Franchising can be a good way of starting up your own business, but it's not without risks. This article outlines some of the pros and cons.
While franchising may not be for everyone, it can be a good option for people who want to start their own business, but feel they need support in some areas where they may not have a lot of skill or knowledge. For example, marketing support.
However, there are a number of examples where franchisors themselves have got it wrong, as a result damaging their franchisees.
Some franchisees also join perfectly good franchise operations but do not make a success of it. The type of operation is simply not right for them.
There are a number of issues to consider before entering any agreement.
Research is essential to minimise risk, and to make sure that the franchise being looked at gives the operator a good chance of business success and personal happiness.
Considerations include:
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Does it suit your experience?
Franchisors may not demand extensive experience in the particular area of operation, but it is always useful for the operator to have some relevant experience or knowledge. In some instances, technical experience is essential.
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Is it what you want?
Enthusiasm is a great contributor to success. If you feel passionate about the service or business, you're more likely to do it well. If it doesn't excite you, then perhaps you shouldn't take it on.
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Time demands
How much time is needed and how much are you prepared to give? Generally speaking, a franchise is not a part-time operation, although some may be. But building up a franchise operation is usually quite time-consuming.
Once the franchisees' operations are established, it could be possible to step back and rely on staff. It is also possible to find some franchises where going part-time is a good option to begin with, while at the same time earning income elsewhere until a full time commitment to the franchise is financially possible.
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Competition
Franchise businesses often follow the latest trends, so understand who else is already operating in the space and who the major competitors are.
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Fees and costs
There is usually an up-front investment to make when taking on a franchise, as well as annual fees to pay.
The finances need to be carefully checked, taking such overheads into account. Any contracts or leases associated with the franchise should be reviewed by your solicitor - spending a little now could save you later.
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Research the business proposition
Under Trade Practices law, a franchisor must give you a disclosure document, but it won't tell you everything you need to know.
The business potential may sound attractive, but what is the reality behind the sales pitch?
Look at the competition in your area for the service or products being offered. Talk to other franchise owners (who have no other connection to the franchisor) for a reality check, and assess what the possibilities really are.
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Check your finances
Keep business finances and personal finances separate. Also it is an advantage to have enough funding available to take the step without needing to mortgage your home or take on other types of debt.
Check the cash flow position and real cost of start-up, as you would any other business opportunity, to ensure your finances will last.
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What happens if things go wrong?
Check the franchise agreement to see what happens if you cannot keep going. Do you have any rights at all, or is everything in the franchisor's favour?
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How long has the franchisor been established?
Getting in with a new franchise opportunity often means there is more blue sky available, but if the franchise hasn't been around for long there is usually more risk involved.
On the other hand, a well-established franchisor with a number of successful franchise operations is likely to drive a harder deal, but there is likely to be less risk involved.
There are always two sides even in this. It could be a franchise operation has been around for a long time, and the products or services offered are not keeping up with competition, or are no longer relevant.
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Talk it through
Talk to others, particularly your accountant, but even friends and family. Go through the pluses and minuses and air your own doubts.
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If in doubt, look elsewhere
If, in the process of investigating a franchise opportunity, there are areas of doubt, then don't take the risk. It may be as basic as not getting on with the franchisor.
If such doubts exist, it is usually enough reason not to go any further with the business idea.