Your New Year Franchising Resolution
The New Year approaches, it is a time for people to think about a fresh beginning and franchising offers more advantages including the backing of banks as Richard Holden explains
Getting out of the corporate rat race and starting their own business is an attractive option to many people. However, not everybody has a unique idea or a competitive advantage, so how can you succeed in running your own business when statistics tell the story that many fail?
Experts say franchising is generally regarded as a safer way into self employment as you will be investing in a tried, tested and proven business model and receive initial training and ongoing support. You would not receive these benefits starting up your own business independently.
It’s not hard to see why people choose franchising as their preferred route to setting up in business. Before you take the plunge, it is worth noting that not every franchise offers the same level of support so you’ll need to do your research and plenty of it. Despite all the warning signs, it is amazing how some people invest their hard earned savings in business opportunities that have little or no chance of ever delivering on what promises have been made in the sales pitch. Without thorough research any potential investor is leaving it to chance finding a franchise opportunity that will deliver the success they are looking for. But often dreams can turn into nightmares if you choose the wrong business opportunity, so don’t leave it to chance.
With the internet, information has never been so widely available to people looking to invest in a franchise. But how do you know that the information you are reviewing is truthful? There are no short cuts and detailed research is essential. Franchise exhibitions and seminars are also a valuable source of information for people considering their franchise options. Details of franchise exhibitions scheduled for 2011.
Banks with specialist franchise departments, such as Lloyds TSB, are another important source of information and free, impartial advice about your franchise development plans. It is natural for investors to desire the comfort of joining a well established franchise brand, which has operated and proven the sustainability of its business model and systems through the previous recession by the level of ongoing support they provide their franchise owner network. So a good starting point for a potential investor is to consider brands that have been around for several years and that have been accredited with membership to the British Franchise Association (bfa). You could broaden your search later if necessary.
Once you have reviewed the franchise information pack, arrange to attend an open day or meet up with the franchisor to learn more. Lloyds TSB has produced an invaluable guide for investors researching franchising, which sets out 30 key questions you should be asking a franchisor to help you make an informed decision about the investment. This guide is available free of charge to anyone on request from the bank’s franchise unit. Speak to as many existing franchise owners as possible to establish the level of support they have received from the franchisor and whether they have been able to achieve their start up financial projections.
With a series of carefully chosen questions you’ll be able to learn a lot about the viability of the franchise opportunity from the existing franchise owners. Don’t let the franchisor ‘cherry pick’ who you speak to; insist on a list of the entire network and you choose which franchise owners you wish to contact.
It is important that investors consider the legal implications and it is recommended that they seek professional advice before they sign on the dotted line. Get the franchise agreement independently checked and explained to you by an experienced franchise solicitor. The Lloyds Banking Group offers a franchise agreement review service in conjunction with a bfa-affiliated solicitor at a discounted rate.
Financial projections for the business are another vital assessment tool. Most franchisors will provide you with illustrations of possible trading performance, however, it is up to you to dig deeper. Find out what the financial projections are based upon and the assumptions that have been used. Do the figures reflect the average performance of existing franchise owners and if so are they regularly updated? Figures produced a couple of years ago before the recession may bear little resemblance to what franchise owners are likely to achieve now. You need to research the local market conditions when compiling your own projections and it is always prudent to get an experienced accountant to check them over before you present them to the bank.
The availability of finance is as critical to franchise owners as it is for any other business. Banks with a specialist Franchise Unit are the best place to look for financial support. These banks understand that well-established franchise opportunities with a proven track record over time offer investors a safer route into self employment. Consequently the bank will tend to lend more to a franchise owner than they would to someone starting up a new independent business.
The bank would generally expect a franchise owner to make a capital investment of at least 30 per cent of the total set up costs. For a less established franchise, the capital stake needed may be higher. Security may also be required by the lender and finance is subject to status and an assessment of your business plan. Banks have a wide range of finance options to help you get started. Loans are usually provided to purchase the business and its assets. Interest rates can be fixed or variable and capital repayment holidays can be arranged. Overdrafts provide flexible working capital support. Debtor and Asset Finance may also be options to discuss with the lender.
Many franchise owners will be presenting their business plan to a bank manager for the first time so it is essential that they prepare for that meeting. To emphasise this point, look at BBC’s Dragons’ Den programme. Many of the business owners present their pitch to the dragons so poorly that, from the outset, they stand little chance of securing the backing they are looking for. Expect the bank manager to challenge your business plan. The franchise owner should be able to confidently answer questions about the operational and financial aspects of their plan.
Running your own business will inevitably take a great deal of drive, commitment and enthusiasm if you wish to succeed. It’s not a step to take lightly, however, franchising may well be your route to building a successful future. Not everyone is cut out to run a franchise, so think things through carefully, get professional advice and when you explore your options, don’t leave any stone unturned. Lloyds TSB are running a series of free educational seminars throughout 2011 for people interested in discovering more about investing in a franchise opportunity.