10 things to consider before buying a franchise

Dec 2, 2021 | Articles, Personal Finance

Do your homework before signing on the dotted line.

  GRANT SMEE IF YOU’RE looking to be your own boss by becoming a business owner, there is a persuasive argument for buying into a franchise rather than striking out on your own—but it’s important to do your homework before signing on the dotted line. Franchising has long been a popular route to entrepreneurial success in South Africa, with over 800 franchise systems operating through 48 000 outlets in the country. In a country rife with unemployment, the sector employs close to 500 000 people—and its contribution to the local economy is equivalent to 14% of GDP, according to the latest FASA survey. While local franchising has strength in numbers, the sector struggled during the COVID-19 pandemic and is only now beginning to stabilise. That said, franchising has a significantly lower failure rate than that of independent businesses (as much as five times less)—but there are still significant risks involved when buying in to a franchise. However, the majority of these risks that are specific to franchises can be mitigated if a potential franchisee simply does their homework, and thoroughly researches both the brand and the state of the market before buying in. It’s also important to consider your personal strengths and what will be expected of you as a franchisee, as not everyone is suited to this journey. Accordingly, there are a number of market, practical, and personal considerations to take into account, into which our Top 10 factors are categorised.

Market considerations

1. Consider the demand
Potential franchisees should conduct thorough research in terms of consumer trends, market demand, and any risk factors. It’s a tough time to be a business owner in South Africa, so make sure that there is enough demand for your potential product or service before signing on.

Luckily, access to market information and customer insights are some of the major advantages when joining a franchise, so potential franchisees should be able to access this data.

2. Consider your competitors
Once you’ve determined if there’s a demand for the product or service that your franchise will offer, investigate how that demand is already being met by competitors.

It is therefore recommended that you have a frank discussion with a representative from the original franchise it-self about what market advantages the franchisee can count on, whether they can realistically expect to outsell competitors in the area, and why.

3. Consider the brand’s reputation
Reputation can make or break a business—and in the case of franchising, reputation can be influenced by one bad actor and end up tainting the whole brand.

Therefore, it is suggested that you read Google and Facebook reviews, speak to customers, and find out if there has been any negative media coverage around the brand in the last five years. It’s crucial that franchisees be fully aware of the public perception around the franchise, and that this information comes from an objective source—don’t just trust what Head Office says.

Practical considerations

Once the initial research has been conducted, it’s time to start thinking practically about what is required to get the franchise up and running.

4. Consider other franchisees’ success rates
Talk to other franchisees, and ask them to be honest about their experiences—would they recommend joining the franchise to others? What have their success rates been like, and what challenges have they experienced?

Looking at sales data and financial reports from other franchisees (and the company as a whole) can also help round out this picture.

5. Consider the start-up costs involved
There is an upfront cost to joining a franchise, as franchisees need to pay a licensing fee for the right to use the brand’s assets and resources. While this joining fee is an expected part of the process, it is recommended that you ask what other initial costs will be required for budgeting purposes.

On the plus side, the franchise’s marketing resources and support—a major advantage of choosing the franchise model – should be included in this joining fee, and will help with getting customers in the door once you’re ready to open.

6. Consider what your earning potential is likely to be
Once the business is up and running, it may still be several months before you start to break even.

Find out the average amount of time it takes most franchisees to start turning a profit, so that you can be financially prepared and have the liquid capital necessary to cover running costs. Make sure that you have the savings and resources to back you up over this period, and remain conservative with your spending.

7. Consider the franchise’s business model
Is the business model of the franchise designed to facilitate your success as a franchisee? Are there tried-and-tested systems in place to ensure the profitability of the business? Analysing the business model of the franchise also involves taking into account the ongoing fees such as royalties that must be paid to the franchisor by the franchisor, as this could have a significant impact on profitability.

Personal considerations

The final set of considerations that a franchisee must take into account before joining a franchise relates to their own character and career expectations—do they align to the nature of franchising?

8. Consider what will be expected of you as a franchisee.
Becoming a franchisee carries many of the same responsibilities as being an independent business owner. You will be responsible for staff, as well as for the practical requirements of keeping a business running.

To be a successful franchisee you need to be a leader—and this will require sacrifice and making hard decisions. Before you take on this role, it’s important to be aware of what is expected of you.

9. Consider what resources are available to help you succeed.
Business mentorship is a major benefit of the franchise model, but not all franchises have systems in place to promote ongoing mentorship and support to their franchisees.

Therefore, you need to choose a franchisor that has made mentorship a priority, and that offers support and resources to their franchisees long after the initial training.

10. Consider whether or not being a franchisee aligns to your passion and personal strengths
Finally, you need to accept that not everyone is cut out to be a franchisee. You have to be passionate about joining the franchise and committed to its success—even if it isn’t your name on the sign.

Above all, you need to embrace hard work, responsibility, and the pursuit of excellence if you start this journey.

Grant Smee is an entrepreneur and the managing director of the Only Realty property franchise.