Weighing up the costs and benefits before buying

Spending the time to diligently research a business opportunity, whether franchised or not, is of critical importance. Raynia Theodore provides a checklist of questions to ask and issues to consider.

BUYING A SMALL business, whether franchised or not, can be a bewildering experience. If you are thinking of purchasing a franchise, you need to consider the advantages and disadvantages of buying a franchise as opposed to buying an independent small business. You must also undertake extensive due diligence to make sure that the business in question is right for you and will meet your expectations.

Assessing a franchise vs a non-franchised small business

The advantages of purchasing a franchise over an independent small business will usually include:

• Instant brand recognition in the marketplace
• “Ready-made” and proven system of how to operate the business
• Support from the franchisor, including training and technical support
• Quicker return on investment
• A network of businesses within the system, which is great for advice and benchmark purposes
• “Pool” of marketing funds, in most cases, for the advertising and promotion of the brand
• Higher probability that your business will succeed
• Easier to obtain finance – in some cases you can borrow against the business itself; and
  • Better purchasing power, which may lead to discounts on some purchases.
  • However, there are also some disadvantages in buying a franchise as compared to an independent business, which include:
• No real independence as you must report to the franchisor and follow the system
• If the franchisor or other franchisees within the system receive bad publicity, it may negatively impact on your franchised business
• Unrealistic expectations of high returns if a brand is well known
• You cannot use the brand and the system once the franchise agreement comes to an end or is terminated; and
• The right to use the brand and the system is for a limited period (ie the term of the franchise agreement and any renewal term).