Buying a franchise? Do your homework
By Joel Bissitt
Buying a franchise represents what can be the most complicated and important decision's of your life. It is vital that you get the correct advice and guidance before you 'take the plunge'
However, with approximately 34,000 operating franchisees turning over £9.65 Billion in 2003 and almost 97% of franchisees being in profit after five years compared to 45% of other independent business, buying a franchise business in the UK still presents a fantastic opportunity to succeed in business. (Source: British Franchise Association).
Some areas to consider when buying include:
How much does the franchise cost?
There are two areas here, initial set-up costs and ongoing costs. Initial costs will be the initial franchise fee and any additional set-up costs. After this you will pay a royalty or management fee which is usually a percentage of your gross turnover.
Is the franchise business viable?
If a new franchise how long have they traded for and do they have documentary evidence of success such as accounts etc. If they are already trading as a franchise how many franchisee's do they have and how successful have these franchisee's been.
Does the franchise company have a national brand or corporate image?
Think of the 'Big M' used by McDonalds, or the fluorescent colours used by Dyno-Rod, not all successful franchises have this type of strength in their brand but this should also be a consideration.
What supporting financial information has the franchisor provided?
In most cases a franchisor will present the prospect (potential franchisee) with cash flow or income projections.
It is important that you understand that almost every projection will be for 'Illustration purposes only' and thus should be viewed with a sceptical eye.
Ask how the projections have been created by the franchise business and what opinions have been reflected in the figures that have been provided. For instance, if a pilot operation has only been trading for one year, but you are presented with a two year cash flow it is obvious that year two has been created from the unproven projections of the company itself. If the franchise is established have the figures been adjusted to reflect the actual figures achieved by existing franchisee's?
What track record does a franchisor have of franchising its business?
The majority of franchise opportunities that you make enquiries into will already have franchises set up and trading, however some may have only just started franchising themselves. If the franchisor has been franchising for some time it is recommended that you research the number of trading franchisees and their locations prior to buying a franchise. If the company has just launched a franchise then more research will be required on the pilot operation and the viability in your chosen territory.
Is the franchisor a member of the BFA?
The British Franchise Association(BFA) have many stringent policies in place for every one of their franchise members, involved in these policies are the associations criteria for membership, these differ for the associations provisional, associate and full members but in the main cover such items as the viability of a business, and its compliance with the European Code of Ethics for franchising.
To a potential franchisee, a BFA member should provide additional comfort in buying a franchise although you should not rely on this alone as many very successful franchise businesses are not a member of the BFA.
What training and support is provided by the franchisor?
Quite simply, the training and support that is given to you will be fundamental in the operation of your franchise business. Check out exactly the training and support you will receive initially and ongoing to help grow your business.
What does the franchise agreement contain?
A breach of the terms laid out in this agreement could result in either party pursuing the other for damages or indeed termination of the franchise operation itself. Therefore it is vital that you check and understand your obligations under this document and comply with them at all times, if you do not understand or are unsure of the meaning of any clause of the agreement you should raise query with the franchisor prior to completing your purchase of the franchise. In short get legal advice from a qualified solicitor before entering into an agreement.
Is a Franchise Operating Manual provided by the franchisor?
A franchise operating manual provides information and guidance on the business and method to enable you to set-up and run your business and in many cases, forms a fundamental tie with your franchise agreement.
What franchise pack will you received when you become a franchisee?
Another important consideration when purchasing a franchise, what exactly will you get for your investment? Usually this will include all equipment and documentation required to run and set-up the business but the structure and the way fee's are charged for elements of the franchise pack will vary from business to business so you will need to confirm this before proceeding.
What are the terms of resale and renewal of the franchise?
A franchise resale is when you decide to sell the franchise on to another party. This could be because of lack of performance, a change in personal circumstances or that you wish to capitalise on past successes or retire. Either way the franchisor usually has pre defined exit strategies so that in these circumstances each party has a plan to work to.
Do you have ample funds in place to support the business?
You must plan your business & personal finances carefully making sure you have plenty of contingency funds.
What financial support is available from the franchisor?
On some occasions a franchisor may offer their own funding, lease back on equipment or other schemes. Many franchisor's will also help with any funding proposals to banks and have relationships with major lenders.
What is a franchise territory?
Most franchises will have a pre defined territory which is usually exclusive to the franchisee. If this is the case you should check that this is confirmed in the franchise agreement and if there are any other terms on the agreement which relate to this.
Can I actually do the job?
The most important factor of all, which in truth only you can decide.Make up your own mind and be honest with yourself. A franchise is a substantial commitment, one which should be viewed long-term.
Top tips for buying a franchisee
1. Research the franchise opportunities that you are interested in.
2. Enquire to the franchises that interest you and request more information. Assess the viability of the proposition based on your skills, abilities, available territories, financial position and ultimately whether you wish to open your business in the industry.
3. Apply for an interview with the franchisor.
4. If you have not already done so at the initial meeting request to see the set up of another franchise outlet.
5. Request to speak to an existing franchisee.
6. Complete your research and ensure you get a professional opinion of the franchise agreement and your obligations under it.
7. If you are satisfied with the above complete the purchase of your new franchise business.
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