How to choose a franchise: tips from the founder of a coffee chain

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

What to look for before buying a franchise, so as not to regret it later.

Almost every entrepreneur with free capital has thought about buying a franchise business. According to estimates by Franshiza.ru, carried out in 2017, 1,470 franchisors (franchise sellers) work in Russia. There are plenty to choose from.

However, high competition leads to the emergence of unscrupulous franchisors. Despite the fact that out of 1,470 companies on the market, no more than 700 are active: someone cannot cope with the growth rates, and someone simply launches a non-working model on the market, and the buyer of the franchise becomes a victim.

What should a novice entrepreneur be ready for and how to determine which franchisor he should work with and which one should not? Let's try to figure it out.

1. Find out which franchise you are buying

To begin with, you need to understand that franchising is when one party (the business owner - the franchisor) transfers to the other party (the buyer of the franchise - the franchisee) the right to conduct a certain type of business using the developed business model. In fact, you are being sold the expertise and tools to implement an already working and profitable model.

The International Franchising Association USA (IFA) identifies three areas of business franchising.

Trademark franchise

The franchisee is only entitled to use the trade name. For example, the brand "Masha and the Bear" from the cartoon has grown into a franchise of all kinds of goods for children - more than 600 types in total, from coloring pages to dishes.

Distribution franchise

The franchisee receives the rights to sell a specific or localized product from the franchisor. For example, this is a sale in new markets (Coca-Cola, Chevrolet) or an expansion of the local distribution network, where the franchisee becomes a new point of sale (the Chebarkulskaya Ptitsa chain of stores).

"Clean" franchise

The franchisee is provided with a full cycle business (including license, physical production, work expertise, marketing strategy, quality control process, etc.). Most often, these types of franchises are used in the restaurant business (McDonald’s, Starbucks, and others).

In the first two options, the purchase of a franchise implies the direct participation of the franchisor in the process of entering the market and development - it is he who owns the brand (or image, or character).

A "clean" franchise also assumes a model where the parent company, by transferring its experience to the franchisee and the franchisee-book (a set of rules for launching and operating), provides him with relative freedom of action. In most chain coffee shops, franchisees can choose about 5-10% of the accompanying menu themselves - chocolate bars, muesli, and so on. However, there is also the opposite option. For example, McDonald’s strictly regulates all processes: from placement (only premium real estate and the best location) to the menu (franchisees are not allowed to add their own positions).

2. Check your franchisor

After you figured out what a franchise is and what it is, it's time to think about how to check the franchisor for good faith.

A good franchisor has nothing to hide from a potential partner.

Indicators of the network and individual points are the best advertisement for him. It's another matter if the business success rates are overestimated.

Feel free to check the franchisor. For example, on the FTS website you can find all the data about a legal entity: who is the founder of the company and what is the authorized capital, find out the date of registration, etc. There are various databases (I like "") where you can see the financial indicators of a legal entity on tax reporting.

3. Chat with existing franchisees

The next step in confirming the trustworthiness of the franchisor is to talk to its existing franchisees. They have already gone the way that awaits you, they know about many pitfalls, can talk about the profitability of their business and what to expect from working with a franchisor.

It shouldn't be a problem for the parent company to give you the franchisee's contacts. But if for some reason the franchisor cannot introduce you, then this is a reason to think - is it worth working with such an opaque company.

If you are convinced that you are starting to work with a respectable franchisor, then move on.

4. Find out if the franchisor has his own business

There are cases when the parent company sells a franchise, but does not run its own business. In fact, this means that the franchisor teaches others how to do business, although there is no confirmation that he knows how to do it himself.

A company cannot sell expertise in launching a business if it does not have relevant experience in this.

Expertise in any fast-growing niche becomes obsolete within a year or two, or even faster. You cannot teach another how to open a coffee shop if you have not done it yourself (or did it once upon a time). Even the world market leaders - Starbucks and Costa Coffee - regularly open their own coffee shops to monitor the market from the inside.

5. Find out who runs the franchise network

In the overwhelming majority of cases, the parent company itself manages the franchise network. However, there are some functions that it can outsource, such as finding and attracting new franchisees. This is done by trading companies, which also develop the proposals themselves.

The structure of the management company with franchises should look like this:

• Working with potential franchisees (after initial familiarization).
• Working with signed franchisees (at the launch stage).
• Working with existing franchisees (in our experience, closer to 6–8 months of work, when partners reach the payback point).

All the processes of interaction with the franchisee after their acquaintance with the offer, the franchisor must conduct himself, and not through outsourcers. Only the franchisor has the expertise on how to act in a given situation when launching or developing a project.

If the manager does not have a clear structure of the franchising department, then it means that there will be no structure in working with you.

Output

You and the franchisor have a big common task - to make a profit. He will not work for you, but he will clearly explain what needs to be done in order for his business model to be profitable.

There is a high supply in the franchise market, therefore, not only business indicators are important for an entrepreneur, but also the philosophy of the parent company: ideally, it is worth finding not just a franchisor, but a like-minded person. After all, as you know, if a business is not fun, it should not be started.