Many potential franchisees contact us to ask just how to start out:
How to choose a franchising chain?
Is it worth buying a new franchise, or perhaps taking over from a franchisee selling his rights?
Is success assured?
Is the cost of the franchise reasonable?
Are the royalties that the chain is asking from the franchisee reasonable?
These and many other questions are very important, but before we can address them, we always make sure that the potential franchisees understand what they are getting into.
Shortly about franchising in general
In a nutshell, the significance of buying a franchise is that the franchising company, which among other things manages the chain, is selling the franchisee a license to open and manage a branch under its brand. The conditions of the franchise are defined in a franchise agreement, in which the parties undertake a wide range of rights and obligations to each other.
It is important that the potential franchisee understands that the support network given by the franchising company also has disadvantages (alongside many advantages), the main one being that the franchisee is not in charge of his own world (for better and for worse), and that, unlike opening an independent business, the franchisee is subordinate to the franchising company.
On the other hand, this method also has many advantages. The franchisee does not have to learn how not to make errors at his own expense, and the franchising company provides him with a supportive envelope, close accompaniment, reputation, contacts, and considerable business know-how.
As mentioned, in the franchise agreement the franchisee undertakes to the franchising company to make a one-time payment for the franchise, and to set aside a fixed percentage of his regular income. In addition, the franchisee has to comply with the company’s operational, administrative, and business requirements.
How to ensure success as a franchisee
In order to take advantage of the full potential of the franchise method, the potential franchisee should do his “homework” with care, and pay attention, among other things, to the following issues:
- Choice of the relevant chain – the potential franchisee must ensure that the chain suits him on a personal level, that he believes in its products and enjoys using them. It is important to understand that the choice of chain has a weighty psychological aspect, and a franchisee who becomes the representative of a product in which he does not believe, and decides to engage with a franchising company only because of the “easy” terms of the franchise agreement – will probably not succeed in the long term. Furthermore, it is very important for there to be good chemistry between the managers of the franchising chain and the potential franchisee; as in any business partnership, the personal aspect is of decisive importance for the success of the business.
- The experience of the franchising chain – we recommend choosing a franchising chain that has proven experience in the franchise field. In this context, it is important to clarify that although a chain may have many branches they may all be owned by it, and so this does not mean that the chain has experience in dealing with franchisees. On the other hand, it is important for the chain also to have “owned” branches, so that it can give the potential franchisee help as necessary, and share its experience when the potential franchisee has to cope with particular difficulties, and at the same time, know how to deal properly with the potential franchisee so as to achieve success together.
- The market and its environment – there is no doubt that the presentations and flyers prepared by franchising companies for their potential franchisees are attractive, well produced, and promise the world. But it is not enough to be dazzled by them: we always recommend that our clients go “out into the field” and talk with a number of the chain’s franchisees, go to the place where the branch will be opening, ask people whether there is a need for the product / the specific brand, and what they think about opening a branch of the chain at the intended site. Some franchisees even hire the services of a market research company to provide representative information for the particular area. In addition, it is necessary to check whether there are other branches of the franchising chain in the intended area / town, and whether the franchising chain intends to open more branches in the relevant area in the future.
- Financial aspects – these can be broken down into two general components: (a) The funding aspect of the potential franchisee: how the investment will be financed, calculation of the anticipated gross and operational profit, anticipated return of investment, obtaining the financing required at each stage along the way, from purchase of the franchise to setting up a shareholders loan for the business if necessary;(b) The second aspect is the financial soundness of the franchising company. There is no point in engaging with a company that is not financially sound, and in certain cases it is necessary to ensure that the owners of the company are prepared to sign personal guarantees in favor of the potential franchisee. The identity of the company owners should be checked, and whether they have a good reputation in the market; check that the franchising company has a proven business model, and look at the turnover of franchisees in the chain, how many branches in the chain have closed, and the reasons that have led to these branches closing.
- Intellectual property – the franchising company must be the owners of a registered trademark, if there is one, and must have proven experience in training franchisees, including having a book of procedures, training arrays in all fields relevant to the franchise, and employees with proven know-how in training and accompanying franchisees.
Please note that this is information in a nutshell, and does not represent comprehensive legal advice. Potential franchisees who want to open a new business and minimize the risks involved are invited to contact us and arrange a consultation, during which we will be happy to share our considerable experience and guide them to success in their new franchising business.