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Do You Think A Franchise May Be Better
Despite what some people may think, franchising is not the instant route to a successful business. It certainly has the potential to be, and statistics indicate that buying a franchise may be less risky than investing in your own startup, but much must be investigated before signing on the dotted line.
The investigation process starts with an assessment of your personal and financial capabilities, and your suitability to the business. The degree of experience with a product or service and the level of management experience are important considerations. Furthermore, will the business satisfy your income, security, liquidity and growth preferences?
Once you have assessed yourself, you then have to assess the franchisor with the objective of determining its experience, reputation and capabilities, and its strengths and weaknesses.
There are many different types of franchises available, and often many in a market niche, it is useful to create a "screen" through which to sift a prospective investment. If the franchisor passes through the screen, then serious investigation and negotiations can proceed.
Screening information may be obtained from the following sources:
-the franchise package or website
-a visit to facilities
-bankers, accountants, lawyers and other experienced advisors
-trade shows and industry conferences
-franchise magazines and annuals
-chamber of commerce or board of trade
The following are some of the more common things you should be considering when investigating a franchisor. You may have further issues, depending on the particular facts at hand. All issues should to be addressed with the objective of determining the franchisor's reputation, experience and capabilities, and its strengths and weaknesses.
-history and reputation of the business
-degree of experience with the business
-directors, their history, experience and reputation
-key personnel, their experience, qualifications and capabilities
-financial strength of the franchise system
-head office organization and key positions
-how the franchisor make its money
-training programs and programs to help franchisees
-relations with franchisees, suppliers, bankers and advisors
-competition and franchisor's competitive edge
-number of operating locations
-company owned stores and reasons held
-performance of and special privileges to corporate stores
-stage of franchise system development
-growth and expansion plans and their funding
-rate of failure and reasons therefore
-pending lawsuits and current material events
Finally, a thorough understanding of the franchise package is required. This includes acquiring a sophisticated understanding of the product or service and the proposed location, as well as the legal rights and obligations of both franchisee and franchisor. In other words, what exactly is being purchased by the franchisee?
In summary, although franchising can have many advantages, potential franchisees must perform a rigorous assessment so they know exactly why they can succeed with a particular franchise. By investigating the franchisor using the type of framework shown, you can efficiently screen prospective franchisors to leave only those that fit your pre-set parameters.
It is important to note that there are many more issues that must be addressed and no one should commit to any transaction before consulting experienced professional advisors. Using lawyers, accountants, and bankers who all have experience in franchising, and even better, the particular franchise you are considering, will ensure substantially all your interests are considered.
© 2015 John B Voorpostel CPA, CA, CMB
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