How to Spot Out Potential Franchisees

Franchisees come from a wide variety of backgrounds and range from university graduates to those who left school at the earliest opportunity. What unites them is the idea of running a business of their own with the safety net of a larger company’s know-how and resources.

Perhaps somewhat surprisingly, research shows that, in many ways, the typical franchisee is rather similar to the conventional independent small business owner. For instance, around a half of all franchisees have either had previous first-hand experience t of self-employment or, alternatively, had parents who were self-employed.

Potential Franchisees

There are fewer women in franchising than among the conventionally self-employed and this is somewhat surprising, since franchising seems an ideal way for women to increase s, their share of self-employment opportunities.

One reason many opt for the franchise route to working for themselves is that previous employment did not prepare them for self-employment. For example, working for a large company tends to produce fewer who end up working for themselves perhaps because large firm specialisation does not give the all-round experience which lends itself to running a small business.

A franchise substitutes for this lack of experience by offering a proven business package with continuing support. It does much the same for those who have business skills but lack a business idea.

It should be understood by potential franchisees that no busi­ness is totally risk free. Although compared with the conventional independent small business the survival rate of franchises is superior, failures do still occur.

The Entre Computer Centres franchise is one recent example, despite the fact that it enjoyed considerable success in the USA earlier in the 1980s. Another is the La Mama franchise, retailing fashions for expectant mothers, even though it was set up by an experienced franchisor.

Besides the benefits of a tried and tested business package, there are other reasons why the small franchised enterprise should be less failure prone. For instance, many conventional small businesses go to the wall because they are hopelessly undercapitalised. In a reputable franchise this should not happen because the franchisor knows the likely costs and can often secure better loan facilities from banks.

Also, many small businesses fail simply because they have no proper financial and management control systems. Their pricing and overhead apportionment, for instance, is often based on guesswork. With a franchise, such systems should be part of the basic business format.

Just as franchisors vet applicants carefully, individuals think­ing about this form of self-employment ought to ask themselves if they really are personally well suited. It may be a protected form of business but it requires just as much hard work, long hours and get-up-and-go as any other small business. It also re­quires someone who can work for himself and yet work harmoniously also with another, host business.

Some franchises have fairly steep entry costs which rule them out for many people contemplating a small business. For in­stance, Wimpy now ask for a minimum investment of £450,000 but there are others on offer for under £10,000. Anyone deciding which franchise to go for should ask some basic questions to reduce the chances of making a serious mistake at this stage.

  • Is the franchise company a member of the British Franchise Association? This franchise industry trade association closely vets companies before admitting them to membership. Obviously, some very good companies for their own good reasons, prefer not to join but, none the less, membership can be generally counted in a com­pany’s favour.
  • Are other franchisees successful using the format that you are considering? Potential investors should visit at least two existing flooring franchises, preferably without the franchisor present, to talk to existing franchisees. These outlets should be freely selected from a complete list of existing outlets and should not be selected by the franchisor.
  • Is the franchisor’s long-term success dependent upon the success of franchisees? An ethical franchisor should be willing to take an income related to the franchisee’s own success rather than demanding a fixed royalty or service fee.
  • Is the franchisor selective in picking franchisees? Any shady operator interested only in short-term gain is likely to accept almost anyone willing to part with money.
  • What would you get back if you decided to terminate your contract or in the event of your death? In a good franchise operation, an outlet that has been developed into a flourishing small business can be sold as a going concern or inherited by descendants subject only to a minimum of conditions which protect the franchisor’s legitimate interests in the transaction.

Potential Franchisees

  • Is the figure you are told you will need to invest the total figure required to get you started or a minimum figure? Sometimes sizeable amounts of loan capital and equip­ment rentals may also have to be found, putting a heavy repayment burden on the new franchisee. Also, a franchisor who does not readily give clear investment in­formation from the outset may not be an ideal partner for the continuing business relationship that lies at the heart of a franchise.
  • What is your estimate of the future potential of the fran­chise? Is demand for the product or service offered like­ly to be maintained or, it is to be hoped, increased? Some franchises that have been offered attempt to exploit a fad or fashion, but public taste has switched to something else, leaving franchisees with a worthless business
  • Do the prospects for success appear just ‘too good to b true’? If so, they almost certainly are. Promises of success beyond your wildest dreams’ are invariably just that – dreams.

Filed Under: General How To's


About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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