How should you look for the right franchise system?
What steps should be taken to check a franchise offer in detail?
In the case of continued interest, the potential franchisee is recommended to enter into an in-depth discussion with the franchisor and to get into contact with several franchisees, which will enable him/her to clear up questions and queries arising from the studying of the introductory material. When requested to do so, every franchisor should be able to give the names of competent partners who are willing to provide information and provide answers even to difficult and critical questions. In talks with other franchisees it is important to find out to what extent the performance of the central system matches up to their expectations and whether they consider that the franchising contract is in need of improvement. Obviously you should not let this initiative get out of hand: show consideration for your partner’s schedule. Time given over to you is time lost from his/her own business. The following points may be raised during in-depth questioning:
At first glance the culture of the enterprise may appear of secondary importance but in fact the kind of culture which is in operation contributes to the style and atmosphere in a system which in their turn are decisive factors in the dynamic of a franchise system. Therefore both parties to a franchise agreement have the right to expect that they be regarded and treated as partners. Their respective obligations to one another must be fairly balanced. A conscientious franchisor will take his/her partner’s problems seriously and his/her response to suggestions from the franchisee should be free of any preconceptions. Good communications between the central system and the franchisee will lead to a growing understanding on the part of each partner for the interests and force of circumstances affecting the other.
A comparison between various franchise offers is extremely difficult, even when the area of activity is the same, as the service package offered to the potential franchisee is very complex. For this reason the franchisor should at least offer concrete reference points by presenting a detailed listing to the franchisee of what will be expected from him/her.
At this stage it is important to establish whether the concept which has been presented is really going to be put into practice or whether it is just a way of setting a target. For instance, how has the franchisor adapted his marketing mix to specific market conditions ? To this end it is advisable to prepare specific questions to enable you to examine the franchisor’s approach systematically. It is essential that you gain the opportunity to examine the business guide lines and the business manuals to see if they are comprehensible, feasible and believable.
You should find out what competitive edge the franchisor, as best authority on his/her system, has managed to gain and to what extent such specialist knowledge will be placed at your disposal. This information given can be critically examined during discussions with franchisees and competitors. No less important is to establish how long the competitive edge will continue in the future. One should pay attention to this obligation to innovate and ask the potential franchisor directly about the further development of the competitive edge which has been gained.
If the potential franchisee can see weak points to the system he/she should not be satisfied with mere promises. It must be made crystal clear why these weak points have still not been dealt with and what is the latest time by which they will have been. In such cases the suspicion that a closer examination of the system will reveal more weak points cannot be far away.
Make certain that the area which has been targeted for business offers adequate potential and if possible, that no other franchisee is active in this area. The franchisor can establish if this is the case by appropriate market surveys to look at relevant criteria, for example when applicable, population density, purchasing power, social milieu, competition, transport and traffic facilities.
The franchisor may be satisfied with statistics, obtainable on request, concerning existing operations, in order to calculate the profitability of his own future business. Alternatively, he/she may draw up a specimen profitability calculation for the planned location which will take into account the personal circumstances of the applicants as well as the characteristics of the particular area.
Unambiguity of Royalties and Fees
There are no guidelines for the fixing of royalties and it is not easy to judge what an appropriate fee should be in any given situation. It is not just a question of high the sum should be, it is also a matter of what the franchisee is given in return for his/her money. Consequently many franchise sellers offer a breakdown of royalties and fees with an explanation of the service each corresponds to. This makes for clarity and underlines the reciprocity of the franchise relationship.
It is crucial for your economic prospects as a franchisee that when you sell at a price which is typical for the market, you are left with an appropriate profit; and of course all costs, including franchise royalties and purchase prices must be included in the total profit calculation. The franchisor should provide you with concrete economic calculations to enable you to check this accurately.
Most franchisors support their new partner by fulfilling various administrative obligations and by keeping an eye on the legal requirements as related to the impending opening of the business.
Assistance in the Initial Phase
Starting up a business is a particularly difficult phase for a franchisee. It is often the case that this start-up phase plays a decisive role in determining the reputation and further development of the business. It should therefore be made clear whether or not helpers from the central system will be present at the opening of the business and what kind of support is being offered in this respect. If the franchisee falls ill during the beginning phase, this can have particularly deleterious consequences; it can put the whole business plan in jeopardy and cause financial bottle-necks. Under some agreements, where the system lays special stress on partnership, special stand-by services and support funds have been set up to deal with such emergencies.
A fair and balanced contract, which takes the interests of both parties into account equally, is the basic pre-requisite for the success of the franchise system. Given the complexity of franchise contracts, no draft contract should be signed without having been inspected by a consultant well versed in franchising-related questions. Such precautions will often prove less costly to the franchisee than disputes with a franchisor later, occurring as a result of a lack of awareness of the actual and legal complexities of a franchise offer.