose from 70% in 1991 to 88% in 2004. Therefore, there must be a good rationale for expanding this industry.

How come it’s expanding?

This is because before a business franchise is released to the public, it usually undergoes testing. There’s a reasonable probability it’ll spread to other places if it succeeds there. Consider the success of fast food chains like McDonald’s and Dominoes as an illustration. They can be found just about anywhere, demonstrating that if demand exists in one part of the country, it will also live in others. The reason for this is that, as a whole, human beings are very similar and are prone to conforming to prevailing fashions. Domino’s will have one hundred thousand happy customers if only one hundred people enjoy their pizza. It’s basic science, yet it bears consideration before investing in a franchise. The one drawback of this idea is that as franchise demand increases, so does the price.

Entering at the optimal time.

Buying a franchise at the correct time is critical in turning your original investment into a good profit. To invest in a franchise in a “key” location when the brand is still unfamiliar to most consumers. One advantage of this strategy is that it limits the vendor’s ability to charge a premium for a new and unknown franchise. The franchisee runs the risk that the firm as a whole won’t succeed, which is why this strategy has drawbacks.

Before making any decisions, do as much research as possible.

First and most importantly, you shouldn’t part with your money unless you have solid evidence that you’ll make a profit. Not wanting to wait longer to ‘own’ a firm is not a good enough reason to part with your cash. It’s easy to be fooled into thinking that starting your own company is a fun and exciting way to gain social status, but it’s a lot of effort. For this reason, before committing to anything, you should do extensive research.

It would be best if you also were mindful of the frustrations inherent in running a franchise. Put, you are a franchise owner if you own a business. What you actually ‘own’ are the privileges to use the company’s name, trademarks, and internal systems. This may be vexing to some people. There will be a lot of regulations and policies that you must adhere to as a franchise owner, so make sure you’re up for the challenge first.

If you buy a franchise but later decide it’s not for you, the franchisor may require you to resell it to them for a predetermined price, say ‘X’ pounds. What do you think the franchise owner will do now? Sure enough, he turns around and makes a tidy profit by selling it. Therefore, the first step is to ensure that you are confident that you can successfully own and operate a franchise.

The question of what abilities you possess is the next logical step. Do you recall the three questions we posed to ourselves in the first class, “The Business Idea?”

1. In what areas do I excel?

What do I find rewarding?

Tell me about my personal history.

It would be best to revisit these questions before deciding on a franchise or investing. Find out which franchise is right for you by answering these questions. Franchises that need direct interaction with consumers might not be a good fit if you like to work independently and avoid social situations. Face-to-face customer service is vital to every business, but it may be challenging if you’re not cut out for it.

Obtaining the necessary funding to acquire the franchise.

You need to know how much money you must spend before choosing a franchise to invest in. Looking for funding before establishing a company can seem backward, but there is logic to this. Picture yourself at a convention dedicated to franchising businesses. You spend the entire day perusing the booths and exhibits, eventually settling on a franchise that will set you back at £20,000. You investigate potential funding sources, only to conclude that you have zero chance of stumbling onto such a large sum. On the other hand, picture yourself attending one of these shows with a firm grasp on your financial resources. Now that you have all the information you need, you can make an informed decision about a franchise that fits comfortably within your financial means.

Certain banks may offer you the money to purchase the franchise depending on the current economic climate, your track record, financial status, and business strategy. There are more advantageous alternatives to raising capital, yet receiving a reasonable rate on a business loan is feasible. The first is to ask close people for a loan. This is the preferable option because:

One, there is much less danger. You won’t need to pledge any of your possessions as collateral.

Second, they are more open to a lengthier repayment period with smaller payments.

Third, they will not require a significant payback on the loan.

While these benefits are excellent, they pale compared to the damage that may be done if you neglect to repay money rightfully yours.

Therefore, approaching close friends and relatives will likely yield the best results in raising the necessary funds; however, tread carefully!

This free online course was created by Richard McMunn, a firefighter for 17 years and a winner of the HSBC Award for Entrepreneurship. Do you want to learn more about launching a business that will thrive for years to come? Check out Richard’s well-known free.