Three Things Every Franchisee Must Understand

Author: Vin Tsui

Date: JAN 20th, 2015

Topic: Industry Experts

If you are someone who is considering a franchise as an avenue to entrepreneurship, undoubtedly you have explored a host of franchise systems. Virtually every franchise system will tell you that it is the gateway to success. Before you jump in and invest your hard earned money, you should step back and make sure that you understand a few things.

First: you need to understand what a franchise is and what it is not

With a few exceptions, buying a new franchise is not the same as buying a thriving business. More often than not, as an owner of a new franchise, you are responsible for developing the market for your new franchise. In the context of what most people think of as a franchise, it is a licence or right to carry on certain commercial activities using the trade-mark(s) owned by someone else. Typically, such licence is accompanied by strict rules and restrictions that you, as a franchisee, must follow in operating the business. This is significantly different from starting a business from scratch, where you, as the business owner, have the autonomy over all business issues. Subject to certain legal restrictions, you can decide what you want to sell, how you want to sell it, who you want to sell it to, etc.

Second: You need to understand your preferences or tendencies as a business person.

One issue to determine is whether you are someone who is comfortable following rules. Are you someone who wants absolute autonomy? Or do you prefer a structured environment? If you desire autonomy, then you need to find a franchise system that will permit the level of autonomy that you seek. The degree of autonomy offered by a franchisor to its franchisees will vary. Generally, the more established the franchise system is, the less autonomy is afforded to the franchisees. You need to take stock of your strengths and weaknesses. Are you a morning person? Some franchise systems require that services be provided early in the morning. If you are not a morning person, then you will find the business very taxing. Do you like dealing with people? If not, you should consider franchises with less face-to-face customer interactions. Do you have a strong sales acumen? Virtually all businesses require some level of sales skills. If this is not your forte, then you need to find a franchise system that does not require a high level of sales skills or account for the costs of hiring sales personnel. You get the idea.

Third: You need to understand what you are actually buying.

Regardless of what a franchisor’s sales representative may tell you, independent due diligence is critical. If the franchise that you are looking to buy has any operation in a province that has franchise disclosure legislation, you should receive a disclosure document from a franchisor (unless you are buying the franchise from an existing franchisee without any involvement from the franchisor). However, you should not rely solely on the disclosure document. At minimum, you should conduct your due diligence using other resources such as the internet and interviews with other franchisees of the franchise system (both current and former franchisees). Unless you happen to be an accounting and legal expert experienced in franchising, you should obtain the services and advice of a lawyer and an accountant skilled and experienced in franchising. An accountant will help you fully understand any financial statements and pro forma earnings projections that the franchisor may provide to you, and the economic impact of your investment. A qualified lawyer will help you understand the business and legal implications of the disclosure document and all the legal documents that you have to sign. Yes, the services of these professional advisors are not cheap. But don’t be penny wise and pound foolish here. You are about to invest a significant amount of your time, money and effort into a business. You owe it to yourself to ensure that you fully understand what you are actually buying.

Ultimately, no one can tell you with any certainty as to which franchise is right for you. That is something that you must determine for yourself after thorough due diligence. But that does not mean that you should not get some help in making that determination.

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