By Gary Loh
With the improving economic climate, many individuals are looking to start a business via franchising. However, the first foray into franchising can seem like a risky proposition, especially if this is something that has not been done before. The benefits of franchising are that an existing business model with brand recognition already exists, and that support and guidance are offered.
There are numerous articles which educate potential candidates on tips to consider before moving into franchising. However, these articles could help by telling the reader more details they should consider when one is shopping for a franchise. Let’s start by stating what most articles will say and what else (value-add) you should be hearing from these articles:
TIP 1: Make sure the franchise is a member of your local Franchise Association. The Association has invaluable resources that are useful to potential franchisee and it will ensure you are getting involved with a reputable business.
Value-Add 1: While your local Franchise Association may know the established and promising Franchisors in your territory, the Association is unlikely to endorse any Franchisors, neither are they involved in the daily operations of the Franchisors. As such, the Association is not in the best or relevant position to comment nor recommend any Franchisors which you should or should not work with. In short, the Association should not even be in the position to “broker” or “act on Franchisor’s behalf” to seal any commercial deals.
TIP 2: Check whether the business is a proven concept. This can be achieved via market intelligence research, survey with potential customers etc. Getting in on the ground floor of a new venture may be very exciting, but it is also incredibly risky and this is not the kind of uncertainty that most people will be looking for.
Value-Add 2: So much of the above is true. However, what this tip did not elaborate is that while market research and customer survey is important, it is not foolproof. Until the franchise actually commences, no amount of research and survey can accurately forecast the demand and the reception the concept will get in your territory. “No Risk – No Gain” – regardless in franchise or not, practitioners need to get their hands wet and get into the action, to verify their acumen and decision to purchase a certain franchise concept.
TIP 3: Speak to individual franchisees as they can share with you on how well the business is received, what the major challenges are and how supportive the franchise owners are. These are all questions that need to be asked and the answers will help form an accurate opinion of the business as a whole.
Value-Add 3: Many franchisors agree to this statement, however, probably none of them will allow you to have access to their franchisees unless some form of understanding or agreement has been signed between the Franchisor and you. Let’s not assume that the Franchisor has anything to hide from you, rather, the Franchisor is not obligated to provide you access to her franchisees to ask sensitive financial and operational questions. Franchisees will also take the cue from the Franchisor and sees no reason to entertain you on business matters without first getting any clearance from the Franchisor.
TIP 4: Be prudent and budget on the start up costs and the ongoing fees. These differ dramatically from one franchise to the next and will have a significant impact on any profits.
Value-Add 4: While as important as the start up costs and ongoing fees, do inquire about the franchise renewal fee as well as any other recurring raw material, product and material cost which is payable to the Franchisor. Many franchise systems require the franchisees to order supplies – books, raw materials etc. from the Franchisor, thus it is to your benefit to clarify on the price list of these supplies to avoid any misunderstanding during the relationship. Clarify the amount of initial supplies which the Franchisor may have promised as part of the initial Franchise fee, and be alert to excessive amount of supplies allocated to you which may seemed too good to be true.
TIP 5: Spend time with the bank and make sure they understand how the franchise works, how the business operates and what sort of support they will be expected to deliver. Without such support and understanding, it is very easy to run aground, even though the business may be perfectly viable.
Value-Add 5: Banks typically will not loan funds to the Franchisee to purchase or sustain a franchise system. The reason is simple. Most franchisees will establish a new entity/company to run the franchise and banks are more unlikely to loan funds to a new entity/company, unless there is some form of guarantor behind the new entity/company. For most new franchisees, their initial source of funds will come from one of three sources – Self, Friends and Family. Banks will only start to support from entity/company after the initial period when it has been shown to be profitable. They will need you to show viability before injecting funds for subsequent growth.
TIP 6: Be realistic about your ambitions. By all means be ambitious, but temper that with some realism and do not expect to become a millionaire overnight.
Value-Add 6: Definitely true! Franchisors may sell the idea that the concept breaks even and profits after a few months, but most concepts will return a sustainable profit stream after 12-24 months. This has caused many candidates to be sold on the concept, but disappointed on the outcome. Also, it takes perseverance and constant R&D to make the franchise work. Many successful franchises have gone through a glut and hit rock-bottom, before realizing their full potential. Few start with a bang and continue to be a success over a long period.
TIP 7: Take care and grow the customer base. This takes time and effort. It will require the franchisee to get out and create the awareness for their business.
Value-Add 7: You will experience customers’ turnover. Most importantly, new customers must exceed those who have departed. Customer service remains important as experts have estimated that the cost in procuring a new customer is 6-7 times that of retaining an existing customer. Another important point to note is that for territories with multiple unit franchisees, there is little to stop a customer from walking into another franchisee’s outlet over yours. As such, your interaction with the customer makes all the difference while you keep a look out for both external (rival brands) and internal (fellow franchisee) competition.
TIP 8: Remember, the customer really is king. If customers prove awkward or difficult then killing them with kindness is a better approach than showing them the door.
Value-Add 8: Finally we agree on one of the tips!! Indeed, ending the relationship with a tough and demanding customer is better than offending one. Maintain your relationship with external stakeholders at all times. You do not want them to speak ill of you or your business to new stakeholders.
TIP 9: Don’t try to alter the original concept. Of course businesses have to evolve, but the worry is that by moving away from a successful model, franchisees actually end up creating problems for themselves.
Value-Add 9: Research and development is critical to grow any business, including a franchise business. Many agreements between the Franchisor and franchisees allow for the franchisees to contribute innovations, new products and services, to benefit the brand. It is recommended that Franchisor and/or franchisees to contribute actively, however, the Franchisor retains the final say on whether to proceed on with these innovations or new products and services.
TIP 10: Don’t try to expand too fast. Some franchisees are too keen to expand their operations and can be tempted into taking on too much borrowing, which ultimately stifles the business rather than encouraging further growth.
Value-Add 10: Expansion must be sustainable and could be achieved by the Master Franchisee opening more outlets under their charge or sub-franchising to other parties. It is in both the Franchisor and Franchisees’ interest that the brand is sustainable and managed at all times. While the Franchisor may impose a minimum expansion plan for her Franchisees, Franchisors are reasonable and negotiations can be conducted to review a more sustainable expansion plan when the market conditions warrant for such needs.
Gary Loh is the Director of Purpleclay Consulting Pte Ltd, which is a franchise consultancy firm and grant application specialist. Purpleclay Consulting has assisted many promising franchise brands for local and overseas expansion, as well as assisting these brands in winning various business accolades and awards. This company is an approved SCOPE-IP Business Consultant under the Intellectual Property Office of Singapore (IPOS) and an I-Advisor under International Enterprise Singapore (IE Singapore). Gary can be reached at +65 6561 3011 or email at firstname.lastname@example.org.
For more information, visit www.purpleclay.com.sg.