Entering a 'Business Marriage' - An introduction to franchising
If franchising is a form of 'business marriage', you would be well advised to go through rigorous courtship before you take your vows. Stuart Anderson speaks to Franchise Development Services Managing Director Roy Seaman
With the number of franchisors (companies offering franchise opportunities) in the UK now approaching the 1,000 mark - all potential suitors for your hand in a franchise relationship - how should you go about creating a shortlist of serious candidates? Try these primer questions to speed dating the franchise industry:
Is your company a member of the British Franchise Association (bfa)?
This question is becoming ever-more important with the influx of companies offering franchise opportunities. The bfa has set out a set of guiding principals for the industry which act as a code of conduct for franchisors. All members are required to sign up to this code, so familiarising yourself with its dictates will give you a head start in understanding what ethical franchising is all about.
There are three levels of membership of the bfa: Full, Associate and Provisional. 'The Full Members are likely to have the highest credibility,' recommends franchise consultant Roy Seaman.
'The Associate Members will have proven themselves to a standard whereby they could aspire to Full Membership, while the Provisional Members are meeting basic criteria but do not as yet qualify for the more important categories.
'Should the franchisor not be a member you must be extremely cautious, and if you have any doubts whatsoever back away from the franchise. The failure rate of non-member franchisors is significantly higher than that of Full and Associate Members of the bfa, with over 95 per cent of bfa members still trading successfully after five years.'
What are my capital requirements for making a success of a franchise?
There are a number of areas where you need to get the franchisor to spell out what will be expected of you, and what will be provided to help you achieve it.
Question every assumption, starting with the financial forecasts. How conservative are 'conservative estimates' - what assumptions are they based on? What growth have current franchisees been achieving? How long should the business be expected to take to break even? How much working capital will you need?
You should also ask to see the franchisor's finances, or obtain a bank reference. What are the company's main source of earnings? If it appears to be the initial franchise investment fee, warning lights should be flashing. The franchisor's incentive should be to earn from the ongoing success of its franchisees, not the initial sale of licences.
'Even franchises that are low cost and being run from home carry substantial set up costs in relation to your home office requirements and the initial marketing,' says Roy. 'You should not invest in any low cost franchise (say, under £15,000) unless you have the ability to lose that money and start again. The highest number of failure rates in franchising come from the low investment area.
'Any financial projections relating to turnover and profitability must be substantiated. Ask the franchisor for written proof that other people have reached the levels being indicated.
Also, ask the franchisor to break down the cost for every element of the package that they are offering. Franchisors that charge a total fee have not understood the real tax benefits of breaking the package down. You also need to know how they value the initial training, ongoing training and other content.'
What is your background history in the franchise industry?
Most franchise brochures should provide you with some basic information about the franchisor, but make sure all gaps are filled. How long has the franchisor company been established and what is the background of the founder? How long has the franchisor company been posting profits? When did it begin franchising and how successful was the pilot? How many franchisees are in operation, how fast is it growing and how many will complete the national network?
'Ask if the franchisor has previously been involved in franchising,' advises Roy. 'If he has, ask which company or companies they were. Make a note of these brands and check out with organisations like the bfa and franchise consultancies to check what happened to them.
'You also need to find out who the franchisor's professional advisors are. Lawyers must always be bfa affiliated - other lawyers may have little or no experience in the real world of franchising. Franchise Consultants are now considered to be one of the most valuable assets that a credible franchisor will have.'
What is the training and support set up?
Your initial training is likely to be included in the initial investment fee, but does that include staff training? If so, will the franchisor require all staff to be trained by the head office and, if so, how much of this cost will fall on your business?
The justification for the ongoing management service fee is the support of the franchisor, so check you are getting value for money. What support initiatives does the franchisor provide?
For instance, some franchisors operate a sales department in order to generate initial business for their franchisees and provide business from day one. Does the franchisor operate field support managers, who will make on-site visits to your business to help you cope with any problems?
Support can also be provided by your peers in the franchisee network. How does the franchisor encourage this? Such initiatives as a franchisee intranet, or regional and national franchisee conferences are superb methods of getting the franchisee network cooperating.
'Ask to visit the franchisor's headquarters,' adds Roy. 'You need to meet them in their own environment and ascertain whether the offices belong to them, are on a lease, or are rented. Never meet a franchisor in a hotel environment and allow yourself to be sold into the franchise. You must always visit the headquarters before parting with funds.'
Can I speak to other franchisees?
Ask any franchise advisor and they'll insist that current franchisees are the most valuable resource in judging the viability of a franchise opportunity. After all, they're the people at the sharp end of the business, actually experiencing the pressures, pitfalls, pleasures and profitability of the franchise concept. They'll be able to provide real stories and real figures, rather than talking in abstract forecasts and expectations.
'If the franchisor suggests that it is not their policy to allow prospective franchisees to call and speak with any franchisees selected from the entire franchise network, be careful,' Roy recommends. 'Some franchisors have 'pet' franchisees who they know are trading successfully, while at the same time the majority of their franchisees may be unhappy. A credible franchisor will allow you, at the appropriate time in your evaluation to speak to any of their franchisees.'