HOW MUCH WILL A FRANCHISE COST?
Most people could list a couple of crucial questions for prospective franchisees to ask. One of them is “How much will the franchise cost?”, but this isn’t the only important question.
And nine other crucial questions.
Although people c an sometimes be reluctant to ask direct questions, we think it’s important to do precisely that. To help you on your way, here are 10 crucial questions to ask when you start to investigate a f ranchise.
1. HOW MUCH WILL A FRANCHISE COST?
It’s vital to get a direct answer to this question – ideally when you make the first inquiry about the franchise. When we say “cost” we mean every expense you will incur to get the franchise established. This includes the initial franchise fee, training fees, fitout of premises, and equipment, including vehicles. If you’re buying an existing business this includes the cost of the business and any additional fees from the franchisor.
On top of these costs you will also need to pay for legal advice and accounting advice. The reason it’s so important to know this number is that you need to make an assessment of whether you can afford to buy the franchise, and you can’t do that unless you have a good idea of the cost.
2. HOW MUCH OF THE COST CAN BE FINANCED THROUGH LEASES OR LOANS?
Regardless of which franchise you consider, you’ll need to use some of your own capital to fund the business. However, you might also be able to finance some or all of the equipment, vehicles and fitout with a lease, loan or chattel mortgage. In some cases a bank may also lend you money to get the business started. When you know what can be financed you’ll be able to assess whether you are likely to have sufficient funds to get the franchise underway. In our experience it’s vital to consider the financing question early in the process. This will put you in a better position to make decisions on the business and to get it up and running without delays due to financing.
3. HOW MUCH CAN I MAKE?
I believe you deserve a good answer to this question – a good response could be something like, “In our disclosure document we provide a snapshot of turnover and costs of existing franchisees. You are able to see the average of the top, bottom and middle performers, and how many franchisees are in each category.” If the franchise locations vary, the results might be shown for similar groupings.
For an emerging franchise, a good response might be, “We include averages for the main costs, based on the results of existing franchisees, together with monthly sales figures for the first 24 months.”
By contrast, a response of, “We aren’t able to tell you that because the law prevents it” is a poor response and should be considered a red flag.
4. WHAT DOES THE FRANCHISOR DO TO HELP ME SUCCEED?
You are looking for a specific response to this question. The franchise salesperson or relevant franchisor employee should be able to tell you precisely how the support program is operated and what the marketing program is. There’s no single “best” franchise support model but you do need to know what help is provided.
5. IS THERE A MARKETING FUND AND IF THERE IS, HOW DOES IT OPERATE?
Franchise marketing funds exist to finance promotion of franchisees’ business. However, not all franchise networks have a marketing fund – and even when they do you will need to pay for some local marketing.
If there’s no centralised marketing fund, you should think through how you will promote your business and what that will cost. Ask the franchisor what activities they recommend and what the cost will be both at the start and ongoing.
If there is a marketing fund, find out how it is administered and what input the franchisees have. Ideally there will be a committee that includes franchisor and franchisees. It’s important to note that even where there is a marketing fund you are likely to need to supplement that with local marketing activities.
6. HOW DO I GET CUSTOMERS?
This might seem like a straightforward question but it’s important to ask. For instance, in several franchises we know, most of the revenue arises as a result of referrals from the franchisor. This creates risk for the franchisees because they are relying on someone else to generate business for them.
7. WHO ARE THE PEOPLE IN CHARGE AND WHEN WILL I MEET THEM?
This question is about understanding who you are getting into business with. Who is the chief executive or managing director, who are the senior staff and what is their role in the business? How much experience do they have in the industry and in franchising? Although the names of the management team will be in the disclosure document, the recruitment process should ensure you meet these people early in the process
8. WHAT DIFFICULTIES HAS THE BUSINESS ENCOUNTERED AND HOW HAVE THEY DEALT WITH THESE?
Every business faces difficulties from time to time. The big question is, what problems has the franchise encountered and how they were resolved? The answer to this question will give you an insight into how the executive team tackles the tough stuff!
9. WHAT IS THE DISPUTE-RESOLUTION PROCEDURE?
Disputes arise between franchisees and franchisors, just as they do in other business and family relationships. It’s best to know upfront how the franchise team deals with disputes and whether there is a documented dispute-resolution procedure.
10. DO YOU RECEIVE SUPPLIER REBATES AND WHERE DOES THE MONEY GO?
Some franchisors receive rebates from key suppliers. There might be good justifications for this. However, you should clarify what effect the rebates have on the price you pay for goods and services.