I’m buying a franchise – am I set for life?
Unfortunately this is too often the expectation of a Franchisee, particularly those who have not done sufficient homework before deciding to enter their system of choice.
Firstly, being a franchise is hard work – irrespective of the system. Successful franchisees all have total commitment to their system and business. If you do not work hard failure is almost guaranteed, so don’t sit back and wait for everything to be done for you – Life’s not that easy.
Be aware that you are not actually buying a business. You are being granted the right to operate a franchise using the Intellectual Property (Name, logo, advertising etc) for a set period of time. The time is usually referred to as the TERM of the franchise. The length of time may vary considerably from as little as a couple of years to several decades.
The issue here is that you must understand that when the time is over, the contract has run its course and you no longer have a business!
So it is most important that you calculate that you can earn a good return on your investment within that time frame. Your Accountant will be able to help you with this calculation.
In commercial reality, a good franchisee is frequently offered an extension of the term and the business rolls on. But you must not expect this to occur automatically and even if it does there will probably be more fees attached to the extension or renewal. The key here is to find out all this information BEFORE you sign the very first Franchise Agreement even though it seems way into the future and too far off to worry about. Trying to negotiate all this after the event is too late.
One factor that may influence this dramatically is your Franchisor’s approach to new franchises. If your system allows you to sell your business using the remaining term of your franchise then the goodwill component of your business sale may be substantially reduced. If the system grants new full term agreements to all new franchises this will aid your sale considerably – and every franchise will want to sell and move on eventually.
So that raises one last point; Prepare an exit strategy – we can all get into business very easily, but very few of us plan how we are to get out of it in the future, why and when.
Phil Blain, Franchise Alliance