How to evaluate your franchise proposal?

Here's some clarity on the franchise business.......

Starting a franchise not only means you are an entrepreneur but also cuts down the typical risks associated with starting a new business. There is a higher degree of security, as replicating an already existing business model is always less risky than starting new.

But is it as simple as it sounds?  Not really!

There are a few pertinent questions you must ask before you embark on this journey:

How risky is the business model and does it suit your risk tolerance?

Is it a proven concept or is the franchise idea still catching up? Does the risk in business model suit your risk tolerance? A good way to understand this is to reflect on how you took major money decisions in the past. Did you take a long time to evaluate an investment opportunity which carried high risk or did you take the plunge easily? What was the outcome and how did you handle it? Mapping the risk of the proposed franchise idea is extremely important.

What are the total costs involved - both one time and recurring?

Remember not just to consider the initial capital outlay, but also the recurring costs which you may incur. Will you be able to commit such a capital initially and over the years? Is it possible to even make money in the business? A good way to find out this is to prepare a business model and understand the payback period of the idea. Check your personal finances and analyse if you will be able to commit this amount of capital.

What is the track record of the business model?

It is of paramount importance to do your research and evaluate the pros and cons of the business idea. Understand how this model has worked with other franchisees. When you do not find out the track record of the franchise proposal, it could be a recipe to failure, unless you are very lucky.

Does the chosen territory have a good potential?

Franchisees usually operate in specific geographical territories earmarked by the franchisor. The success of the business depends on the dynamics of the territory you have chosen. Therefore it is vital to research the potential of your territory. Another aspect to be clarified with the franchisor is whether he is planning to allocate your territory to another franchisee or  planning to start his own outlet in that area. This will definitely affect your sales as customers will have more options. It is recommended to include this clause in the business agreement with the franchisor.

What is the feedback from other franchisees?

A good way to understand pros and cons of the franchise proposal is to understand the feedback from the existing franchisees. Are they happy with the franchisor relationship? What is their view on the business potential? What are the limitations or drawbacks they view in the business? What is the failure rate? How are conflicts addressed? You could visit existing franchise outlets and talk to franchisees.

What is the level of support offered by the franchisor? The support offered by the franchisor is very important to determine the success of the franchise business. Some franchisors offer initial support but stop the support after the training period. Will the franchisor disappear after your franchise is launched? Talking to existing franchisees could help in this respect.

Have you understood the fine print of the legal agreement?

Read the fine print of the agreement before signing it. If you think any clause is against your interest (which in most cases will be), then negotiate with the franchisor. It may not always work in your favour, but you must be careful not to get caught on the wrong foot. It is recommended to seek the help of a lawyer to evaluate the fine details.

What has been the most significant consideration for your franchise business? Please share your views.