As an ethical franchisor we believe in being totally transparent and honest with prospective franchise owners. In association with our expert legal advisors we have written this article to give potential franchisees some guidance on what questions they should be asking franchisors before committing to a franchise opportunity.
One of the key questions you should ask is how long a franchisor has been in business. There are several excellent young franchise businesses however a franchise which has a track record of success over several years should give you comfort that is it likely to be less risky than a start-up. Next ask how many active franchisees they have operating – there is strength in numbers and the larger the network the more secure it is likely to be. Ask to speak to existing franchisees – franchisors should be willing to let you select any of their franchisees, not just those they have cherry picked!
Getting an idea of what the head office organisation consists of is vital, after all they will be providing your back up services for five years or more. Ideally you will have attended a discovery day at the organisation’s head office and this should give you a good opportunity to assess the professionalism of the organisation. How can the franchisor demonstrate its ability to deliver the necessary follow up services? Ideally a service level agreement should form part of the franchise agreement.
One should not take information on financial performance or integrity at face value. Ask for a bank reference and if necessary a report from Companies House or a credit checking agency to reassure yourself that the venture is financially sound. It also pays to contact the British Franchise Association to discuss their knowledge and experience of being involved with the franchise.
Ask about franchise failures as well as successes. Inevitably some franchise owners will fail due to a number of circumstances. Try to get an honest and genuine appraisal from the franchisor of the reasons why it happened. How choosy is the franchisor in selecting franchise owners? Are they willing to take anyone on who has the necessary funds or is there a rigorous selection process to ensure there is a good fit between the franchisor and franchisee?
What does the franchise fee include and importantly, what does it not include? Are there any “extras” you need to budget for such as capital equipment or office leases. Also don’t forget you will need working capital and “contingency” funds for any business operating expenses or emergencies on top of the franchise fee.
Most franchisees are keen to know how much profit they are going to be able to make in the business. Every franchisees circumstances are different so be wary of franchisors who offer arbitrary financial projections. Projections should be challenging but achievable and tailored by you in accordance with your own business plan.
Ask the franchisor how they have proven the business model works. Did they run a pilot franchise to prove the model and iron out any issues before going live with a network? How much financial commitment does the franchisor have in the business….have they invested heavily in personnel, resources and infrastructure to adequately support the network?
Find out if the franchise business is seasonal. In most businesses there will be peaks and troughs but this can be mitigated by the mix of business generated. In our own business a strong temporary workforce that is maintained weekly complements permanent recruitment which adds directly to the bottom line.
A good franchisor should advise you on the best time to launch your franchise taking into account time needed to recruit and train staff and so forth. You should examine carefully how much the franchisor will charge on a monthly basis as a management service fee. What does this fee include and is a percentage spent on national marketing support to help grow national brand awareness? What continuing support does the franchisor offer in terms of administration, HR, marketing and communications and business development?
We strongly advise that any franchise agreement is reviewed by a bfa approved solicitor as a high street solicitor is unlikely to have the depth of franchise knowledge required to make an informed judgement.
Lastly I would say to any franchisee that running any business is hard work, demanding the highest levels of personal and family commitment. You are making a substantial financial investment, however, no investment is guaranteed, especially when it depends on both your efforts and that of the franchisor as well as the vagaries of the market place. Having said that franchising can be life transforming and could be one of the best decisions you make in your career.