The following is part of a series of short articles to assist individuals and companies who are contemplating buying a franchise.
It is truly surprising how many potential franchisees act like compulsive gamblers at a slot machine. Purchasing a franchise does not have to be a game of chance. There will always be an element of risk, but it is not necessary to blindly invest in a business hoping that success will fall your way.
In many cases, an investment in a franchise will be the largest single investment that a franchisee will make in his or her lifetime. Just as you would not buy a home without carefully inspecting it, a franchisee should not purchase a franchise without taking the time to properly research the business.
Although not necessarily a guarantee of success, there are certain key elements that generally exist in most successful franchise systems. To the extent that these items are not present, a potential franchisee would be wise to question the franchisor as to their absence and reflect upon the difference between acquiring the franchise rather than opening your own independent business. They are:
- Brand Recognition – A well known trade-mark or brand connected with products or services will attract business to your franchise without extensive advertisement or promotion on your part.
- Uniform Operating Procedures – Generally speaking, each location should be similar in appearance, and offer the same products or services at similar prices. The quality of the products or services sold should not vary from location to location. Good franchise systems have operational managers who regularly visit and inspect all locations to ensure that the franchisor’s rules and standards are being followed.
- Collective Advertising Fund – One of the benefits of belonging to a franchise system is the ability to share advertising and promotional expenses with other franchisees. Contributions to an advertising fund are required in most franchises. However, most franchisors will not guarantee that advertising dollars will be spent in the area in which your franchise is located, so it may be wise to research where your advertising dollars will be spent.
- Group Purchasing Power – Another benefit of franchising is the ability to obtain supplies or inventory at discounts that would not otherwise be available to an independent business. Many franchise agreements now provide that the franchisor can keep any volume rebates or discounts, but in practice, a good franchisor is able to get lower prices than you could on your own, even if the franchisor keeps the rebates.
- Protected Territory – In order to protect your investment, an exclusive territory may be granted where the franchisor agrees not to open any other franchises or compete with you within a certain area around your franchise location.
- Location, Location, Location – Regardless of what franchise you purchase, a poor location will cause the business to fail. An ice cream franchise in the Arctic will not likely succeed. Franchisors who conduct their market research carefully, including traffic flow studies where the business depends on large numbers of people, will have a greater chance of success. There is also a tendency for certain large landlords to prefer leasing space to franchised concepts especially since it may have already leased similar space to the same franchisor in other locations.
Depending upon the franchise concept that you are contemplating, the absence of any of the above items may mean that you are losing some of the greatest benefits of franchising. There may also be other elements that may prove important to the success of a particular franchise, but in the typical retail franchise, these elements are crucial.
© Morrison Brown Sosnovitch LLP, 2013 All rights reserved.