Are you a person who likes to set his own way of doing things or will you be comfortable with following a set of procedures defined by somebody else? Franchisees are more of the latter. They are obligated to follow systems and procedures defined by the Franchisor. This ensures uniformity across different outlets. If you would rather create your own recipes, systems, policies, etc. and would feel limited following pre-set operations, then you may be better off putting up your own business.
To become a franchisee, you should have adequate capitalization to open a franchised outlet. The franchisor will provide the business know-how and the use of the trademark but the franchisee will put up the money needed to open the outlet (see Initial Investment). Depending on the business involved, the initial investment may be quite large. Aside from the usual investment in business assets and rent deposits, the franchisee has to pay a Franchise Fee and shoulder the incidental expenses associated with training. The franchisor usually discourages the franchisee from getting a loan to finance the initial investment because the interest expense from the loan may render the return on investment quite unattractive.
What are your objectives in becoming a franchisee? If it is simply to get a good return on your investment, then a franchise may not be the right investment tool for you. A franchise is an active investment that requires the franchisee’s participation in management. There are other less demanding investment vehicles than a franchise. Get involved in a franchise if you want to get a good return in the process of running an ongoing business.
The Franchising Offering: What to Look For
When looking into a company for possible franchising, first of all, look into the product or service. Before you look into the details of their franchise program, understand the total concept first. What is unique about their concept? How is it different from the rest? Before you become a franchisee, you should first become a customer. Do you like the product? Are they marketing an innovative product or service? Even if there are similar products in the market, what makes this company different? What makes them special? Is it the product quality? The price? The service quality? Only after you have understood the concept and have become a satisfied customer should you begin to examine their franchise offering. If you are not sold on the concept, you will be hard-pressed to sell it to your future customers.
Find out what the Initial Investment quoted by the Franchisor covers. It typically includes franchise fee, initial inventory, equipment, and renovation. A franchisee will often need to set aside higher capital than the figures mentioned by franchisors. Other initial investment items are training expenses (travel, living expense, salaries), rent deposits, business permits &licenses, grand opening expenses, and working capital. With these additional investment items, will the investment payback be significantly longer than the figure quoted by the franchisor in his franchise literature?
Training and Support
What type of support will the franchisor give? The franchisor can assist you in all stages of operating the business – site selection, lease negotiation, training, construction, procurement, grand opening planning, personnel recruitment, etc. After your outlet has opened, how often will the franchisor visit you for support? How often do you need to attend training programs after opening?
The Franchise Agreement is the contract between the franchisor and the franchisee. It enumerates the rights and obligations of both parties in the relationship. It covers the beginning, the length of the term, the renewal provisions and the end of the contract.
Important provisions that should be examined in great detail are the territory granted, fees & payment schedule, and conditions resulting in breach or eventual termination of the agreement. In most good franchise relationships, the franchise agreement, once signed, is put away and the parties manage the relationship through mutually beneficial business practices