By Vico Ling
The COVID-19 vaccines have arrived on our shores. If effectively rolled out and deployed on schedule, this is expected to lead to favourable economic recovery, boosting trade and commercial activity. We could just be stumbling upon what could be the largest opportunity to capitalise on post-coronavirus recovery.
Unemployment is on the rise, but this has also made way to an uptick in entrepreneurial endeavours during this economic downturn. While it has been disheartening to see the dramatic number of business closures and job losses caused by COVID-19, some industries flourished over this period due to COVID-driven needs and opportunities. With the light at the end of the tunnel seemingly within reach, should you consider purchasing a franchise in 2021? Here’s a list of essential questions to ask before you consider buying a franchise:
1. Has the franchisor embraced the digital revolution?
It was necessary, but now it is inevitable. The pandemic highlighted the significance of being adaptable and flexible enough to innovate to keep up with current changes to ensure business survival. Efficient systems guarantee business success. With better connectivity, mobile integration and the move towards cloud technologies, franchisors will have more time to focus on operations, training, support, and developing value-creating initiatives. Look for franchisors with established processes in their supply chain; inventory management; recruitment and payroll; customer relationship management; health and safety; business functions, and so forth; in their operational manual, that reflect the continuous improvement of their processes and procedures.
Technology goes hand-in-hand with franchising. Because of the challenges imposed by the pandemic, mobile technology, omni-channel marketing, online purchasing are now essential key components for a business’s survival. The F&B sector, for instance, should offer delivery and online ordering systems or even drive-thru lanes; or a retail franchise could use online marketplaces as a sales channel or even a delivery infrastructure; or an education franchise should take advantage of online education platforms. These tech-fuelled solutions make running a franchise more efficient and profitable.
2. Who owns the intellectual property (IP) rights?
Purchasing a franchise means that you are buying into the IP, strong corporate backing and operational model, including the brand name, reputation, standard and quality of goods and service; all its values; system; and know-how that results in the consistency of the product or service. Essentially, you are buying into an established asset. Franchisors worked hard to develop systems, structures, best practices and business techniques that are proven. It provides franchisees an advantage with a model that has a better chance of standing up in times of crisis.
Thus, before commencing a franchising relationship, all relevant IP associated with the business must be adequately protected to keep away potential competitors.
Franchising is essentially a sophisticated form of licensing rights for the franchisee’s use of the business’s IP. Without proper mechanisms put in place, it is easy to tarnish the brand. Thus, due diligence must carried out to identify and assess the IP owned by the franchisor, to determine if sufficient rights have been obtained, in the relevant countries. IP rights are territorial and therefore only enforceable in countries where they are registered; what happens when this is overlooked is the reason why Australia is the only place in the world where “Burger King” is called “Hungry Jack’s”.
3. Have you found the right location?
Finding the right location is perhaps the most critical phase in the franchise process and Deloitte’s 2021 Commercial Real Estate Outlook suggests that it is a buyer’s market now. This means that franchisees who are eyeing a highly desirable location of their choice could negotiate a bargain. Commercial property owners are ready to rent their premise at flexible lease terms to fill vacant storefronts. Banks are ready to provide lower financing cost by lowering interest rates to stimulate economic growth.
F&B franchisees, for instance, have compelling opportunities to buy and convert recently closed restaurants. With readily available commercial kitchen equipment, this lowers upfront costs and enables them to open the restaurants more quickly and see faster returns on their investment. This is also the case with other franchises in different industries.
4. How strong and accurate is your data?
The decision-making process to purchase a franchise must involve transparent data to support the decision. A franchisor’s market research and financial projections shown to you at face value may not wholly reflect the truth. Check if the data is reliable by establishing whether the research is outdated, appropriate methodology was used for the study, the correct demographic was surveyed, and what the assumptions were. An elaborate market study helps identify and connect the right targeted pool of customers for the right products or service.
It is essential for a franchise to keep up with trends and market changes to make rapid but informed decisions. The data must cover varying supply and demand patterns, market conditions and consumer behaviour. More importantly, the acquired data must be able to be rendered into actionable goals to maintain profitability amidst the economic turbulence.
5. How will franchise growth be handled?
The franchise agreement typically includes provisions allowing franchisees to use their trademarks, with the only competition being other franchisees. It is crucial to recognise whether the franchisor is limiting your franchise to an exclusive or specific territory. Conduct due diligence to probe if you will get exclusive access to the local community, uninhibited by other franchisees and competing outlets. However, a franchisor may also carry out promotions or offer the same goods or services in your “territory” online, or via other competing outlets.
An established franchise outside its home country is extremely vulnerable. When a franchisor wants to expand to overseas territories, it is possible that another entity may coincidentally have been using an identical trademark for similar goods and services in that territory. This means that a franchisor must have its mark protected in overseas territories to avoid any contention when expanding. Therefore, it is essential for the franchisor to have developed a well thought out plan for securing trademark rights overseas.
6. Does your franchisor safeguard your interests?
At some point in a business arrangement, there may be potential disagreements, or a franchisee may feel side-lined. You may want to consider all contractual obligations, how conflicts or disagreements are to be resolved; and renewals and terminations within your contract. A renewal is not guaranteed and could come with a fresh set of terms and conditions. Where a non-renewal or termination is set, always enquire into the remaining obligations to the franchisor.
A franchisor–franchisee relationship is more than a partnership, involving abundant mutual trust and requiring both parties to make full disclosure. It is essential that franchisors enforce obligations towards master franchisees, franchisees, and developers to observe franchise standards. If one of the franchisees breached its commitments to the franchisor, action should be taken quickly as failure to do so may encourage other franchisees to breach their commitments, causing the system to be in danger of collapse.
7. Are there any ambiguities within the franchise agreement?
The franchise agreement should give franchisees a sense of security as to what they are buying into, especially the length of the franchise contract, clarification of any renewal clauses (as renewals are not automatic), whether other key service and systems will be outsourced, the franchisor’s marketing effort, and where a franchisee should get their supplies and equipment from. Expectations regarding operational structure, payments, other obligations or restraints from the franchisor should also be clearly stated.
Every business has its occasional conflicts, and it’s important to know if a system or process is put in place to deal with franchisee–franchisor disagreements and if the resolutions meet your expectations.
Determine the amount and level of operational training and other operational support that will be provided by the franchisor. Make sure you know whether the franchise can be sold to another party or whether the franchisor would buy back from a franchisee; and if so, how much would they pay for it?
8. Any other necessary due diligence?
It’s a good idea to do a brand inquiry to check if any complaints or lawsuits have been filed against the franchisor and to compare it with competitors within the industry. Also consider how much support the franchisor provides in the system, training, and processes for its daily operations; so less time is spent to get a running start. Gauge its turnover, profitability and experience from other existing franchisees. That way, time could be spent on growing the brand, business and profitability of the franchise. The first few years will be tight, so it is important to be realistic and plan accordingly based on financial projections.
When push comes to shove…
This pandemic has revealed a class of “future-proof” chains that are leading the industry with resilience and innovation. Businesses embrace change and adapt, and this could be a major opportunity for franchises to bounce back stronger after a major crisis like the pandemic. Investors have to begin with an honest appraisal of whether a franchise has the resilience for further future disruptions.
Small preliminary steps could be put into place today for bigger success tomorrow. The franchises with the biggest advantage would be ones those who enter the market with an impregnable franchise operation and a market strategy that allows for aggressive action. Entrepreneurs and investors should be optimistic and seize the opportunity to take full advantage of the market forces to finance and accelerate their growth in 2021.
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