Before you buy a franchise business, read this

Posted at 01/20/2014 11:37 AM | Updated as of 01/21/2014 8:36 AM

MANILA, Philippines - If you’re on the lookout for a way to get into business, you've probably thought of getting a franchise.

So many new businesses have emerged in the past few years—from iced drinks to rice cakes to courier services and schools—and a good number of entrepreneurs have successfully grown their operations through franchising. And yet at the same time, you've probably noticed some franchise businesses that have disappeared from their locations overnight.

Now you wonder—is franchising right for you?

By definition, franchising is a method of practicing and a business concept. For a fee, the franchisee is granted the right to market a product or a service under a a system that uses the trademark, name, logo and advertising owned by the franchisor. In a broad financing program, the franchisee may use the name or sell the products of the franchisor, including the plan for managing and operating the business.

The most obvious advantage of getting a franchise is that it is like getting a business in a box. There is no need to develop a business concept or build systems, and you can learn from other co-franchisees who can tell you about the upsides and downsides of the business.

On the downside, franchisors impose their own systems that may not be flexible and may not match your ideas or expectations. Moreover, there are associated costs involved, such as the franchise fee and royalties, and the fees from revenues you make. You may also be asked to purchase some supplies from the franchisor.

Just as franchises flourish because of good franchisors and equally good franchisees, some fail because of the same reasons. Franchisors may fail to give their franchisees sufficient support and may be too profit oriented at the expense of the franchisee. On the other hand, franchisees may fail to follow through on the franchise agreement and do their part of the deal.

If you’re thinking of getting a franchise, it is important to recognize that you will be committing to an obligation, which is why you have to get as much information and get to know your facts before you make your decision.

Here are some guidelines to help you in deciding if franchising is right for you.

Assess why you want a franchise.

Franchising is not for all people. Those who may not want to follow the rules of their franchisors will not be happy with being told what to do. Franchisors will also require your commitment in resources and time. Ask if you are ready to give these and bind yourself to a franchisor. Are you considering a franchise because it has always been part of your personal or business plans, or were you just offered an opportunity that seems too good to pass up? Knowing your motivations and interests will play a very important role in your decision making process.

Do a background check.

Check out the track record and financials of the franchisor as well as the franchisees. You want to know that the franchisor is financially sound since you will be depending on them for the lifeblood of your business. You also want to know that franchisees are doing well—this is an indicator of how your business would probably do, all things being equal. Talk to franchisees and ask about the kind of support they have received, how they are performing, and everything else that would matter to your prospective business.

Look at the franchise agreement.

The Franchise Agreement is the legal document which details the rights and obligations of the franchisor and the franchisee, including the length of term, the start and end periods of the agreement, the renewal provisions and the end of the contract. Make sure you understand what these terms mean and do not hesitate to ask questions from the franchisor. Show copies of the franchise agreement to a lawyer as well. Don’t rush yourself into signing the agreement. Look at what it has to say about the roles of the franchisor and the franchisee, and think if you are agreeable to all the terms in the contract.

Learn about the business.

Understand the business. It is not enough to know about the franchisor, you should also know the ins and outs of the business, including the market it serves, price points, regulations that affect it, to name a few. Try to know what people like about the products of the competitors, their experiences, and needs. Then decide if the industry is attractive enough.

Know your finances.

A franchise may require a substantial financial outlay. Determine if your choice of a franchise would require an investment that is well within your means, or is within your risk tolerance. Investing in a business, whether it is franchise or not, has its own risks, so you have to make sure that you are comfortable about the amount of money that you will be putting at risk. Most franchisors would be asking you for your net worth in your application, so it is worth revisiting your financial profile to see if you are ready to take on this business.

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