Buying a franchise: Part Three

By Philip Wylie, 21 May 2010

[continued from Part Two]

Franchise evaluation checklist

Concept

When looking into a company for possible franchising, look first of all into the product or service. Before you look into the details of their franchise program, understand the total concept first. What is unique about their concept? How is it different from the rest?

Before you become a franchisee, you should first become a customer. Do you like the product? Are they marketing an innovative product or service? Even if there are similar products in the market, what makes this company different? What makes them special? Is it the product quality? The price? The service quality?

Only after you have understood the concept and have become a satisfied customer should you begin to examine their franchise offering. If you are not sold on the concept, you will be hard-pressed to sell it to your future customers.

Total Investment

Find out what the initial investment amount quoted by the franchisor covers. It typically includes franchise fee, initial inventory, equipment, and renovation. Franchisees often need to allow additional capital. Other initial investment costs include training expenses, rent deposits, business permits and licences, grand opening expenses, and working capital. With these additional investment costs, will it take significantly longer to earn the investment payback than the time quoted by the franchisor in his franchise literature?

The cost of a franchise varies enormously from business to business. Upfront franchise fees range from $1,000 to over $500,000. What the franchise fee actually includes is another matter which varies between franchisors.

Training and support

What type of support will the franchisor give? The franchisor can assist you in all stages of operating the business – site selection, lease negotiation, training, construction, procurement, grand opening planning, personnel recruitment, etc. After your outlet has opened, how often will the franchisor visit you for support? How often do you need to attend training programmes after opening?

Franchise agreement

The franchise agreement is the contract between the franchisor and the franchisee. It enumerates the rights and obligations of both parties in the relationship. It covers the beginning, the length of the term, the renewal provisions and the end of the contract.

Important provisions that should be examined in detail are the territory granted, fees and payment schedule, and conditions resulting in breach or eventual termination of the agreement. In most reasonable franchise relationships, the franchise agreement, once signed, is put away and the parties manage the relationship through mutually beneficial business practices.

Other considerations

Below is a checklist of questions for researching each franchise business:

• How long has the franchisor been in this type of business, and when did they start franchising?
• How many franchises do they operate and where?
• How many of their outlets are owned by the original franchisor?
• Is it possible to buy an existing store instead of starting a new business?
• Can the franchise guarantee uniform quality throughout its franchise network?
• Does the franchise have an Operational Procedures Manual to facilitate quality control and consistency throughout the franchise network?
• What is the franchisor’s fee for the franchise license, and what does the fee include?
• Is the franchise brand name registered with the Ministry of Commerce?
• Would it be possible to meet existing franchisees to discuss their business?
• Is the franchise registered with the International Franchise Association (IFA)?
• Does the franchise agreement allow the transfer of the franchise licence, and if so, what is the transfer fee? Are there any other penalties for termination of the franchise licence?
• Is the franchise ISO (International Standards Organisation) registered?
• What control procedures does the franchise have?
• What promotional support is offered by the franchisor on and after opening the new store?
• Does the franchisor offer exclusive territorial rights?
• Which territories are available and which ones have been assigned?
• Is it permissible to spend a few days observing the operations of an existing franchise?
• What are the estimated costs of remodelling the premises, inventory and other working capital requirements?
• How does the purchasing and stock control system operate?
• Is the franchisee bound to procure all inventories from the franchisor?
• What royalties are payable to the franchisor, and when are they payable?
• What joint national marketing is organised by the franchisor, and how is it charged to the franchisees?
• What are the operating sales and profits of the stores and would it be possible to obtain financial statements?
• Have any of the company’s franchisees failed, and if so, for what reasons?
• Does the franchisor offer any flexibility regarding the products and services offered for sale?
• What is the term of the franchise agreement, and what is the fee for renewal?
• Are discounts available to franchisees who buy additional franchises?
• Are referral fees offered to franchisees who introduce the business to other prospective franchisees?
• What support does the franchisor offer in identifying suitable premises and remodelling the store?

Ask for a copy of the franchise agreement and the operations manual. Ask your lawyer to review the franchise agreement. Don’t forget that the agreement should always be equitable to each party; otherwise the franchise will not be successful.

Consider also the level of saturation in your targeted market. For example, in Thailand there are currently around 10,000 convenience stores. Of these stores, 7-Eleven has 3,750 outlets, Family Mart has 650, V-Shop has 800 and Freshmart has 300 stores. The deputy managing director of CP All Public Company Ltd, a subsidiary of the Charoen Pokphand Group and the master franchisor for 7-Eleven in Thailand, claims that the market will be saturated when there are 20,000 convenience stores in the country. 7-Eleven will limit their outlets in Thailand to 5,000.