How to Evaluate a Franchise Business: 6 Tips

While I have much to say about the audio at the venue (it was an open area and very noisy so the organizers must take note of this for their next exhibition), I must say that one of the more educational talks was by a certain Mr TK Lee, a franchise consultant. He was one of the speakers given 30 minutes to talk during the Franchising and Licensing Asia event.

Thirty minutes is a good amount of time to listen to a talk. Too long and my mind tends to wander off. So to keep me focused, I usually jot notes. It gives me something to do.

Mr Lee gave 6 important criteria to use when evaluating a franchise. I am paraphrasing so this is NOT his exact words but words to that effect.

1. Profile yourself.

A franchise is not a way of getting out of your job. It is buying a business. It is getting yourself into a business. It won’t work if you think you are going to be the BOSS and act like one. You have to be as hands-on as your staff. If you think you can hang around and watch money roll in, this is not the business to buy.

My version is this: buying a franchise is a bit like buying your shortcut to success as the systems are laid out for you. But who works the systems? Someone like you. It frees you from thinking what business to start, how to start it, where to get resources etc. But it does not free you from managing it or running it. For the lazy person, a vending machine might be a better deal than a franchise. But even vending machines need servicing and maintenance. So do you know yourself well enough? Are you committed to making the franchise work? If buying a franchise is just an escape from the drudgery you call a job, then it is not going to work.

2. Research the desired franchise.

Do your homework. You can look at new and growing franchises as their fees may be lower. Or you can go with proven businesses which have been there long enough (but which also means the fees are higher). As a franchise is a partnership, what do you expect from your franchisor? Just because you can run a restaurant does not mean you can run a restaurant franchise.

3. Initial contact with franchisor.

Just because you want to buy a franchise does not mean the franchisor may want to sell it to you! Now the reality is, this is a mutual (beneficial) partnership. The franchisor must want to work with you and see in you the potential for his success (as well as yours). So therein lies the mutual evaluation. Just as you would evaluate the franchisor and his terms, he is also going to evaluate you as a potential franchisee. Do you fit his idea of a good franchisee? Being turned down by an established franchisor is not an uncommon experience even if you have the financial means.

4. Investigate the franchise system and laws.

Accordingly Singapore does not have a law on franchising while Malaysia and US have. Understand the law and its regulations before you jump into a franchise. Also, you may need to ask how a specific franchise works and how the franchisor will support you. You can talk to their existing franchisees and check out product margins. Above all, you need to really go into detail about franchise rules and regulations.

5. Understand the franchise model.

Not all franchise models are the same. Again, you need to understand how the franchisor has planned his model. Some are not into direct consumers. Some target offices and corporate companies. For instance, if you sell espresso machines, your customers may not be consumers at all. It could be offices where they have their own pantry and need to supply coffee to their staff.

6. Review the franchise agreement.
Here’s a question: which is better – a thick agreement or a thin agreement? A thin agreement might be easier to review but a thicker one may also mean the franchisor has put more thought into all aspects of the business. The franchise agreement needs to cover all eventualities and the more you know and review in the agreement, the better you are. Or at least you know what to expect in all types of situations.

At the end, buying a franchise is buying a business which someone has thought of all the details, systems and plans.

Many people dream of owning a McDonalds franchise outlet. They look at it like an automatic money machine. But I know a friend who owns a McDonalds outlet and she puts in long hours. It’s just like a regular business except that in this, you get support if you get lost and disheartened.

You don’t need to think of how to market and advertising costs and methods on a case by case basis. Collective advertising and promotion help to bring customers your way. And of course, having a strong brand is a selling point in itself. It may not be very flexible if you’re the sort who likes spontaneity in business and don’t want to be tied down to rigidity. It would be godsend to you if you love going by the book.

Are you searching for a franchise? Why are you looking for one? I’d love to know what you think!

P/S: Your guide to owning a franchise…this is a very useful read!

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