Franchise Buyer's Checklist
While investigating a franchise opportunity, ensure these points do not conceal problems
The Franchisee Prospectus should contain...
- Directors' and key executives' business experience
- Company's track record
- Description of the franchise
- Initial investment required
- Other payments due to the franchisor
- Data on help in raising finance
- Restrictions on franchisee's personal participation
- Termination/renewal of agreement terms
- Number of existing franchisees and their success rates
- Franchisor's rights to select/approve sites
- Training and support guaranteed to the franchisee
- Financial information about pilot operation
- Financial data on the franchisor
- List of franchisor's banker and other professional advisers
What to find out from the franchisor...
- The Company's financial health and history
- How long it has been franchising
- Details of pilot operation results
- Current number of franchisees
- Permission to talk to random franchisees
- Main source of company earnings
- Value and appeal of product or service
- Long term viability of product/service
- Type and level of head office support
- Full details of the training provided
- Whether training is an extra cost
- Total cost of taking up the franchise
- Realistic working capital needed
- Permission for bank references and other referees
- Territorial practices and exclusivity terms
- Types and amounts of advertising
- Any need to buy products from the franchisor
- Target obligations
- Realistic profit and loss figures
- Management service fees or royalty payments
- Operating restrictions
- Launch assistance
- Sample contract
The Franchise Contract
must cover...
- Your rights to sell/transfer ownership of franchise
- Obligations to the franchisor, e.g. buying supplies / services
- Rights to renew or extend contract beyond original term
- Terms and conditions for terminating contract
- Description of exact training and support offered
- Precise price, commissions, rental fees involved
- Precise boundaries of the territory awarded to you
- Description of your heir's rights in the event of your death
Be wary if the franchisor...
- Promises huge profits with thin investments
- Says 'act now to get in on the ground floor'
- Fails to give statistics on sales and profits
- Promises 'easy sales'
- Fails to identify directors or principals
- Tries to 'trade you up' to a higher fee
- Says 'act now, it will cost more later'
- Promises profits by sub-franchising
- Has a name similar to a well known business
- Promises large income from 'work from home'
- Demands large 'front end' licence fee
- Has a very short term contract
- Provides no data on track record or financial strength
- Cannot give plans for future development
- Has vague territories
- Is ignorant of competition
- Has incomprehensible contract
- Is vague about support and training
- Has weak advertising
- Is vague about your financial obligations
- Has poor head office premises
