Last Updated on 18/04/2021 by Mandy
Is this the right time for you to purchase a franchise in 2020?
It is important to know that during an economic downturn, the number of people looking for franchisees increases! People are looking for security and want to be their own boss.
Looking for a new job or would you be considering purchasing a franchise? Keep in mind most franchises are above $10K for a 5 or 7 year licence. This does not include equipment or stock.
If you can’t afford this then you should consider buying a business instead.
Ask yourself some questions first:
- Are you on the rebound from leaving a job, or major life event, where you might make a hasty emotional decision? Needless to say, if you are expecting a baby, moving city or finishing up a course, this also may not be the right time for you!
- Consider how much time you have available to commit to this venture. If it is less than 15 hours a week, don’t waste your time and energy pursuing this opportunity.
- Are you selling something in order to purchase this franchise? If so, wait for it to sell.
- Do you have a good credit score? If not, it may still be possible. Contact Naritas to make an appointment to discuss your financial situation. There are a number of lenders who will be prepared to take on this risk, depending on the franchise fee and history of the group.
- Draft a timeline which includes how much time you can allocate towards initial research, contacting franchisors, reviewing documents and obtaining business and legal advice. Make sure you have a 2-3 week window, for due diligence, signing contracts, obtaining finance and training. This period should have lighter commitments, and not be during school holidays!
- Prepare a resume which includes all your professional, managerial and industry experience. This should highlight why you could be a great franchisee.
- Check if there are any local part-time jobs available in your field, ask yourself whether a franchise still makes sense for you. When we do recruitment for franchisees, we see lots of inquiries from mums who just want a job!
Advice for new franchisees and how to avoid making mistakes
- It is not a good idea to pay money for a ‘new hot franchise’ according to what the media says. The minimum time to franchise an existing business in Australia is 12 months. The benefit of owning a franchise is to buy a system that has been proven over a period of time and in different locations. If the business model and brand are not well established you may be better of starting your own business (and brand).
- New franchise groups may not offer that depth of experience, mentoring and support and there could be teething problems while the franchisor learns.
- Read any online reviews about franchisee complaints. Ask whether the FCA or FANZ has any complaints lodged against them.
- Check the failure rates of your franchise group. Ask past franchisees why they left. Be prepared to listen to their problems and ask yourself whether you could find yourself in a similar situation.
- You need to ensure you use the 14 due diligence period to consult an experienced franchise lawyer and accountant. Not just the contacts the franchisor tells you. These professionals will see things you do not!
- Check what is included in the franchise fee and what working capital you need. What is the average return on investment (ROI) period?
- Imagine the impact if you failed in this franchise in the first 3 years, what would the cost be to your finances, marriage, family life, health?
- Image if you were wildly successful and needed to enlist/hire support services. What would the cost be to your finances, marriage, family life, health? Would family or friends help you mind the children etc?
- Unfair royalty programs: if you are not profitable, the franchisor shouldn’t get royalties. Understand the best franchises need you to be successful, so they are successful.
- If it is possible for the franchisor to make money, even if you break even or incur a loss, then what is the ongoing incentive for the franchisor?
It best to ask during the ‘14 day Due Diligence’ process and if you don’t feel respect for the franchisor, then don’t join the group.
Don’t be pressured into signing anything and remember that 7 years is a long time.
Naritas Commercial Finance can help you secure the capital and tools you need to set up a new franchise. Naritas has over 15 years of experience working with over 100 lenders to help find the commercial loan that suits your needs (and the needs of your business). Your broker has access to a number of lenders and products to cover both short-term and long-term financing options. Regardless of your credit or work history, you have a variety of options.