Buying a franchise is not a complicated process if addressed properly. Each franchisee during the process of franchise acquisition must focus on achieving two major goals:
- Make sure that the franchise, that is about to be acquired, will enable franchisee to exploit as much benefits of franchising as possible while avoiding major risks and pitfalls.
- Persuade franchisor to conclude the franchise agreement that would be favorable to franchisee.
First thing to remember
There is no one “true” winning method of achieving these goals. Since the acquisition of franchise is bilateral process, any possible scenario, ensuring that both parties, franchisor and franchisee, are satisfied, is good enough. However, because the prospective franchisees are usually less informed and weaker prepared, it happens quite often that the franchisor dominates the process of establishing formal relationships with franchisees.
Many honorable and fair-playing franchisors will grant you a franchise only if it truly fits you. However, each franchisor is eager to expand its franchise network as fast as possible, so it is quite understandable why less scrupulous franchisors are preying on confiding prospective franchisees. Franchisors, belonging to this type, design their franchise marketing to create an emotional hype among prospective franchisees – polished franchise brochures will show you happy franchisees, inviting you to replicate their success, and persuasive ads will try to convince you, that buying their franchise is all you need to become prosperous. In their turn, professional franchise salespersons gently yet surely will push you towards signing the franchise agreement as soon as possible. Some of these franchisors create a perceived scarcity and exclusivity by establishing rigorous franchisee recruitment procedures thus heating up candidates’ desire even more.
Some countries with longer history of franchising have imposed legal requirements to protect franchisees from misleading franchisors. For example, in the United States each franchisor must disclose significant load of information about its franchise in so-called FDD (Franchise Disclosure Document) and update it regularly. Moreover, under the Franchise Rule, which is enforced by the Federal Trade Commission (FTC), a prospective franchisee must receive the franchisor’s FDD at least 14 days before they are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor [More about FDD]. However, in most other countries, including EU Member States, the franchising is regulated much more liberally than in the United States. Therefore, the duty of due diligence falls purely on the franchisees’ shoulders.
In order to decrease the probability of mismatch and increase your chances to acquire a franchise that is right for you, we recommend following steps of buying a franchise depicted in a diagram.
Preparation for buying a franchise
Confucius once said that success depends upon previous preparation and, without such preparation, there is sure to be failure. The same applies to preparation for buying a franchise. Firstly, during the preparation, we recommend each prospective franchisee to carry on self-assessment exercise in such perspectives as your character, skills and competences, family support and financial resources. Secondly, you must carry out the market analysis and get yourself acquainted with major business trends in your city, country and worldwide. We advise you to look for unsatisfied demand and new products or services that might disrupt the traditional fields of business. You need to understand the ecosystem and competition in the fields of businesses that seems appealing to you – investigate client segments, value proposition, cost structure and revenue streams, evaluate competitors, find their strengths and weaknesses, analyze their performance and financial results.
Then you need to conclude the list of criteria for choosing a franchise on a foundation laid by results of self-assessment and market analysis. Try to be rational when putting down the criteria – do not overestimate your competences and capabilities, do not be too emotional when deciding about the most promising field of business and, on the top of everything, do not overrate your financial capacity. Finally, we advise you to develop short resume (CV) and motivational letter aimed to present your features, aspirations and capabilities to franchisors. Most appealing franchisors receive tens, if not hundreds, of applications every day, therefore it is wise to do your best to present yourself as serious, promising and well-prepared person to pass the franchisor’s gate-keepers as fast as possible.
Pre-selection of franchises
After you have formulated selection criteria, it is time to start the pre-selection of suitable franchises. The aim of this stage is to look into a sufficient number (for example, up to ten) of franchises that meet the selection criteria and to request detailed information about these franchises in order to shortlist up to two or three franchises for detailed assessment. There are number of ways to fill your initial franchise list. Firstly, you must use Internet. There are number of on-line franchise catalogues, informational portals and blogs that might link you to the interesting franchises. You might also want to visit international and local franchise exhibitions to meet representatives of franchisors in person. Finally, you are welcome to contact franchising consultants and ask them for advice. Let us presume, that out of ten franchises on your list, two did not reply to your request, one has provided you with unprofessional information and four franchises appeared to mismatch with your selection criteria. Therefore, you end up with three franchises that still have their appeal, preliminary comply with your requirements and are smooth in communicating with you.
During the next stage, you must undertake a detailed assessment of the several short-listed franchises and select the most suitable for conducting franchise agreement negotiations. Most of the franchisors will ask you to sign non-disclosure agreement, memorandum of understanding or letter of intent before proceeding to due-diligence activities. After signing the respective document, we recommend you to assess franchise and franchisor in every possible aspect:
- Franchisors’ company (history, reputation, financial indicators, litigation cases etc.).
- Franchise network (growth dynamics, franchisees KPIs, geography etc.).
- Franchised business (competitiveness, business model, cost structure, revenue streams, supply chain etc.).
- Franchise terms and conditions (franchise fees, required investments, rights and obligations of both parties franchise acquisition etc.).
We also strongly advice to verify all the information obtained from the franchisor against the information provided by current franchisees belonging to franchise network. Moreover, when choosing a franchisor that you would like engage with, it is important to evaluate not only “facts and figures”, but “soft” criteria as well. Such patterns of franchisors’ behavior, as failing to answer your emails or calls, concealing or providing inconsistent information, postponing deadlines or pushing you to sign a franchisee agreement as soon as possible, should at least warn you. If the franchisor does not demonstrate genuine interest in doing business with you during the pre-contractual communication, then it might get even worse after signing the franchise agreement.
Negotiating the franchise agreement
After you completed a detailed due-diligence of at least couple of franchises and picked the best, you will proceed to the stage of negotiating contractual terms and conditions. It happens quite often, the franchise agreement negotiations are merely a formality because franchisors are not inclined to accept compromises regarding individual terms and conditions of the contract. Many franchisors follow the principle of take it or leave it. Occasionally, the opposite situation may occur when a new franchise (franchisor) is prepared to negotiate contracts with each new franchisee in order to attract as many franchisees as possible. In any case, you should not lose your rational mind and work hard to ensure that the franchise agreement is acceptable for you.
Since legal texts are quite tricky to understand for most of us, it is quite reasonable to seek a professional advice of a franchise lawyer during the negotiation process. Firstly, a good lawyer will ensure that none of the contract provisions is in conflict with local or international laws. Secondly, you will be sure that you clearly understand all rights and obligations of both parties of the agreement as well as the consequences of breaching the contract provisions. Finally, a professional legal advice might help you to negotiate more favorable contract conditions.
Signing a franchise agreement
After both parties have accepted contractual terms and conditions, the franchise contract is signed and you become a franchisee. Now the actual business starts. You will be expected to follow franchisor’s rules and procedures, inform franchisor about any deviation in usual business activities and pay respective franchise fees to the franchisor. On the other hand, franchisor is expected to provide you with all necessary “know-how” and assistance to start and run your business, to support you during day-to-day business operations, to improve business model and provide you with sufficient value for money that you will pay to the franchisor.