Do Your Homework Before You Put On Your Apron !!!
Factors to Consider When Choosing a Franchise
4] Financial and Economic Factors
During the analysis of the franchise contract, one needs to pay attention to specific clauses that will have a financial impact on the running of your business.
a) Franchise fees and royalties – Pay attention to how the franchise fees are structured. Is it a once-off lump-sum payment ? Will there be a fixed monthly royalty ? Or will you also be expected to pay a fee based on the percentage of sales to the franchisor. Different franchises have different fee structures. Familiarize yourself with it and figure out how comfortable you are with the terms.
b) Market conditions – Assess the market demand for the brand. Evaluate how strong is the industry that you want to operate in. Give consideration to past, current and future industry trends. Performing market research will help to determine if the brand or product is worthy and viable. During the market research phase, pay attention to potential customer preferences and demographics. Fine tune your strategy accordingly.
c) Cash flow analysis – With the help of an accountant, prepare a cash flow forecast to determine if you have adequate resources to navigate the first few years of business. Most businesses will have high start-up costs. Large franchise fees. Payments for equipment and premises. Hiring and training of staff. Inventory costs etc. You need to determine how much of a cash float you need to keep to help get you through the early years when your new franchise business is still running at a loss.
d) Ease of exit – Some franchises may have clauses that make it difficult to sell or exit a business. Make sure that your lawyer educates you about the consequences of pulling the plug on a franchise agreement. Consider what penalties and losses you will be responsible for if applicable. It is important to have a good exit strategy especially when it comes to a point where you have to retire. Ideally, you would want to be able to sell the business easily. Also plan for business continuity in the event of the death of a business owner.
