A franchise offers the advantages of a well-known brand name, and the support and training the franchisor provides. Even with this backing, it is important for a franchisee to know the factors that can significantly affect their chances of success. Factors such as demand, location, local laws, and competition can provide challenges that a franchisee must be prepared to handle. Below are top 6 things that you might want to know before deciding to invest in an education franchise.
1. Local Market Knowledge
Usually, a franchisee selects the site for the franchise. Therefore, it is critical to understand the local market forces that may impact your franchise. Knowledge of one-time and recurring costs such as that of rent, advertising, marketing, classroom supplies, teachers, maintenance, and infrastructure must be acquired to weigh the costs against the estimated profits.
Remember that in many cities, local costs may vary depending upon the area, so you may compare the various costs typical in your business in different areas. Additionally, availability of resources must be considered along with the costs, as often costs jump up when there’s scarcity of resources.
To build a business that is attractive to the local population, these influences need consideration:
- Language (Knowledge of the local language to effectively communicate with the local people)
- Cultural flexibility (To adapt to the unique cultural and behavioral characteristics of the students and parents)
- Local competition (The existing schools and institutes that are in the same market)
- Market changes (Routine evaluation of the changing market and predictions on future market changes based on that evaluation)
Having comprehensive knowledge of the local market ensures an early success for a franchise. With the backing provided by the franchisor, a franchisee can determine the various local market forces at play and create an environment for immediate success.
2. Franchisor History
A franchisee, before deciding to open a franchise, must have the following information about the franchisor:
- Years in operation
- The number of franchisees owned
- Success rate of franchisees
- Reasons for the failure or success of the franchisees
- Complaints about the franchisor
- Growth of brand name
Even though most franchisors provide all basic support to a franchise, as their success is also dependent upon the success of their franchisees, it is important to know beforehand exactly what support the franchisor will provide at the beginning and through the years.
3. Costs for the Building of Training School/s
Before you decide to invest in an education franchise, consider expansion and changes such as committing to a long-term commercial lease and building out a training school(s). These questions may help you to decide if you should build a physical training location:
- Is the demand stable?
- How much would it cost?
- When will the cost be covered?
- Would the property rates increase with time?
- In which other ways can you use the school?
Reach a determination after detailed research. Based on that determination, you will be able to make accurate estimates and predictions regarding the building of the training school(s).
4. Total Investment Required
A franchisee needs to pay initial costs, continuing royalty payments, and other fees. Depending on the country and the franchisor, the costs may vary. According to the Federal Trade Commission of the U.S.A., a franchisee will need to pay some or all of the following:
- Initial franchise fee and other expenses
- Continuing royalty payments
- Advertising fees
The initial investment often varies according to the location and the size of the institute. The cost may also depend on how big the brand the franchisor is. McDonalds, for example, requires a potential franchisee to have liquid assets of at least $750,000.[i] Startup costs, which include construction and equipment costs, average from $955,708 and $2.3 million.[i]
On the other hand, a smaller brand may require less investment. For example, the total investment of Best in Class, an education center in the U.S., is $60,000 to $100,000.[ii] The franchise fee is $30,000.[ii] In comparison, the investment for Back to Rock franchise, a music school, is anywhere between $360,000 and $505,000.[iii] The amount includes a school with furnishing, marketing for the opening, and a startup package of musical instruments.
5. Local Laws/Restrictions
Every country has some common and some specific franchising laws. Also, state governments may have additional franchise laws. For example, in Australia, the most common form of business entity used by franchisors is a corporate structure in the form of an incorporated company in accordance with the Corporations Act 2001 (Cth).[iv]
The tax system regarding franchises may be different in some countries as opposed to other forms of businesses. Also consider if restrictions apply for foreign business entities and foreign investment. Some of the common questions regarding local laws that you may want to find the answers to include:
- What are the exemptions and exclusions?
- Which agencies regulate franchising?
- What restrictions apply to foreign investment and foreign businesses?
- Are there any employment restrictions for certain types of franchises?
- What are the real estate laws?
- What should a disclosure document contain?
Learning about the local laws and restrictions, and laying out the procedures that are required to be followed creates a system that takes care of the legal issues, including taxation, at present and in the future.
6. Local Government Business Incentives
Many countries offer incentives to businesses, local and foreign. China, for example, provides tax benefits to foreign investors bringing in investment to special sectors or Special Economic Zone.[v] To attract foreign investment, Japan offers subsidies, tax incentives, tax credits for R&D, and incentives for Special Zones.[vi] Often, local governments also provide various incentives and support exclusively to foreign and foreign-affiliated companies. These benefits lower costs and provide an edge in a competitive environment, enhancing a franchise’s chances of success.