4 Questions to Ask Before You Purchase A Franchise
There is truth in the fact that buying a franchise provides you with a proven operating system, there is still much in terms of hard work that you need to do from your end. The need to have the business running smoothly, having the staff trained, equipment functional and get the financing in order is your responsibility.
All of this can get quite overwhelming for many when starting a business. This can get even cumbersome if there are rules on the franchise that you may not have even heard of. This is why when you are buying into a franchise, you are getting much more than the menu or the brand. There are a few questions that you must pose before you jump headfirst into the franchisor, and to figure out of it is the right fit for you.
Sales Are Important, But Profits Matter More
Although sales and revenue are important, the profit that you generate is what earns you your meal. It does sound great to have annual revenue of $1-2 million, but if the profit margins are a bleak 7% or $70,000, then you are worse off than a franchise with annual sales of $500,000 with a profit margin of 20% or $100,000.
Everything increases as the revenue go up-this includes expenses and maintenance. The more you make use of the equipment, the faster it wears down. The higher will be the staff that you need to employ and the greater the chance of accidents and workers compensations in the event of an unforeseen accident.
Franchises love to flaunt their increasing revenue over the years, but the real question you need to ask is the profit margins- has it been increasing over the years? Franchisors want to bring in as many franchisees so as to inflate their brand reach and create more money. Not asking this question would be comparable to putting on clown makeup and dancing to a tune.
What Are The Discount Rates? Does Considerable Portion Of The Sales Come From Coupons?
What is the sales model of the franchisor? Do they have strong brand recognition or are they driving sales by employing discounts and coupons? A sales model that weighs heavily on discounts can increase sales but at the cost of the franchisee and your diminishing profit margins. If the GDP is balanced with products that have a high margin and discounted products, then that is still viable. If discounted products reign then that is plain short-sightedness.
Does The Franchise Have Price Protection From Vendors?
When you sign a contract with the franchisee, do they make use of the buying power to control costs? Knowing how competitive they are when it comes to driving ahead profits and not merely marketing, shows what you are putting yourself into. Some brands are better, with franchises having a lower buying power while others come with secure contracts that protect their brand.
The task is up to you as a potential business owner to pick out a brand that makes use of your royalty to fine-tune your business. Just a printed menu and a logo are not sufficient to support you- it needs a supportive brand and a hardworking franchise to make it happen.
What Are The Long-Term Prospects?
The ideal franchise business is a proven system that is recognized and has brand value to its name. But what good is a brand if the corporate ownership isn’t working to protect the long-term investment? If you are scratching your head on what are the brands you want to associate with, or if the franchise itself is a business that makes sense for you, get in touch with us at Building Block Capital. Asking the right questions is the first step to getting the right answers and propels you on the path to realizing your entrepreneurial goals.
The bottom line is to find a brand that works just as hard for you, as you are willing to work for it. The brand must be willing to hold you and others like you to a high standard, protecting the brand and you in the process.