Published on 15 January 2015. Updated on 1 July 2025.
If you are fed up of the nine-to-five job and want to be your own boss, then getting into a franchise can be one real option. Before leaving your secure job and jumping into the arena to be a franchise owner with your hard-earned money at stake, you must know the rules of the game in order to avoid any unpleasant surprises.
The business premise of the franchise model is simple. One person thinks of a good business idea and starts a business. It grows with time and is then replicated. Rather than getting employees to run each of the locations, you (called the franchisor) actually sell each ‘sub’ business to a person (known as the franchisee) who pays for the purchase, systems, model, assets and maybe even customers. They may also pay ongoing franchise fees and potentially a marketing fee as well. Some franchises are sold as ‘green territories’ where there are no customers, just the shell of the business, systems, etc and then you need to know it.
The franchisor sets the rules of the game, and if convinced, the franchisee buys in, purchases the franchise and is now a business owner – but with a difference – you must follow the franchisor’s rules.
Read Before You Decide to Become a Franchise Owner
1. Know your Risk-taking Ability
You may have a family, children, a massive mortgage, old parents or some other personal issue that may not allow you to leave a stable job and go for your venture. The situation may not permit you to play with your savings. Every business has its risks and by better planning it can only be reduced, but risk cannot be eliminated altogether.
So before taking the plunge you must have clear understanding of your risk-taking ability, or else you may want to rethink the decision and perhaps stay in a steady job.
2. Properly Understand the Rules and Conditions
Every franchise has certain rules to define the way quality and consistency of the product or service has to be maintained. If you do not follow them correctly then, the franchisor may discontinue the arrangement, and all the money and effort will go down the drain. So before entering into any franchise, make sure you understand the rules and conditions and make a detailed plan to ensure that you can follow them. With every franchise comes a Franchise Agreement. Before you pay a single cent, I highly recommend you ask to see the Franchise Agreement. Please actually read it. I saw one, where you paid about $150K for the franchise, but every 3 years you had to pay AGAIN what the franchisor deemed the value of the franchise. So really, every 3 years you repurchased your franchise. One client didn’t read this initially. Once you have fully read the agreement, then see a solicitor about it and ask questions. Assume nothing, ask everything.
3. Check Your Finances
Every franchise needs some funding from the franchisee, and you must know such needs and your ability to generate the required funds. For this, take hold of the information related to all your assets and liability and the difference is your net worth. This info will not only help you to know if you can afford a particular franchise or not, but you will need it to discuss the case with your franchisor to make them decide in your favor. Understand too, you may not earn a strong income from day one, especially if a ‘green territory’ so ensure also you also have funds available to not only live on for several months, but to inject into the franchise business and cover costs.
4. How to Search and Identify the Right Opportunity
One way to find a franchise is to start surfing online. You may get lots of opportunities with tall promises, but don’t believe everything you read. We suggest you start the search by first understanding you and your constraints. Take a pad and write down the professional skills, your strengths and weaknesses; also jot down your financial constraints and limitations. In short, do a SWOT analysis.
Only when you are sure of the price range you can afford, search for good franchise options that fits your needs. This approach will considerably improve your chances of success. Once you have some probable options that fit your requirements and financial constraints, then investigate the industry, marketplace and even potential competitors.
To start with, talk to the company representative. He will answer some questions, but remember anything said means little if the franchise agreement says something else. If it was promised, but not in writing, it really cannot be often relied on. Another good way to get the information that the company may not give is to talk to another franchisee owner. Don’t just talk to someone they recommend (they will naturally give you a franchisee who loves the franchise) … instead you might speak to a few just selected randomly and have a list of specific questions. This will be time consuming, but remember it’s a big commitment in time, money and effort, so do your due diligence.
5. Understand (and Fully Accept) the Franchise Agreement
Probably one of the most important terms you should do is to go through the franchise agreement. Read it multiple times. Do you understand every single clause? Sometimes the terms (rules) can be somewhat unfair and remember this document was prepared by the lawyers of the franchisor, so it’s very likely going to be slanted in their favour! Then see a franchise specialist lawyer. Yes, they will cost money, but next to purchasing your own home, this is likely the biggest transaction of your life and probably one with potentially far more risk than buying a home.
With this approach, slowly the bigger picture will start becoming clear and you may see a clear decision taking form. You may even look at several franchises. I did this with one client who wanted to buy a franchise and together (before we even got to a lawyer) had looked at over half a dozen, which we eventually dismissed for various reasons. Ultimately, he ended up starting his own business from scratch which was quite different from the franchises and ended up being quite successful. Don’t feel if you don’t find the right thing that you have to settle. There are some great franchises out there, and there are some terrible ones too. You have to sift through – engage lawyers and even liaise with your accountant and get some professional advice. It’s a big decision, so don’t go to an expo, get sold by a skilled salesperson and sign up on the spot. Take the time to do the right research and make the right decision for YOU.
Read 11 Things That Can Cause Disaster & Crisis in Small Business.
