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The process of purchasing a franchise lets a person set up and run a business without starting from the very beginning. The tried and true formula which is already in place is just adjusted and adapted by the person who buys it and then continues on in the business world. However, buying a franchise is not always only sunshine and rainbows. It has upsides and downsides.
How to buy a franchise the right way
Here are three crucial steps to take before buying a franchise that will allow you to avoid making a mistake and help you get things right the first time.
Step 1: Evaluate The Franchise
A. The franchisor should give you an information pack
- This should answer the initial questions you have about the franchise.
- The best (and most trustworthy) franchisors should also give you a franchise award manual which gives you more information.
- Be careful to not take everything in this initial information pack as gospel. Take the information they give you and look into it, find evidence that backs it all up.
B. Research Time!
- Now it is incredibly important to do your research from outside sources to avoid getting biased or slanted information
- Make sure you are educated about the field or industry you are getting yourself into, as the presence or lack of background knowledge can affect the success of a purchased franchise.
- Have a conversation with your bank about the purchase decision; see if they have any knowledge which could inform your decision.
C. Research in detail to understand the business concept and processes within it
- What field is the business in? What are it unique selling points and what makes it stand out compared to similar competitors?
- Where does the business trade and where is opened up to potentially being a good trading ground in the future?
- Who are the main competitors to the business? Is there anyone threatening the franchise’s territory or taking its customer base? Do a threat analysis.
- Has the franchisor taken steps to expand the business over the past few financial years? If not, is there something stopping them from doing so?
Step 2: Evaluate the Costs of the Franchise, the Potential Loss and Return
A. What are the costs of the franchise as a whole?
- How much is the up-front fee for the franchise? Smart franchisors will make this lower and only a representation of admin fees and a small buy in price. Still, its something to consider.
- How much money will need to be invested into the franchise?
- How much will materials bought from the franchisor cost you in the future if you buy the franchise? In a franchise purchase, buying materials from a franchisor could go one of two ways; either there will be a large mark up on the goods, or you could get them for cheap due to the franchisor’s purchasing power.
B. What is the projected or expected financial performance of the business?
- What do you expect to take once you come into possession of the franchise? How much money are you going to get in return for your investment?
Step 3: Do Some Final Checks
A. Take a visit to the franchisor, in person
- Ask them upfront and honest questions about anything that you have concerns or worries about.
- Evaluate honesty markers. Do they seem like they are trying to hide something or deceive you?
- Think about how much pressure they’re putting on you to make the decision. Are they hurrying you? This could be a red flag.
B. Do your own market research, don’t just trust theirs
- Ensure that their business model will actually work in your area.
- Think about your potential clientele and how you will attract them.
- Evaluate the competition that you are going to have.
- Think about your long-term goals and prospects once you set up the franchise.
C. Prepare a business plan!
- Just like you would for any other business, you need to ensure that you have a plan of attack. A business plan is crucial to the success of any business.
- Consult professional help if you need it.
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