Don’t Let A Franchise Rip You Off!
The license to use the trademark registered by a business is called buying a franchise. A franchisee is allowed to sell products and services under the brand name of a popular business. The franchise business also gives training, operational and marketing support to the franchisee in order to run the business in a prescribed way. This is the fixed format of business. In the fixed format of business, there are certain benefits provided in lieu of certain fixed fees that the franchisee must pay irrespective of his profitability. It is in these fees that many franchise play games to rip you off. If you are a smart entrepreneur you will sort out such opportunities from the good ones.
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An entrepreneur has to incur heavy expenses in order to build the brand image of the products or services offered by his business. Not only money but time and expertise is also invested in building a brand. A franchisee gets the direct benefits of using a brand that is already recognized by the market. He is usually able to get in customers from day one if he manages the marketing of his business launch very well. But, for this benefit, he has to pay the franchisee fee and ongoing royalties on the amount of total sales revenue. Different businesses have varying franchise fees. Some are nominal and some are very high. The fees for the most popular brands are usually very high. It raises the bar for the people that are interested in investing in it. But the popularity of a brand is not the only criteria on which a franchisee fee can be based. Apart from the initial amount and royalty, one has to pay a whole list of fees to the franchisor. There should be no problem if there are enough transparency and accountability. One should be able to understand the basis of a particular cost. Franchise disclosure document: You can begin by going through the franchise agreement that is to be signed by both of you. Make a list of all the costs that are mentioned along with a note for the amount. Make a separate list of all the regular fees such as royalty fees, indemnification fees, software upgradation fees, marketing frees, standard floor fees, training fees, etc. Try to get an understanding of all the fees and how much is to be paid and what is the frequency of the payments. Ask the franchisor clearly whether there are any costs over and above those mentioned in the agreement. If he answers in the positive, ask him in detail about such costs and also the reason why they are not mentioned in the agreement.
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Scams: There is an entire industry thriving on the franchise business. A few of them are outright rip-offs. Beware of scams that are ready to cheat a businessman on the pretext of a franchise. There are also fraudulent businesses that will take every possible route to evade taxes. This kind of extra costs that are over and above those mentioned in the document definitely signal that something is wrong. Be extra cautious when dealing with such a franchisor. Existing franchisee: Try to get into an open conversation about the various costs and fees with an existing franchisee. An existing franchisee that has been in the system for a few years is familiar with the expenses and the profit potential. If he is not satisfied with the cost-benefits, then you need to explore further. Try to note down the costs that are negotiable based on criteria such as business model. Talking to a franchisee about all the support that is given to him will give you a much better idea if the franchise is worth spending money on. Basis of calculation of fees: Each franchisor will have his own way of calculating the fees to be paid by the franchisee. Firstly, the ways of calculating should be uniform for everyone. Secondly, they should be transparent and consistent too. Some franchises collect the fees on the basis of revenues and some calculate it on the basis of actual profit after taxes. There are also some fees that will be flat, irrespective of the volume of business. A consultant may be able to guide you whether the basis of calculation of fees is fair to the business or
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not. Sometimes, some locations benefit from certain policies while some locations will face a disadvantage. Franchise fee validity: If you compare all the franchise business opportunities available to you, you will see that the franchise fee declared by a business may be valid for a differing number of years. The validity varies from five years to twenty years. If the franchise fee validity is long enough and the brand is well established in the market, it will be reasonable to pay even a high amount of fees because the risk of failure goes down. On the other hand, the fees may be less for relatively new business and the years of validity may also be less. In such a situation, the business may drastically increase the franchise fees in the future if the business becomes successful. If the business is not yet established in the market, the fee is relatively high and, the validity is only for a few years then it may need a double consideration before moving forward with it. Resale policy: Read the franchise document thoroughly to understand the resale policy of the business. Check if the policy states that a franchisee cannot sell the business to another person when he is no more interested in operating the franchise. This kind of policy is not advisable. When a franchisor is sure of giving franchisee only to a candidate that would be operating the business successfully, he is not too focused on failure and resale. But, there are some entrepreneurs that sell the franchise to a person even when it is understood that the candidate may not fit well in the business.
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In such a case, more often than not, the candidate fails to run the business in a profitable manner and makes the decision of getting out of the business. In the event of a resale of the franchise not being allowed, he can do nothing but bear the losses and move on without investing further time, effort and money. Thereafter, the franchisor sells the territory again and earns the fee amount. The episode may be repeated over and over again. This process is called ‘churning’ a franchise business. Most of the reliable
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franchise consultants are aware of such franchisors and can alert a potential candidate against such a situation. Expert consultation: In any matter regarding a franchise, a consultant that is an expert in franchise business will be able to help you. They are experts in the finer nuances of calculating the feasibility of a franchise business. They can help you in making accurate financial projections that will give a clear picture of the return on investments. They can also compare the projection with other franchises and tell you if it is within the norm of the sector or if it is an outlier, indicating if it is a good deal or not. Whenever you are considering buying a franchise business, it is very important to get the financial details and assess the profit potential of a business. One should never get carried away by the huge benefits that are usually highlighted by the franchisor. Once you are able to work out the financial part, do not forget to focus on the business as a whole and your relative interest in it. This is essential because it is only your continued interest that will create profits.
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