Franchise sales: Why buyers must exercise care
What you need to know:
- Most of Africa is particularly vulnerable as local brands start embracing franchising, most of which evolve without following international best practices when engaging potential franchises.
- A good balance between company-owned and franchised outlets is healthy-franchisors with one or two outlets whose main income is from franchise sales could be fraudulent.
Having explored pre-franchise sale disclosures in statutory and self-regulated markets, it is important to note that the World Franchise Council (WFC) prefers self to statutory regulation.
Out of forty-eight WFC members, only eleven have statutory regulation, with the rest relying on the WFC self-regulation guidelines-the UNIDROIT Model Franchise Law-when making their national association’s Code of Conduct.
This leaves the rest of the world as a ‘franchise jungle’ without any form of franchise regulation.
Most of Africa is particularly vulnerable as local brands start embracing franchising, most of which evolve without following international best practices when engaging potential franchises. Even foreign franchisors know there is no regulation and unless they are members of a WFC-recognized franchise association back home, some are likely to cut corners for quick bucks.
For this reason and even in the regulated markets, it is important that potential franchisees carry out franchisor due diligence before investing their hard-earned money and sometimes a lifetime-in a franchise opportunity.
In order to size-up a franchise opportunity, here follows, in no particular order, a number of questions potential franchisees should ask the franchisor, answers to which will give a fair picture of the franchisor. Note, the franchisor can only release some of the information under an NDA while some might even be contained in the marketing brochure.
First, ask for how long they have granted franchises, how many franchised and non-franchised outlets they own and their location.
Older franchisors with more than a few franchised outlets have gained more experience than newer ones and are a better bet.
A good balance between company-owned and franchised outlets is healthy-franchisors with one or two outlets whose main income is from franchise sales could be fraudulent.
Second, ask if you are allowed to talk to existing and terminated franchisees. Current franchisees will give you a fair picture of the franchisor, terminated ones reveal common sources of conflict.
Third, ask what support you will receive to run your outlet. A franchise without support from head office is shaky.
Forth, find out what kind of background work they have done before calling for franchisees to apply, eg detailed market research- to reveal the level of demand; you may be paying for a franchise that will not give you any returns.
Fifth, find out if they follow a franchise-specific strategic plan or a normal strategic plan or they just grant franchises to anyone who requests-or both.
A franchise-specific strategic plan thoughtfully guides the franchisor on franchise roll out.
Sixth, ask if they have developed and successfully ran a prototype unit before franchising. This indicates their level of systemization and standards refinement. Seventh, ask what documentation is involved in the transaction.
Franchisors relying only on a franchise agreement could be fraudulent. Eighth, find out if they are members of a WFC-recognized franchise association, for the reasons we have discussed on franchise-sale disclosures.
Ninth, find out if they have any ongoing and past franchisee-related litigation. This reveals possible areas of conflict.
Tenth, is how many franchises they have terminated and why. Pay particular attention to the why.
Eleventh, find out what the total investment cost is and what it includes. What about ongoing royalties, are they fixed, turnover or margin-based?
To this list you may add questions such as what the average annual turnover of an average outlet is, how long the franchise period is, length and location of the training program and the exit terms.
The writer is the Lead Franchise Consultant at Africa Franchising Accelerator Project. We work with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise.
We turn around struggling indigenous franchise brands to franchise cross-border.
We settle international franchise brands into Africa to build a well-balanced franchise sector. We create a franchise-friendly business environment with African governments for quicker African integration.
