‘Good franchises’ are those that are a good for YOU, some people succeed and others fail in the SAME franchised business. This happens for several reasons and in all types of business.
The following information relates mainly to small franchises which are home based but most of the information would be useful to anyone whose aim is finding a franchise that suits them.
Amongst the points you should consider, to avoid a bad outcome are:
• Is the franchise a ‘GOOD FIT’ for you?
• Are the costs within your means?
• Has the franchising company been in business for a reasonable length of time?
• Is the franchising company financially sound?
• What do the franchisees say?
• Is the territory (if any) of a reasonable size and appropriate to what the franchise sells?
A ‘GOOD FIT’?
Some ‘bad fits’ are obvious, if you are frail – don’t buy a carpet cleaning franchise, if you don’t like animals – don’t go into pet care etc. Most ‘bad fits’ are not so obvious and they often involve selling. Most franchising companies underplay the need to sell BUT it is often a major part of a business.
Establish whether or not the business involves any kind of ‘cold calling’. If it does (or even might) and you are unwilling to do it – STAY CLEAR. Remember ‘good franchises’ are ‘good fits’ with you.
An interest in what the business does obviously indicates a ‘good fit’ and so a good franchise. You should try to seek out that small home based business franchise that deals with something that you are already interested in. If this isn’t possible, consider whether or not you might be able to develop a genuine interest in their business.
ARE THE COSTS WITHIN YOUR MEANS?
A failure to ‘get the money in place’ can cause real trouble. You should ensure that you have sufficient funds to:
• buy the franchise
• buy any stock
• pay for other set up costs
• pay the royalty fees in the early months
• possibly support yourself in the early months
• cope with late payments from customers
You should make a full list of any possible costs and assume that you will have no profit for up to 6 months (this hopefully will not be the case but better safe than sorry).
It is also wise to reduce the income projected by the franchising company by at least 30% and increase their cost estimates by a similar amount. If you cannot see any profit at that point – BE VERY CAREFUL!
One of the franchises that we bought quoted totally ‘pie in the sky’ figures in their prospectus (as we later discovered).
IS THE FRANCHISE ‘TRIED AND TESTED’?
It is estimated that 70% of franchising companies go out of business within 5 years of set up.
‘Good franchises’ are those that have been operating successfully for several years. If the company is fairly new, I would always advise against going ahead. It is true that someone has to be a pioneer and the first few takers might be given a bargain – they also might be paying way over the true worth of the business – no-one knows at that stage. It is obviously extremely risky.
THE EARLY BIRD MAY CATCH THE WORM BUT IT’S THE SECOND MOUSE THAT GETS THE CHEESE!
The MAJOR advantages of buying a franchise is that you are paying for a PROVEN business model and a known brand name. If it isn’t proven, then it can’t be considered a good franchise bet. What exactly are you paying for? You might as well cut out the franchisor and do it yourself.
IS THE FRANCHISING COMPANY FINANCIALLY SOUND?
Information about corporations is available online. When sending you their prospectus, companies offering (what might be) ‘good franchises’ will often also send you some information about recent trading figures.
You will want to establish that they are trading successfully BUT this does not confirm that this such companies can be considered to be ‘good franchises’ from your viewpoint.
The franchising company may be making a good profit, which provides some reassurance about them but they may be making a good profit at the expense of the franchisees.
WHAT DO THE CURRENT FRANCHISEES SAY?
Because of the internet, it is usually easy to contact a number of current franchisees and ask how they are getting along. Now, this sounds like the ideal way to know exactly whether or not something is a good buy. Unfortunately, THIS IS NOT SO.
Some franchise agreements state that the franchisee may not discuss his franchise experience. If that is in the agreement, then the franchising company may well be trying to hide something.
A complete stranger contacting a franchisee about his/her business can hardly expect total honesty. Would you tell a total stranger all about your business? No, neither would I.
No matter how poor a franchise is, you are unlikely to hear any damning criticism from the franchisees for various reasons:
• They may be afraid of being identified to the franchising company so will give guarded or positive feedback no matter how bad the franchise is.
• No-one likes to admit that they have made a big mistake even to themselves. They may be struggling but are likely to put on a brave face about their business, especially to someone they do not know.
• Some companies will pay franchisees to assist in recruitment so you may be speaking to someone who stands to gain from you joining.
If you need to ask the company itself for contact details for current franchisees, and their list is not complete then your feedback is likely to be very positive but much less reliable. Ask for a list of ALL franchisees and a complete list of ex-franchisees who left within the last 12 months. Get a letter confirming that any list that they supply is complete.
IS THE TERRITORY ON OFFER OF A REASONABLE SIZE AND APPROPRIATE TO THE PRODUCT/SERVICE BEING SOLD?
Size of Territory
Of the three franchises in which we have been involved over the years, two offered territories which were too small to provide enough potential customers to make the business really profitable.
Territorial limits are a major disadvantage of franchises. The companies want to create as many territories as they can to maximise their own profits.
Suitability of Territory
A business that works well in one area might not (and often does not) work so well in another and this basic fact is often ignored in franchise prospectuses. The companies tend to mention only the size of territories on offer.
For instance a pet grooming franchise might be very successful in a leafy suburb or a group of villages but what would happen in an area consisting of poor housing or where students form high percentage of residents? It would be much less profitable.
MOST FRANCHISED BUSINESSES WILL DO BETTER IN AREAS WHERE INCOMES ARE HIGH. Seems obvious but some buyers fail to realise the implications when buying.
Well there’s some basic information about good franchises, or at least how to guard against the bad ones. I hope that you find this useful in your search.
Stephen has 15 years experience of setting up and running home based businesses with his wife Glynis. They have experience of running franchised businesses, MLM and own brand businesses.
Good Franchises – Tips on the Basics When Looking For a Small Franchise By Stephen E Dillon
The following information relates mainly to small franchises which are home based but most of the information would be useful to anyone whose aim is finding a franchise that suits them.
Amongst the points you should consider, to avoid a bad outcome are:
• Is the franchise a ‘GOOD FIT’ for you?
• Are the costs within your means?
• Has the franchising company been in business for a reasonable length of time?
• Is the franchising company financially sound?
• What do the franchisees say?
• Is the territory (if any) of a reasonable size and appropriate to what the franchise sells?
A ‘GOOD FIT’?
Some ‘bad fits’ are obvious, if you are frail – don’t buy a carpet cleaning franchise, if you don’t like animals – don’t go into pet care etc. Most ‘bad fits’ are not so obvious and they often involve selling. Most franchising companies underplay the need to sell BUT it is often a major part of a business.
Establish whether or not the business involves any kind of ‘cold calling’. If it does (or even might) and you are unwilling to do it – STAY CLEAR. Remember ‘good franchises’ are ‘good fits’ with you.
An interest in what the business does obviously indicates a ‘good fit’ and so a good franchise. You should try to seek out that small home based business franchise that deals with something that you are already interested in. If this isn’t possible, consider whether or not you might be able to develop a genuine interest in their business.
ARE THE COSTS WITHIN YOUR MEANS?
A failure to ‘get the money in place’ can cause real trouble. You should ensure that you have sufficient funds to:
• buy the franchise
• buy any stock
• pay for other set up costs
• pay the royalty fees in the early months
• possibly support yourself in the early months
• cope with late payments from customers
You should make a full list of any possible costs and assume that you will have no profit for up to 6 months (this hopefully will not be the case but better safe than sorry).
It is also wise to reduce the income projected by the franchising company by at least 30% and increase their cost estimates by a similar amount. If you cannot see any profit at that point – BE VERY CAREFUL!
One of the franchises that we bought quoted totally ‘pie in the sky’ figures in their prospectus (as we later discovered).
IS THE FRANCHISE ‘TRIED AND TESTED’?
It is estimated that 70% of franchising companies go out of business within 5 years of set up.
‘Good franchises’ are those that have been operating successfully for several years. If the company is fairly new, I would always advise against going ahead. It is true that someone has to be a pioneer and the first few takers might be given a bargain – they also might be paying way over the true worth of the business – no-one knows at that stage. It is obviously extremely risky.
THE EARLY BIRD MAY CATCH THE WORM BUT IT’S THE SECOND MOUSE THAT GETS THE CHEESE!
The MAJOR advantages of buying a franchise is that you are paying for a PROVEN business model and a known brand name. If it isn’t proven, then it can’t be considered a good franchise bet. What exactly are you paying for? You might as well cut out the franchisor and do it yourself.
IS THE FRANCHISING COMPANY FINANCIALLY SOUND?
Information about corporations is available online. When sending you their prospectus, companies offering (what might be) ‘good franchises’ will often also send you some information about recent trading figures.
You will want to establish that they are trading successfully BUT this does not confirm that this such companies can be considered to be ‘good franchises’ from your viewpoint.
The franchising company may be making a good profit, which provides some reassurance about them but they may be making a good profit at the expense of the franchisees.
WHAT DO THE CURRENT FRANCHISEES SAY?
Because of the internet, it is usually easy to contact a number of current franchisees and ask how they are getting along. Now, this sounds like the ideal way to know exactly whether or not something is a good buy. Unfortunately, THIS IS NOT SO.
Some franchise agreements state that the franchisee may not discuss his franchise experience. If that is in the agreement, then the franchising company may well be trying to hide something.
A complete stranger contacting a franchisee about his/her business can hardly expect total honesty. Would you tell a total stranger all about your business? No, neither would I.
No matter how poor a franchise is, you are unlikely to hear any damning criticism from the franchisees for various reasons:
• They may be afraid of being identified to the franchising company so will give guarded or positive feedback no matter how bad the franchise is.
• No-one likes to admit that they have made a big mistake even to themselves. They may be struggling but are likely to put on a brave face about their business, especially to someone they do not know.
• Some companies will pay franchisees to assist in recruitment so you may be speaking to someone who stands to gain from you joining.
If you need to ask the company itself for contact details for current franchisees, and their list is not complete then your feedback is likely to be very positive but much less reliable. Ask for a list of ALL franchisees and a complete list of ex-franchisees who left within the last 12 months. Get a letter confirming that any list that they supply is complete.
IS THE TERRITORY ON OFFER OF A REASONABLE SIZE AND APPROPRIATE TO THE PRODUCT/SERVICE BEING SOLD?
Size of Territory
Of the three franchises in which we have been involved over the years, two offered territories which were too small to provide enough potential customers to make the business really profitable.
Territorial limits are a major disadvantage of franchises. The companies want to create as many territories as they can to maximise their own profits.
Suitability of Territory
A business that works well in one area might not (and often does not) work so well in another and this basic fact is often ignored in franchise prospectuses. The companies tend to mention only the size of territories on offer.
For instance a pet grooming franchise might be very successful in a leafy suburb or a group of villages but what would happen in an area consisting of poor housing or where students form high percentage of residents? It would be much less profitable.
MOST FRANCHISED BUSINESSES WILL DO BETTER IN AREAS WHERE INCOMES ARE HIGH. Seems obvious but some buyers fail to realise the implications when buying.
Well there’s some basic information about good franchises, or at least how to guard against the bad ones. I hope that you find this useful in your search.
Stephen has 15 years experience of setting up and running home based businesses with his wife Glynis. They have experience of running franchised businesses, MLM and own brand businesses.