Check all options before jumping on bandwagon

Franchising is an effective and efficient tool for a company to invest and expand. However, risks exist in any form of investment, and franchising is no exception.

In the past 10 years, franchising has been developing quickly in China. But this business model is relatively immature. Before stepping into the team of franchisees, there are many key points that one should pay attention to. The most important one is how to evaluate investors' qualities and choose a reliable franchiser.

Investors should first analyze their own qualities as a franchisee. Being a franchisee is not like a common investor or an independent entrepreneur. Compared to stocks and real estate, franchising is more like a long-term investment. When people invest in stocks, funds and real estate, the most important moments are buying and selling. Investors do not need to take part in the management process.

However, franchisees have to follow a certain management pattern and create a profit through predetermined means since franchisers have no obligation to guarantee that.

In addition, a franchisee has to be disciplined and follow the terms of the contract signed with franchisers. Creative thinkers are not suitable for franchising. The first rule of being a successful franchisee is to follow the pre-established rules and business formats.

Unlike independent entrepreneurs, franchisees do not have own their stores. They have to work under the supervision and guidance of franchisers. Thus, bad communicators are not suitable to be franchisees.

Once the investors have decided that they are suitable for joining the franchising team, they have to decide what company to invest in.

Knowing the franchiser thoroughly is the first step. Investors should have face-to-face conversations with the target companies, and ask for written profiles of them and their requirement for recruiting franchisees.

A useful way to get to know the franchiser better is to communicate with its existing franchisees. The following questions should be asked:

When did you join this company? How is the business going now? How long are the stable and unstable periods?

Why did you choose this company? What did you see in this franchise before you took part in it? And did you get these points after you joined the company? Why?

What kind of problems did you encounter during the process? And did the franchiser help you to solve them?

Are you satisfied with the training, supervision and other services provided by the franchiser? Are there any problems?

How long did it take to make back your investment?

These questions should be asked to both successful and failed franchisees so that the investors can have a comprehensive understanding of the company and learn from the experience of both sides.

One thing investors should notice is that they need to analyze the background and experience of failed franchisees, and decide if they themselves have these qualities.

The second step is to visit the headquarters of the franchiser. Investors should ask for a feasibility report of the business and check the performance of its model stores.

Normally, franchisees will encounter the situation that the actual amount of investment exceeds the original plan. Therefore, investors should remember to ask for a detailed financial report of the actual expenses of participating in a franchise program.

Also, most franchisers will provide the figures of the best-run franchise stores to attract future franchisees, so investors should know what kinds of figures to trust.

When investors are going through the profiles of the targeted companies, try to find answers to these questions:

How many franchisees does the company currently have? Where are they located? How are they running their stores?

How is the expansion rate? Is it too fast?

How many franchisees have closed? What are the reasons?

How is the franchisee supporting team of the company?

How is the financial status of the company?

Most importantly, investors should double- or triple-check whether the companies are qualified to expand their business via franchising.

If the investors can find satisfying answers to all these questions, they can then start formal negotiations.

The author is the deputy director of the Franchise Committee of China Chain Store and Franchise Association.