Investing in a Franchise

If you have ever heard of franchising and how good of a business model it may be as an investment, you may have heard right. But have you heard enough about it?

Let’s start with the basics.

What is Franchising?

A franchise is a legal and commercial relationship between the owner of an intellectual property (e.g. trademark, service mark, trade name or advertising symbol) and an individual or group seeking the right to use that identification in a business.

Simply put, in a franchise relationship, there are at least two parties who enter into an agreement:

Franchisor: owns the intellectual property and allows the right of using that intellectual property.
Franchisee: pays initial fee and subsequent royalty for using the franchisor’s intellectual property.

What Do You Get You Invest in a Franchise and Join the System?

Franchising could be an attractive way for aspiring but novice business owners to kickstart their entrepreneurship journey. The question is, what is being offered in return for committing to that large financial outlay?

In other words, is it worth risking your money?

Many business owners have jumped onto the franchising bandwagon and adopted this particular expansion model. In comparison to organic expansion, franchising could provide lower risks and a faster rate of business unit development since they are not operating the unit themselves. For all the risk they are transferring to franchisees, along with the money they are receiving, franchisors need offer something back in return at least of equal value.

So what are they?

An Established Brand Name

One of the biggest perks for acquiring a franchise is the fact that you will be setting up a business with an established brand name - which is one of the fundamentals of franchising and it is likely this aspect that brings customers through your doors at the start.

On the other hand, this may not be really totally relevant if your location is outside of the franchise’s home territory. Instead, an unknown brand may provide a whole new market for you to tap into but you’ll have to figure out whether the potential for the business exists and how much work you are willing to put into marketing efforts for your territory.

If Singapore is the targeted territory for your franchise business, you may want to consider Purple Rewards as your marketing solution.

Whatever the case, consider the financial outlay required for obtaining the rights to use the franchise brand trademarks and see if it makes valuable sense.

Transfer of Proprietary Knowledge

In most cases, the franchise fee paid to franchisors should also include the expenses for training for you and/or your staff. This training is crucial in preparing you to successfully replicate the franchise concept and operations. But some franchisors fail to understand the importance of this training programme and instead try to wing it when it happens.

Ask the franchisor what this training program involves - if they fail to provide a clear answer or direction, perhaps they themselves haven’t figured that part out yet. Also, try to understand contingency arrangements in the event you or your staff don’t make it through the training programme. Be sure that you’ll be able to learn all the skills and knowledge required to propel your franchise business to success.

Continuing Mentorship and Support

One of the things that makes a franchise relationship work between franchisor and franchisee is the continuing level of support and assistance, and this will likely make up the basis of your on-going payments in the form of royalties.

Remember, the franchisor is supposed to provide leadership and hand-hold you throughout the start-up and operational process, through good and bad times.

Sort Out Your Needs and Wants Before Acquiring a Franchise

Figuring out what you want from investing in a franchise could be the most efficient way to shortlist some franchise opportunities during your franchise search. Knowing how the franchise investment will impact you and those around you could help you make the decision to sign on the dotted line. So grab a pen and paper (or your preferred mobile phone or tablet), and start looking in the mirror. Because it all starts with you.

Personality and Character

Franchisees are required to follow a specified set of rules and occasionally take directions from the franchisor. If you find it difficult to follow someone else’s rules and accept the discipline of a regulated system, perhaps acquiring a franchise isn’t the best fit for you.

Interests and Preferences

People often make purchase decisions based on what they like, or at least within their financial ability and in line with their preferences. Starting your franchise search with the industries that you have an interest in. This could lead to an easier first step compared to a situation where you have no idea what you are looking for.

Goals and Objectives

Work backwards to determine what your realistic financial and lifestyle ambitions are at the end of a specified time frame. Typically, most people project on a short-term basis of 5 years and a long-term perspective of 10 years. By knowing your end goal, you can quickly eliminate franchise concepts that are unable to support your objectives.

Financial Situation

Most people go into business expecting success but the end result is not always positive. So, determine your level of risk tolerance or in a worst-case scenario, figure out how much of your assets you are willing to put on the line with an acceptable level of loss. Immediate considerations could be to look at how the impact of this potential financial loss could affect those around you (e.g. family, child, etc.).

It may sound nightmarish, but this is the reality of going into business.

Realities of Being a Business Owner

Acquiring the rights to a franchise is a big decision. Maybe as big as life-changing for some because usually a lot of money is involved. Obviously, it is a decision that shouldn’t be made lightly, much less underestimate certain aspects from the start which could leave you unprepared and have major implications in the following months after starting the business.

Time Commitment

Most prospective franchisees make the mistake of underestimating the amount of time that is required from them to commit to the franchise business. While the franchisor provides you with a well-known brand that has a proven business model and attractive products, and even lays out the operational processes, you still need to learn the business and dedicate yourself to good ol’ hard work to connect with the community. If you’re thinking working overtime is a thing of the past, perhaps it might be a good idea to start clearing up that schedule.

Alternatively, to free up more time for yourself, you could always hire someone to handle the management aspects of your franchise business. But hiring a +1 means additional employee expenses that you probably weren’t prepared to take on in the first place. Which brings us to the next point.

Starting Phase

Just because your business is part of a well-known brand doesn’t guarantee customers will come pouring through your doors immediately. Unfortunately, this is a common misconception among prospective franchisees.

Being confident that your shiny new investment will be a success is a good thing, this means you believe in the franchise and its products. However, stepping over the line into over-confidence might result in lacklustre planning to be financially adequate for the starting few months. And this could be one heck of a business killer.

For every business, there is often a ramp-up phase before the business finds it feet. During this phase, revenue levels will not be optimal but fixed operational expenses, such as rent payments and salaries, will still need to be met. What this means is there’s every chance that you’ll be bleeding money at the start so be prepared to dip into a readily available rainy-day fund until the business starts to hit its stride.

How much additional funds to set aside is a conversation you need to have with the franchisor, and that’s what they are there for - advice.

Deviations from the System

By making all the franchise payments to the franchisor, what you are getting back in return is their industry knowledge, business experience and operational assistance. While not a guarantee for success, franchisors help to re-create the same environment and formula that has proven to be a success, and also help you to avoid the mistakes they wished they didn’t make in getting to where they are now.

By deviating from the required processes and standards, it’s really messing with something that works. Changes, however small or insignificant it may seem, could have a negative impact on your business, or even the whole franchise system. If you think you can do it better or want to do it your way, don’t take up the franchise and set up your own standalone operations instead. Franchisees play the role of a follower and you need to accept it.

However, if there is something you have in mind that you believe could change the franchise system for the better, submit the suggestion to the franchisor and let them figure out the feasibility of the plan. If it’s a go ahead, great. If not, willfully deviating from the stated requirements might cost you your franchise investment. Or worse, if the franchise brand reputation is negatively affected, courtroom drama may be on the books.