On its road to become the fastest growing economy in the world, India is an attractive and relatively untapped market for the franchise industry. Despite already being the second largest franchise market, with about 4600 franchisors and 1.5 lakh franchisees, several investors fail to find apt franchise business opportunities in India.
Given the fact that the cardinal benefit of starting a franchise outlet is the well-established business model that comes along, you would naturally think that the only other thing needed for success is choosing the right business partners. However, this is far from the truth. The most successful business model or the most generous business partner might be of no use if the business you establish doesn’t align with your goals and values. In addition to asking questions about profitability, capital requirements and business processes, potential investors and businessmen should also ask themselves ‘How do I know that this business is the right fit for me?’
Before we get into answering this question, let’s take a look at some of the reasons why people avoid asking it. There are several factors – positive and negative – which supersede an individual’s motivation to invest in a franchise business opportunity. Let’s review some pros and cons of investing in a franchise, which will help in framing the questions we need to ask ourselves better.
Pros
- Established Business Model
There is no need for a new franchise owner to iterate a new business model because there is already an established system in place and it works. This naturally reduces the risk of starting a new business and brings in some amount of predictability.
- Provision of Training
Even for someone who isn’t as business savvy, a franchise can be a safe bet because of the provision of extensive training on business processes and personnel management. This helps to have the business running smoothly from the get-go.
- Marketing and Advertising Support
Since the franchisor also provides marketing and advertising support, the franchise owner can invest and focus on strengthening the core aspects of the business and gain from the already-established brand name.
- Franchisee Network
Possibly the best thing about being a franchise owner is that you already have a network of other people in the same business as you. You can rely on them for support and be better prepared to deal with any challenges in running your business.
Cons
- Initial Setup and Franchise Fee
The initial set up cost can be quite high for an established franchise and may cost you more than what it would take to start their own business.
- Royalties
Most franchise agreements require franchise owners to pay a fixed recurring amount in addition to sharing a part of their revenue or profits. This can be tough to sustain in the initial period.
- Little to No Flexibility
Since you are buying into an established business model, there is little to no scope for any changes. The existing system is followed without question, and it might feel restrictive to many.
- Long-Term Contract
Usually, a franchise owner is locked into a long-term contract, which means if the ship is sinking, they cannot abandon it and switch businesses until the lock-in period is over. This prevents several investors and entrepreneurs from entering the franchise industry.
Despite the above benefits and risks, one of the single biggest reasons that can determine the success or failure of a franchise outlet are the objectives and goals of the owner. With the information mentioned above in context, let us look at a few questions that any new or seasoned businessman should ask himself/herself before starting a business franchise.
Asking the Right Questions: How to Make all the Right Money Moves
Wanting to their own business and the prospect of easy profits is what draws most people to franchises. However, many falter in choosing the right franchise business opportunity for themselves. Instead of following the herd, it is essential to think, do your due diligence and ask the right questions. So, before you think of investing, ask yourself the following questions to help you find the right franchise:
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What do I want out of running a franchise?
Take some time to introspect while answering this. Aside from the easy money, why is it that you want to invest in a franchise? Is it to support your family or have you always wanted to run a business but didn’t know how? Do you intend to do it only for a few years and start your own business? Why do you want to do it now?
It is crucial that you set your priorities straight. Even before you start making a list of franchises that you are interested in, you should know exactly what the short-term and long-term plan is. If you are unsure about the answers, do not jump the gun. Running a franchise outlet half-heartedly could prove to be disastrous for your finances, so make sure you know what your motivation is.
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How do I know which franchise is right for me?
Once you know why you want to start a franchise, ask yourself if there’s an industry that you’ve always wanted to venture into or if you already know the workings of a particular kind of business. Use the process of elimination to reject all franchises that do not align with your values. It can be helpful to categorize the franchises into the type of business – retail, industrial or home-based or based on a concept or idea.
Next, it is essential to know how much capital you readily have available, what profit margins you expect and how fast you want to break-even. At this point, you can also consider bringing other partners on board if you don’t have the necessary capital or knowledge. Knowing the answer to these questions can help you shortlist the brands that align with your goals and budget constraints.
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What does the franchise want from me?
Once your list is complete, you now need to do some serious legwork to find out which franchise is the right choice for you. An excellent way to determine is by taking into account what is the franchisor asking you to do and how much freedom would you have. Most franchises will give you sufficient information about the initial set up cost, royalty, marketing, and advertising cost and any other running costs. You should also look into the kind of support and training provided and meet the franchise representatives in-person at this stage. Remember, make it a point to visit at least 2-3 existing franchise outlets to verify the claims made by the franchisor.
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Is the franchisor authentic and transparent?
Another critical piece of the puzzle is establishing the credibility of the franchisor. After you fill out the application to become a franchise, you would receive a document known as the FDD or the Franchise Disclosure Document. This document contains everything you need to know about the franchise – business and litigation history along with the information on how much profit you should expect to make in the first year of business and if there any liabilities. Please make sure you comprehensively study the document and get it analysed by a competent business lawyer to identify potential red flags like unduly high fee, aggressive terms, unfair conditions or unreasonable control. You generally have a few days after receiving the FDD to decide whether you want to sign it or not; so make sure you use them well. Only when you think everything is in order, should you think about signing the FDD.
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Am I ready for this?
Before taking the final plunge, ask yourself if you are ready to start a new chapter of your life, and what you expect to gain and learn from it. Are you prepared to devote the time and resources to make your business a success? What are some of the safety checks in place to ensure that your franchisor, employees or customers do not take you for a ride? If there is any hesitation on your part, you should stop and reconsider.
Understand the ins and outs of the business, the system, cash-flow and prepare contingency plans. For a franchise to succeed, you would still need a good team behind you. Do you have what it takes to make the right hiring decisions? It is all very well to have the necessary capital, a good location, and the drive to run a business but these are some real-world scenarios that you have to prepare for. Make sure you have the answers to all these before you sign the FDD.
Bottom-line
Don’t be swayed by the idea of owning a business and making profits from day one if you plan to open a franchise outlet. Remember, you will still have to work hard and ask yourself some tough questions before jumping in. It may be wise to hire a franchise solutions consultant to do the heavy lifting for you and look into your top choices. Their experience will allow them to sift through companies and help you make the right choice.
The bottom line is that investing in a franchise is not just about making money but, running a business that you can be proud of. So, invest in a franchise that you believe in. If you do not believe in the concept or the company, you will have a hard time reconciling your values with it.
Karan Makan
Technology Engineer and Entrepreneur. Currently working with International Brands and helping them scale their products Globally through different ventures. He owns Multiple Food Brands and is on a continuous spree to acquire many more businesses in the coming years. With over 10 years of experience and strong background in Brand Acquisition, Karan Makan is soon poised to be a Brand in the coming years.
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