Русский Lietuviškai
2020-09-23

Nedas Karklius: How to make the decision on whether to invest in a Lithuanian franchise or not?

In Lithuania, franchising is still something too rarely heard of and alien, although many of the favourite and well-known international brands have come to our country after local investors bought their franchises. Not only are Lithuanians purchasing franchises, but we have been selling them in the recent years with increasing confidence too. So today we can also have a debate on whether it is worth investing in a Lithuanian franchise.

I must not err in saying that every franchisee sees two criteria as key: firstly, they must like the business itself, and, secondly, they must be fond of the franchisor’s credibility. Based on the above criteria, a few months ago we made our first investment in a Lithuanian franchise when we purchased the first tunnel car wash in Vilnius offered by “Švaros broliai”. Since I have no doubt that the supply of Lithuanian franchises will grow in the future, I would like to share the rationale behind this decision taken and what can be learnt by other investors from our experience.

First of all, the key question is whether to buy a franchise or build your own business.

Indeed, both options have advantages. Buying or creating a business from scratch gives you the freedom to act according to own rules of the game: to set the company’s vision, select products and services, and choose freely which supplier you intend to buy from. In an independent business, any decision and success depend only on you. However, when you buy an independent business, you may not get the awareness that you would receive with a franchise unless you buy a business with a strong brand.

If you do not have business experience, a franchise may be a very good way to start it as franchisors often offer training necessary to manage their business model and advice to get your business going. Another important aspect is that obtaining financing for a franchise business may prove to be much easier than for own business as the bank will take account of the fact that the model requested to be funded has already been tested through the time.

But it is important to realise that this is not a guarantee for success in the business. It may lead to a misconception that merely buying a franchise and launching a business will suffice, while the customers will follow suit. As in any business, creating and managing a franchise requires continuous and persistent work, determination, and effort.

Without doubt, the restrictions placed on business freedom by the franchisors are not fit for everyone. And anyone considering the possibility of using a franchise should consider whether their personal characteristics and experience will let them follow the franchisor’s strict rules and restrictions and feel good in such a business.

How to choose what franchise to buy

The franchisor must be subject to extremely high requirements, while compliance with them must be assessed on the basis of specific criteria

Before franchising its business model, the franchisor had to carefully test it to make sure it was viable and would work in practice. Before signing any contract, it is necessary to conduct own market research on the views of the public about the services provided by the franchisor, and evaluate whether there is a growing demand for such goods or services, whether there have been bad media reviews in the recent years regarding the franchised brand, how the network is being developed, or whether the existing franchisors are not closing down.

It would be prudent to analyse the business and financial performance of existing franchisees, liaise with them and assess their experience in the market. It is necessary to make enquiries into what the franchisors have done to test their business model. If the franchise has not been functioning long, then you should definitely find out the details of whether it has been properly tested or whether all the nuances of its model have been considered.

In our case, the decision to enter into a partnership was down to the fact that “Švaros broliai” has been present in the market for over two decades and does not only take the lead in the tunnel car wash business across the Baltics, but is also the fastest growing network in Europe surpassing all (or almost all) companies on our continent in terms of the number of cars washed per hour. The car wash uses the technology by Tommy Car Wash, the leasing US washing company, whose factory I have had a chance to pay a visit to. Their equipment allows us to achieve impressive results.

In addition, we knew that the franchisor has been taking this route in a targeted and consistent manner and has taken time to prepare and improve its processes until it developed own model.

Carefully evaluate the negotiation process

The negotiation process will help assess whether the team offering the franchise is experienced, reliable and financially capable of ensuring smooth operations in the future.

First and foremost, carefully read and evaluate the quality of the franchise disclosure document (FDD) drafted by the franchisor. Does it disclose the financial model and the historical data in detail? If the paperwork seems hastily drafted, this should raise the alarm making you question whether they are professionals and financially strong.

To illustrate, the “Švaros broliai” franchise agreements have been drafted by one of the top Lithuanian law firms “Sorainen”. We held several joint debate sessions and sought a compromise for the contracts together to satisfy both the franchisor and us.

Secondly, the franchisors should be sufficiently open and transparent when speaking about the financial side of their business. Certainly, no franchisor can guarantee success or specific returns, but they should provide fact-based forecasts along with the revenue and cost structure. If the numbers in the forecasts seem excessively optimistic, ask additional questions, and make sure you obtain the necessary answers.

Third, the talks with existing franchisees before making a purchase are very important.If you are only allowed to liaise with the selected ones, be wary. Is everythingtruly all right, especially if you are aware of a number of terminated franchises or ongoing judicial disputes?

Fourth, if you see that the franchisor is rushing you to make a decision and puts all efforts to complete the sales process as soon as possible rather than making sure that you are the right franchisee, consider this a sign that you are on different paths because when you sign a franchise agreement you are unlikely to receive any help from such a franchisor when needed.

Fifth, if the franchisor is unwilling or unable to name and disclose the risks associated with its business (every business has them), be alarmed. Transparency is key. And the prospective franchisees must have the potential challenges (not just benefits) disclosed.

Third, it must be an acclaimed brand and a developed and well-aligned business model

The business offering its franchise must also sell all the knowledge of business management, customer service and management gained up until thetime. If the seller of the franchise does not offer this, then such a deal is unlikely to have a future. We have received a possibility to use harmonised business management systems, staff training, all the instructions needed for the job and, most importantly, access to a pool of customers loyal to the brand. It is important that those who invest in a franchise receive support not just in the process of buying, but also throughout the life of the business.

For instance, when the lockdown had been declared and wash flows fell by around 30 %, we received support from the “Švaros broliai” management team and their insights on how to manage the business. This has led to the fact that, despite the pandemic, we have not had a single month of unprofitable business. It is an excellent example of what an investor should claim from a franchisor.

Fourth, consider its long-term prospects

Even if a business seems successful today, it is very important to find out its long-term plans and development potential before making any investments. The business’ desire to become a franchisor is natural and understandable as it is the fastest routes to expansion. But quite often entrepreneurs rush into selling franchises even before they have developed a sufficiently sustainable business model and they are unable to ensure successful and profitable business for the buyers that have invested in their franchises for many years. “Švaros broliai” have also learnt this lesson. So,when assessing their development plan recently we were able to observe the lessons learnt from the past, consistency, and responsible planning on how to achieve sustainable growth of revenue.

Our goal for the next few years is to grow the footfall of the car wash customers to the maximum capacity. In the future, we expect to expand with them and purchase more tunnel car wash franchises not only in Lithuania, but also possibly abroad.

These four lessons are key to securing a successful investment and a profitable business. Certainly, as already mentioned above, one of the cornerstones is the fact that an investor must be sincerely fond of the business that they intend to acquire under a franchise.

The fact that established brands in Lithuania have increasingly actively started offering their franchises shows the maturity of our national business environment as we already have sufficiently developed and proven business models with many years of experience that are worth copying. This trend shows that the debate on investing not only in globally known and recognised brands, but also in local brands will become increasingly relevant in the years to come.

The comment was provided by a businessman and the Director at the company “Savanorių tunelis”.