How to Select a Franchise

Buying a franchise is one of the best ways to get into business. This is especially true for those who plan to maintain their day jobs or have no business experience. But there are hundreds of franchisors to choose from, and choosing the right one can be bewildering.

The first step should be to eliminate those not suitable to your particular circumstances, and then choose among those that remain. Below are some basic guidelines in choosing your ideal franchise:

Know the total financial requirements. Choosing only what you can afford should be the first on your list. In your eagerness to get started, you may forget the many additional expenses besides what is stated in many franchising marketing brochures. Usually, the biggest cash outlay not included is the rental deposits. Another expenditure frequently overlooked or understated is the amount of working capital needed. Frequently, the period where business has picked up sufficient sales is later than the optimistic prediction. During this time frame, you must have sufficient capital to sustain losses to operating expenses like labor, rentals and utilities. Finally, do not forget to factor in taxes like the value added tax (VAT), which you must pay if you are VAT-registered regardless of whether you are profitable or not.

Do not invest in franchises based on fads. When we hear of friends who were able to recover their investment in a few months, it is extremely tempting to jump in while the going is hot. In most cases, by the time you operate, the window of opportunity for a fad has passed and you may possibly not even be able to recover your investment. Avoid this mentality at all costs. Pick a franchise that will likely last for many years.

Check the integrity and competence of the management. Research on the credibility of those running the franchise. See if they have been involved in matters that show moral turpitude, especially dishonesty, because you may be the next victim. One of the signs of potential problems in this area is if the company is taking over prime locations proposed by the franchisee. Find out, too, the track record of their management and company. How many franchises do they have? How long have they been operating? One of the reasons why you are getting a franchise is to get expert assistance on running the business and this would be hard to get if only rookies are running the team.

Be wary of those who use pressure tactics. While it is reasonable for any franchisor to try to sell their agreement, there is a point where the aggressiveness arouses suspicion. The best franchisors have a long waiting list of applicants and they are more interested in screening for qualified applicants than selling to them. Be extra careful if you are offered large discounts just to immediately close the deal.

Check if the franchisor is affiliated with a reputable franchising organization. This is logical since the organization would probably expel a member who could damage their reputation. Nevertheless, although this is a plus factor, it is still no sure-fire guarantee; treat membership as just one of the essential criteria.

Research by talking to some of the franchisees. You could learn a lot of things if you talk to a few randomly selected franchisees. Beware if the franchisor suggests you talk to only his selected franchisees. When talking to franchisees, you must have your questions prepared beforehand. Also get a feel of the business; see if you are comfortable with operating the venture and managing the type of personnel you will need.

Buy only a franchisor with a strong brand or a product/service that cannot easily be copied. Despite all the advantages of buying a franchise, sharing a large chunk of the profit is hard to justify unless their brand name alone can pull far more customers than what you can achieve with your own effort. An unknown brand may be a good investment if their product or service offers unique advantages that cannot easily be cloned by competitors. If the franchisor has neither a strong brand nor a product/service that cannot be copied, you may be better off starting your own business and just get a business consultant if you think you need one.

*Originally published by the Manila Bulletin. C-4, Sunday, August 26, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.