Funding Your Franchise Business

While taking up a franchise may give you a head start on many counts as compared to building a business from scratch, when it comes to financing, you’re faced with the same challenges you would with any start-up. Seeking the help of the franchisor at the outset can open a few doors and ease the pain considerably.

Be prepared to spend as soon as you decide to buy a franchise. At the outset, you may have to pay a franchise fee in return for the right to use their brand and conduct business in a certain territory.

The franchise fee can vary significantly; obviously the better known brands cost a lot more. There could also be a differentiation in fee based on size and location of territory. See if you can negotiate a staggered payment with the franchisor, in proportion to revenue inflows, so that you don’t have to block cash upfront.

Next come real estate and establishment expenses. If you don’t have your own place, you will need to locate something suitable to rent and do it up in accordance with the franchise branding guidelines. Remember, fancy consumer brands will expect conformity with their public image and you have to be prepared to fork out quite a bit. The good news is that there may be a nominated interior design agency that is given the mandate to do up all franchise interiors, and since they may have entered into a long contract with the franchisor, could give you better rates and credit terms.

If your business is product retailing, inventory costs could stretch your resources, especially in the early days when you have to stock up. Some franchisors supply goods on consignment, which means the franchisee need not block funds in inventory – check if that option is available. Alternatively, always be on the lookout for softer credit terms.

These measures will help ease the pressure of initial financing requirements, especially when there is no revenue to balance the outgo. That being said, you will have to arrange for adequate funds to tide your franchise business over the initial two or three years. If you have sufficient resources already, that is the best case scenario. However, if you need to arrange financing from external sources, discuss with the franchisor whether they have a system in place that can make it easier for you. Generally, they will have tied up with a financial institution for giving business loans to new franchisees. Going that route may be a simpler and faster option, than approaching another bank for money.

Choosing The Right Franchisor

When you start a new business, you would be mostly advised to venture into a field that you either understand or are passionate about. If you are looking to grow an existing business, you might diversify into a related area. But sometimes, business owners plunge headlong into a totally new field by buying a franchise. If you wish to follow suit, choose the opportunity with care, since they’re not all alike.

Although a franchise can give you a launching pad to commence business, there’s still a great deal of groundwork to be done prior to signing up. Investigating the credentials of the franchisor has to be among your topmost priorities at this stage.

The following guidelines could prove useful when you’re negotiating to buy a franchise:

How eager is the franchisor? This will be apparent right at the negotiation stage itself. In a franchised business, the franchisor has to be the driving force if the brand is to be successful. A relaxed or complacent attitude could signal that the parent company is vulnerable to a strike from competitors. Similarly, if the franchisor is non-responsive, it could indicate that they won’t pay you enough attention after you sign up.

Look for other opportunities if the chemistry doesn’t seem right.

What are their growth plans? While you would like to ally with a brand that has an aggressive growth agenda, remember that it could be a double edged sword. Every franchisor will target the maximum number of sign-ups possible and that could work against the franchisee’s interests, since it limits territory and encourages infighting.

Will they stand by you? Since you’re entering unknown territory, you will rely on the franchisor’s support to see you through the initial period. Check out what the training and support calendar looks like. Is there a marketing plan laid out which can help you break into the market?

Some indicators would be the number of days per month that the franchisor’s staff will spend at your location and the number of people assigned to take care of your requirements. If the franchisor is short staffed, you may find that they will not be able to support you adequately in times of crisis.

What is their reputation like? Every franchisor will sell you success stories of other franchisees in a bid to sign you up. Don’t let it rest at that – find out how the parent company is faring as well, as their financial health is very crucial to the stability of the business. Don’t assume that there’s always a sound company behind a strong brand.

A fast growing franchisor may brag about how they’ve grown in recent years. Treat that as a warning signal – usually, a spate of new franchisee signups is accompanied by an equally large number of break-ups. Make sure you are not signing up with the hire and fire variety.

Be sure to speak with at least a couple of existing franchisees to get their perspective on the parent company. If they seem satisfied, the opportunity is probably worth considering.

Are the terms fair? The franchisor will have a standard agreement that both parties need to sign. Since this is the guiding document for all franchisees, you can expect that it will not be changed to suit your preferences.

Make sure that you understand the clauses fully, especially those that deal with territorial rights, financial outlay, terms of separation and dispute resolution. While you can expect that the terms will be loaded in favour of the franchisor, don’t sign something that is blatantly unfair to the franchisee.

Quite often, the reason for buying a franchise is so that the existing infrastructure can be put to better use. But it is equally important that you don’t sign up the wrong opportunity, just so you can keep the staff busy.

Is starting a franchise business in India a good idea ?

One of the business options open to India’s first time or small entrepreneurs is to take up a franchise. Buying a franchise of an established brand is a good alternative to starting on a new idea from scratch or could offer a faster way to take an existing business to the next level.

This option offers several advantages - not the least of which is an opportunity to latch on to a tried and tested model. A well established franchise brand also affords instant visibility, and with most rules being laid out already by the franchisor, you don't have to waste effort reinventing the wheel.

However, and yes, there is a "however", you need to consider several factors before deciding on a franchise business. Exercising adequate diligence prior to sign up could be vital to the end result.

Start with the motive

Prioritize your reasons for wanting to enter this business. What do you expect to get in terms of return on investment or annual income? Most important, do you have the commitment to go the distance?

It is very important to be sure that you really need the brand to make a business. Many franchises are generic in nature, and not much is offered by way of specialized knowledge or support. If there’s a chance you can enter the business by yourself, minus all the franchise costs, maybe it is better to go it alone.

Don’t unless you have adequate funds

The better known brands come at a hefty price. The annual franchise fee itself can run into several lakhs of rupees, and will vary with territory. Different franchisors adopt different models – we know that (at least some years ago) leading garment retailer Arvind would place goods on consignment and pay franchisees a commission on the value of the sale. On the other hand, the training and education company CADD Centre charges a territory based flat franchise fee, regardless of volume.

When you start negotiating, the franchisor is likely to sell you some dreams and their ROI calculations will likely focus on initial franchise fee, royalty payments if any and capital expenditure for setup.

However, remember, that the business is not likely to pay for itself for a while, so the ongoing requirements will be substantial. Don't take it up unless you have the resources to hang in there for three years.

If you still have conviction in the idea, but are strapped for funds, rope in some partners; in any event, don't start still you have enough resources.

Be sure you can handle it

Even with a franchise business, some basics don't change. As with any venture, the success of a franchise will depend on whether you and your team have the requisite skills to run it. A good franchisor is choosy about who they sign up as a franchisee. In the same way, you should choose a franchise opportunity that draws upon your capability or passion or leverages the strengths of the existing business in some way.

An important thing to consider is how much the new franchise business will divert your focus and passion from existing commitments. Is it strong enough to stand by itself? The franchisor will insist on you being personally involved in the formative years of the venture, so you will need to have a back up arrangement in place for the current business.

If you’re a late comer to the franchise, chances are that you will be offered a territory that is not in the large metropolitan cities or the city of your residence. That’s not necessarily a bad thing, because in general, the tier 2 towns in India are exhibiting much higher growth than the large cities.

So, don’t reject the opportunity at the outset. However, this presents some challenges as you look to manage the business long distance. If the proposed franchise territory is unknown to you, spend extra effort to:

Assess the market potential. Get the franchisors to visit along with you and give you their opinion.

Figure out whether the right manpower is available to handle the franchise in your absence. If you have a personal acquaintance in that town, willing to help, that is a huge advantage. Also look for a strong sales or marketing team, since you cannot expect to do all the selling on your own.

Being the first to enter a new territory can be of advantage in the future, when the franchisor company wants to expand their footprint, since you are likely to be offered the right of refusal.

Some other questions you should ask yourself right away:

• Do I need any start up training?
• How many people do I need to begin operations?
• Have I considered all the risks?

If the answers are comforting, continue the dialogue. You will now be faced with the nitty-gritty.

Scrutinize the franchisor’s track record before finally taking up their offer. Sure, the brand is doing well, but how are franchisees treated? What support services and training resources do they provide? Talk to other franchisees before coming to any conclusion.

Franchises come with pre-conditions regarding minimum outlet size, operations methodology, territorial restrictions and so on. Know what you can and cannot do.

The Franchise Agreement will be the most important document governing your relationship. The agreement will list out the rights and obligations of both parties, and spell out the dispute resolution mechanism. Get a lawyer to read it. As a franchisee, you may not have any say in this matter, since the agreement will be standard fare for all franchisees, but it is important to be forewarned about any red flags.

Last but not least, be clear in your mind that you have zeroed in on the right franchise opportunity. There are many big opportunities but not all of them will be suitable. Choose the one that you are prepared to stand by for a while. Companies such as Franchise India work towards bringing partners together. Might be worth a call.