10 tips for a franchise fortune

Thinking of investing in your own franchise? Don’t get so taken in by all the hype and excitement that you ignore any warning signs. Professor Roy Seaman CFE, QFP offers 10 tips to get you started on the road to franchise success.

Franchises offer a more effective way of running your own business, but as with any venture, you need to lay down some solid foundations. To provide you with a background about what to expect when investigating franchising, I have compiled the following tips.

Tip 1: Read all about it

Reading about franchising is essential. Published information designed to assist franchise selection is now fairly plentiful, but not all of it is well thought out, based on solid experience, unbiased or clearly presented. Useful starting points are franchise publications like this magazine and our sister publication, The United Kingdom Franchise Directory.

Franchise Consultants, such as those at Franchise Development Services, lawyers, accountants and banks also produce advisory publications on making a safer franchise choice and there are various books on the subject are produced each year.

Tip 2: See for yourself

Franchise and business opportunity exhibitions are now plentiful and allow comparisons of various companies’ offerings. There is no substitute for personal contact with the franchise opportunity you are thinking of joining. Exhibitions also stage advisory seminars, although not all are objective, with some presented by franchisors themselves.

However, exhibitions can be hazardous to your pocket, as it’s easy to get carried away on the wave of sales pitches. Remember to stop, think, listen to advice and then go away.

Tip 3: Query claims

Franchisors will make a wealth of claims dressed up as information. Unlike the USA, there are no statutory disclosure requirements, so information does not have to be other than sales talk. Study brochures and prospectuses and make a list of all they promise. This list should form the basis of your research.

A prospectus should provide information about the opportunity and franchisor’s background, which you should have checked – data such as the franchisor’s track record, financial status, protection of intellectual property rights, property obligations, pilot experience, territory rights, training provisions, support facilities and profit/loss projections based on past operating experience.

Such matters dominate franchisor/franchise owner disputes about what a franchise owner can reasonably expect from his investment, so they are a useful list of research subjects.

Tip 4: The fame game

Part of the franchise fee should reflect the value of the franchisor’s trading name. Central to franchising is the ability to start trading under an established name – which should have more pulling power than your own.

A well-known existing brand name should make it easier for you to attract customers when you start out – as with McDonald’s and Domino’s Pizza franchise owners, who can use the name as a powerful draw. The Franchise Fee reflects this, but check that the charge is not out of proportion to the value of the name, as it can be with some ‘copycat’ operations.

Having said that, big name franchises are often costly, so many franchise owners accept that taking cheaper ‘ground floor’ opportunities with lesser-known franchise companies is their only realistic option. However, they must be aware when taking on a low profile name, they will be pilots for the franchise in their areas – and the Franchise Fee should reflect that fact.

Tip 5: Status is not a guarantee

Those leaving employment may find it difficult to shake off the habit of being deferential to people in positions of perceived authority. Never presume that other people are right, however experienced or powerful they may seem. Many franchise owners mistakenly believe that status is a guarantee. The company brochure, profit projections, advertisements and manuals may look authoritative – but they could conceal misrepresentation. Don’t accept anything at face value, however prestigious it appears.

Professional people can make mistakes and be as unscrupulous as anyone else.

Tip 6: Be wary of labels

Some people buy certain clothes not because they are better than others, but because they carry a certain designer label. Similarly in franchising, labels are not necessarily a guarantee that you getting anything better. Another legitimate inducement used by franchisors is marketing ‘labels’ which suggest respectability.

Nor does tagging a ‘British Franchise Association’ tag to the franchise name give you any guarantees. Remember always keep your eyes open!

Tip 7: Don’t bank on it

When the banks check out franchises you are keen to invest in, they generally do so on a limited basis, which is not always made clear. Although you are advised to consult your bank when weighing up a franchise, bear in mind that this usually relates only to checking that the financial projections balance out and that you have the financial resources to cover their loan. When a banker agrees to give you a loan for a franchise, this does not guarantee they have made an exhaustive check into the franchise and are satisfied about its financial stability, business history, track record of directors and existing franchise owners’.

Tip 8: Read the small print

The franchise contract, as the basis for your franchised ‘business marriage’, will be the single most important document you will have to deal with. It must be studied point by point before any purchase decision is made – and it is not something that should be attempted without a lawyer.

Most franchise contracts are drawn up with the odds heavily weighted in favour of the franchisor, so you need to go through the small print with a fine-toothed comb to find out about any restrictive clauses, renewal fees and what happens in the event of a dispute. The legal fee incurred in analysing a franchise contract is one of the best investments you can make as a franchise owner.

Whatever you do, avoid trying to interpret a franchise contract yourself – and be careful in how you select your solicitor – they could be good for your money, or could cost you more than needs to be spent.

Tip 9: Think ahead

When investing anything from £10,000 upwards into a franchise, you should be prepared to budget for a reasonable percentage of that figure to have your prospective franchise checked out.

Allow a period of around six months for the actual search and budget for an average expenditure of around £1,500 maximum. This can comprise elements such as buying franchise publications, attending exhibitions; telephone calls to franchisors and their franchise owners, travelling cost, plus enlisting professionals for their advice and guidance.

Spending a few hundred now to check a franchise that could lose you your life’s savings is not a bad investment.

Tip 10: The horse’s mouth

Spend time with existing franchise owners and find out whether the model works in practice and if the franchisor is true to its promises about training, support, product, market and earnings potential. Should the franchisor refuse to hand over a list of franchise owners, walk away.

A broad cross-section of franchise owners is advisable – grumpy ones could be concealing a bad attitude to hard work or a personal incompatibility with the franchisor.

Enthusiastic ones may make it all sound simple, not realising they have an easy territory – or benefitted from a franchisor’s early ability to offer a level of support, which is now beyond its reach within an enlarged network.

Distinguish between long-term and recent franchise owners and evaluate their input accordingly. So put plenty of time and effort into talking to existing franchise owners – the horse’s mouth should give you one of the best insights into your intended company.