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Make-it-or-break-it rules you need to consider before buying a franchise

Munira Rangwala
11th Oct 2017
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Franchise ownership may appear to be a deal made of gold, but more often than not businessmen are enticed by the image it projects - an already established brand, patrons, defined product lines etc., overlooking the hardships and effort needed to scratch through the surface. Before you sign the contract, you need to know that franchise ownership isn't everyone's cup of tea and that every franchise opportunity isn't a gold mine. Yes, the right franchising opportunity can be profitable and satisfying for the right entrepreneur, but there are some factors you still need to consider before diving head-first into buying a franchise. Apart from doing your homework on the franchise and ensuring that the parent company will provide support in the form of training and marketing, there are a few other nuggets (for all those running to bag a fast-food chain) that need to be reviewed before you finalize the deal.

Image: Shutterstock

Image: Shutterstock

Here are five important things you need to consider before you buy a franchise.

Determine earnings potential

You cannot determine the profitability of a franchise based on the earnings of its other locations as those franchises may be making profits or losses mainly based on their location and other factors. Instead, conduct a survey of other franchises in the area you want to set up shop. Investigate how the successful ones are making profits and find out which ones have failed and why. Once you have a comprehensive list of the financials of other franchises, you can determine your potential earnings and the return on investment.

Determine demand

Just like with any other business, you need to determine if there is a demand for your product or service. For example, if you are buying an overseas franchising license, you need to understand that what may sell in other countries may not be well-received in your country. Before jumping on the opportunity, consider the potential for expansion just in case you want to branch out to multiple outlets in the future.

Whether 'territory exclusivity' is an option

Once you have determined the strength of the brand and its ability to pull-in customers, you need to ask the brand owner if you can get 'territory exclusivity', which as the words suggest you get to be the only franchisee of the brand in a certain mile radius. Without territory exclusivity, it becomes harder to build your franchisee and acquire a profitable niche.

Find out hidden costs

Before you sign the dotted line, read your franchise agreement carefully. If you want, get the agreement reviewed by a lawyer. There are often hidden fees in addition to the royalty payments. If you're not careful, you might end up paying huge commissions or royalty for training or marketing that you had no idea about earlier.

Talk to owners of existing franchisees

The parent company will give you a lot of information and hid many, but if you want to know what it's really like to own a franchise, then talk to someone who's owned the company's franchise for a few years. Ask the tough questions and seek advice. Most existing franchise owners are excited to mentor newbies and their enthusiasm is always contagious.

You may be the boss of your franchisee, but the franchisor often has maximum control. It is therefore best to consider the above mentioned five points before you find yourself in an arrangement you're not comfortable with.

Read Also: What you need to look for when picking a franchise investor

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