The Smart way to choose a franchise
Franchising is a $10 billion dollar per year industry, employing 45,000 people in over 7,000 outlets and growing at a phenomenal rate – over 20% per year for the last three years. There are currently over three hundred franchise systems available in New Zealand. That choice is enough to confuse anyone, so you need to be methodical in your approach.
These six steps will lead your enquiry down a systematic path, which will comprehensively evaluate all opportunities presented to you. Where do you start?
Step 1. Price is your first step – what can you afford?
Franchises come in all shapes and sizes. You can invest anywhere from $20,000 – to over $1 million. So before you do anything else choose the price bracket which is right for you. It can be easy to get carried away when a franchise sounds absolutely perfect - it’s exactly what you’ve always wanted to do, but a bit more than you can really afford. The last thing you need when purchasing or starting any business is to be under capitalised. You will have enough challenges in front of you with your new business – new premises, new staff, new meetings with new franchisors, a totally new venture – so ensure you have the funds to buy the franchise and working capital to get started and sustain your business and yourself until you reach breakeven. Buy what you can afford – today.
Financing a new venture is one of the most crucial aspects of going into business. How do you find out what you can afford? What you can borrow? What the monthly debt servicing of your business loan will cost? Talk to the banks who recognise the importance of franchising and have a dedicated division to cater for the franchise sector.
Before seeking franchise finance, here are some Smart tips:
• Lenders want you to have some capital. If you don’t have enough capital, find a partner who does
• The most common source of start-up capital is friends and family. Use them
• Seek out lenders who understand not just small business, but franchising as well
• Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything
• Presentation is crucial. Fill out applications clearly and present a well laid out and concise business plan
• Consider leasing equipment and vehicle to conserve start-up capital and improve the appearance of your balance sheet
• Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt
• Don’t give up
If you first establish what you can honestly afford, then you will immediately knock out two hundred of those three hundred franchises available.
You can start small and plan for growth
Franchising allows you to build the value of your business as a saleable asset by combining your own business results with the added value of the brand. If you want the $150,000 franchise, but can only afford the $50,000 one – then buy the smaller business, build it up over a couple of years, sell it, and then move on into the larger one.
Or find a franchise where you can purchase multiple franchises over time, or develop more franchises in your territory. You may even be able to become a ‘super franchisee’, owning franchises in more than one franchise system. Both franchisors and banks may well support your proven track record. In the US over 50% of franchises are now owned by franchisees with more than one franchise. There are even franchisees in the US who have built an empire of franchises and become publically listed companies!
However, don’t just look for a business that you can afford and assume everything else will work out well. Purchasing any business is a financial decision, but there are many other factors to consider – this is just the beginning!
Step 2. Identify and evaluate your Industry
Franchises are available in a huge range of industries and business sectors.
Select an industry which has a future, and which is currently performing well. Is it stable? Consider the sales and investment levels, the potential of that industry and the trends that could impact this business in the future. If it relies heavily on technology, how will you and the franchisor keep equipment up-to-date and what will it cost?
There are some very smart ways to use technology in business. Ensure that technology is used to make your business more efficient and to give you accurate, timely information that will help you improve your business results. Are benchmarking statistics available on the industry? If so, how does the franchisor compare with other operators in that industry?
Selecting your industry will reduce your one hundred franchise choices to about thirty.
Step 3. Is it a fit for you?
Your next step is often the one that is hardest. You need some really honest soul searching.
What, of those franchises left, will really suit you? Can you do the work required? Ask your friends and family what kind of business they see you succeeding in, and listen to the answers!
Most small businesses need sales and communication skills. Are you the kind of person who likes dealing with the public? Are you comfortable with selling? Consider the role you will be playing in the franchise – front line – hands on operational, or behind the scenes administration and management. Is that what you want to do? Will you enjoy it?
While Franchisors provide training, it makes sense to make use of special skills and interests you have. Be warned however – some franchisors prefer that you have no previous experience in that type of industry, so they can train you to use their system without any preconceived ideas.
How does the family feel about your choice? What does your partner think? Are they completely supportive? Can they help you when you need them? Is your business plan based on them participating? If so, what happens to the business if they change their mind or have other commitments? Most franchisors interview both partners. They know that even if you work hard you’ll need the support of your family to keep up the effort and make the business work.
Will it suit your lifestyle? Do you just love to watch the kids play rugby every Saturday? Does your service club meet every Thursday evening? You may well not be able to do that if you secure a retail business. Can you really feel happy down at the golf club, telling people you are no longer the sales director of a national company, but now own an XYZ franchise? Is it something you feel really excited and absolutely passionate about – proud to be associated with and comfortable talking to anyone and everyone about? Does it really fit?
Are you prepared for the reality of the small business lifestyle?
Sometimes when we try something new, it is more difficult than expected. In any business start-up, it takes time for customers to learn about the business & give it a try. Things can get tough – expenses mounting up & sales lagging behind. You’ll be working long unsociable hours – evenings and weekends. Are you prepared to do what it takes? How will you balance time you spend hands on in the business versus working on the business behind the scenes? Do you understand that everything is at risk – home, assets, families and futures? With a franchise, you are not in business by yourself, but you are in business for yourself and it will be your own business. The buck stops with you. Can you commit to running your own business? Do you realise that the franchisor is not responsible for your success? The franchisor will give you the tools, but you need to open the toolbox, roll up your sleeves and work hard using those tools! Are you up to the challenge? Can you stay positive and realise the opportunity?
Remember why you’re going into business in the first place. If you ask any business owner why they work for themselves the responses are pretty much the same – to make money, share it with those they love, spend more time with family and friends, have the freedom to do what they want when they want…
The reality is that many business owners are short on time and are kept busy doing the paperwork rather than spending time growing their business – or having time for the things they enjoy. Some business owners fall into the trap of spending their evenings and weekends doing paperwork – others get Smart. Today business wants to do more with less. Look for efficient ways to operate and outsourced business services that will allow you to focus on generating income and building your business.
Last, but not least, ask yourself if franchising is the right option for you. Franchisors provide standard procedures and business systems. How do you feel about the franchisor limiting what you can and cannot do in your franchise business? Are you a team player who can follow guidelines and listen to advice – someone prepared to work hard within the boundaries?
Finding the right fit will isolate about five franchises. Of these, pick only the best, and use a logical system of questions to make a comparison.
Step 4. Ask Questions
Ask questions – of yourself, the franchisor, your business broker, family, friends and advisors. Write down the answers.
There is a checklist in the Franchisee Guide – a comprehensive book available from the Franchise Association of New Zealand (FANZ). If you are seriously considering investing your hard earned money in a franchise – make the purchase of this book your first down payment. franchiseassociation.co.nz
Take this checklist along to your meetings with the franchisors. Ask the same questions of each franchisor so you can make accurate comparisons – it will be obvious exactly what each franchise offers, and therefore which one best suits your requirements. One of the most important things to check is whether the franchisor is a member of FANZ – their documents must meet a certain standard and they are bound by the Code of Practice.
Talk to as many people in business as you possibly can. Develop a relationship with a Business Broker specialising in franchising, talk with business owners and organisations in your community – the more help you get the better.
Phone or visit as many existing franchisees as possible, and ask them the same questions you asked the franchisor. By doing this you will get an overall picture. Some will be smart operators, others may be poor operators. You will catch some on a good day, others on a bad day, and get a range of opinions. Ignore the extremes, and look at the overall picture.
Step 5. Seek professional advice
Your accountant can help formulate your business plan and you’ll need legal advice to ensure you understand the franchise agreement. Use advisors who have experience in franchising – because not all do. Choose your professional advisors carefully as their advice may determine your financial success or failure. An inexperienced advisor could end up costing you more.
Don’t expect your lawyer or accountant to necessarily endorse your choice of franchise; they are paid to point out potential pitfalls and be cautious on your behalf so you go into this business venture with your eyes open.
Go back to the franchisor with questions. They know the business, and may well know the answer.
Step 6. Make your decision
So you’ve decided what price you can afford, selected a stable industry with a future, looked for the right fit, isolated a select few, compared them to find the best, and used professional advice to judge them. By now you will have collected more information than 99% of business buyers, and be well equipped to make your decision.
Six steps – Smart and simple. Now – make your decision.
Any business – even a franchise – is a risk. Only you can decide whether you are comfortable with that risk. Asking smart questions means making a more informed decision. There are few joys as great as running your own profitable business with the support of the right franchise, and I hope that you enjoy precisely that.
If you’re looking to buy a franchise, consider Smart. Smart is a 100% Kiwi owned franchise with multiple franchises operating around the country. The Smart group has a wealth of business and franchise experience.
Click here now to find out more about a Smart franchise
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