Ask questions before you invest
If you’re planning on investing in a franchise, you need to be sure it’s the right one for you. The only way to find out is to ask some probing questions,
Common sense will take you a long way in deciding whether the franchise you are considering will prove right for you. However, if you arm yourself with the right questions, these will help you to evaluate a franchise and assist you in making an informed decision whether to invest.
The list of questions below is not exhaustive but it is a good starting point. I have also provided you with notes about what information you should expect to receive from the answers. However, always remember you’ll still need to rely on your own judgement before investing in a particular franchise.
- How long have you been franchising?
Think about the brand’s track record and the director’s background.
- What professional support have you had in developing your franchise?
Has the brand used British Franchise Association (bfa) affiliated consultants and lawyers?
- What is your financial strength?
Ask to see the brand’s financial accounts for the last three years. What capital has it invested and is the business profitable? Is the business financially sound?
- Who is the main competition?
Is the market developing? How competitive is it? Does the franchise have a competitive advantage or unique selling points? What market research did they do?
- How many franchise owners are there?
Speak to as many as you can as part of your research.
- What are your development plans?
Are there sufficient resources? How will they impact on your business?
- How is your head office organised?
Is this a well-organised and significant business and does it have the following departments – management, accounting, sales support and administration?
- Did you carry out any pilot operations?
If it’s a new franchise ask for proof of its success
- How many of your franchise owners have failed?
What lessons has the brand learned? Is it prepared to discuss these openly with you?
- How do you choose your franchise owners?
What skills and attributes are they looking for and how selective are they?
- Are you a member of the bfa?
If not, why?
- Can I take up references?
Ask for a reference from a bank or other reliable sources.
Costs and projections
- How much does the franchise cost in total?
What is included in the package and how much working capital will be required? Is there any additional expenditure? Is it value for money?
- What are the ongoing charges?
Management service fee, mark up on goods or services, advertising levy, any other costs?
- What are the key financial ratios?
Look at the brand’s gross profit margin, typical overheads, projected net profit, stock turnover, debtor days and break-even figure. Are they realistic?
- Can I see actual trading figures from existing franchise owners?
Do these confirm that your projections are achievable?
- Are there any financial arrangements I should know about?
Vehicle and equipment leasing, supplier terms, national accounts, requirements to replace equipment or refurbish premises.
- Is there a minimum performance requirement?
What happens if you don’t achieve it? Is it achievable?
- Is the business seasonal?
When is the best time of the year to start trading?
- Can I choose alternative suppliers?
Am I obliged to buy goods from your nominated suppliers? Are there minimum order levels?
- Do you allocate exclusive territories?
How many potential customers do you have in your area? How big is your territory? Does the proposed area suit you? What restrictions are there?
- For how long is the initial franchise licence granted?
Is it renewable? Is there a fee payable on renewal? What happens at the end of the term?
- What restrictions will there be when I sell the business?
What penalties are there if you terminate the agreement? Are these terms acceptable?
- What marketing programme do you have?
What are your and the franchisors obligations?
- What training is provided?
Consider both initial and ongoing training. Who pays for it? Is it classroom or field-based training?
- What support do you provide prior to the business launch?
Will you get help with site selection, lease negotiation, design, refurbishment, equipment, vehicles, staff recruitment and stock? What launch support can you expect?
- What ongoing support do you provide?
Who will be you main point of contact? Are there regular review meetings and field visits?
- What support is available if you run into difficulties?
Has the franchisor got past experience of successfully supporting other franchise owners with problems?
- How often does the network get together?
Are there regular meetings and conferences where you can share best practices and get advice from other franchise owners?
- Can I meet your head office team?
What experience do they have and will they be able to support you to grow your business?
Franchising – you decide
Of course, franchising is not right for everyone. For people who value independence or want to run a business without restrictions or to re-invent the wheel, franchising might not be the right option. Anyone considering investing in a franchise must be prepared to ask some probing questions of the franchisor.
Their responses will assist you in deciding whether the franchise is right for you.
If they only seem interested in taking your money and not supporting you developing your own business, you should be prepared to walk away. You must be 100 per cent comfortable with the proposed investment. You are looking for a franchisor that is passionate about supporting you to build a successful franchised business, which will be beneficial to both parties.
The franchise relationship must be based upon mutual trust and respect. The franchisor provides support and motivation to their network of franchise owners and, in turn, benefits from their ultimate success through a share of the income. Running your own business requires self-motivation; stamina and you’ll also need the ability to stick at it in adversity. At the same time, you must be prepared to accept the franchisor’s rules for their business system. Be honest – will franchising be right for you?
Ask yourself the following
Are your goals realistic and attainable?
Do you have the drive, tenacity and self-discipline to succeed?
Can you develop and sustain relationships with a wide range of people?
Do you have the full support of your family?
Is the price right and will it deliver the returns you need?
Are you up for the challenge?
Walt Disney once said: “Disneyland is a work of love. We didn’t go into Disneyland just with the idea of making money.”
While your financial realities are fundamental, anyone investing their hard-earned savings, as well as energy and commitment into a franchise must take pleasure in what they do. You will have a far better chance of success if you actually enjoy what you are doing. That’s what will give you the drive to get out of bed on a cold winter morning with enthusiasm and passion ready to face the working day ahead. After all it was Tiger Woods who said: “I get to play golf for a living. What more can you ask for – getting paid for doing what you love.”
If you can’t see yourself with your arm up a U-bend trying to unblock a toilet then don’t buy a plumbing and drainage franchise.
Speak to existing franchise owners
Most franchise brands that have been operating for some time will have had some franchise owners who have failed. It is important for you to understand what lessons have been learned. As part of your research, speak to as many existing franchise owners as possible. It is likely that the franchisor will want to manage that process – and that is fine, but don’t let them cherry pick who you speak to. You should try to speak to a selection of franchise owners including some of the best and worst performers.
You may also wish to speak to someone who has recently established their business – they will have gone through the same process as you very recently so their experience will be invaluable. It’s also worth speaking to more established franchise owners who have gone past the start up stage. They will be able to point out some of the pitfalls to avoid and where you can expect your own business to be in a few years time.
The British Franchise Association runs exhibitions and seminars that provide an invaluable insight into franchise investment. Lloyds TSB sponsors a series of free evening educational seminars about the benefits and pitfalls of franchising across the UK, which are ‘must attend’ events for people starting on their franchising journey. For further details visit the www.franchise-seminars.biz website. The legal agreement should be checked and explained to you by an experienced franchise solicitor before signing. Lloyds TSB offers a franchise agreement review service, at a discounted rate, in conjunction with an experienced franchise solicitor. Banks with specialist franchise departments, such as
Lloyds TSB are a good place to get independent and impartial advice about your franchise options.
Richard Holden heads up the Lloyds Banking Group Franchise Unit and is an expert speaker at exhibitions and seminars. He also regularly contributes in the national and trade press. The Lloyds Banking Group has trained franchise managers based throughout the UK to offer support to both franchisors and franchise owners.
Written by Richard Holden of Lloyds TSB (pictured right)