Key questions to make a franchise a success
Once you have identified a franchise opportunity that interests you and you have spoken to the brand's existing franchise owners, as the prospective franchise owner you you should then quiz the franchisor. Fraser McKay suggests some useful questions to ask
Your meetings with the franchisor before signing will be some of the most significant in your life. They give you the opportunity to put him or her in the 'hot seat', and dig deep into the realities of the franchise opportunity before you commit yourself to it.
Treat the franchisor like you would treat a date with a potential life partner - you don't want to make a bad impression but equally you do not want to end up tied to a franchise which doesn't tick all the right boxes for you.
This magazine's Franchise Checklist (page 130) will give you some idea of what to ask but in order to take your questioning further, consider the following points, and write down a list of what you need to ask before you arrive.
There are a number of areas where you need to get the franchisor to explain in detail 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 franchise owners been achieving?
- How long should it take the business to break even?
- How much working capital will you need?
Ideally you should request that your accountant or bank manager check these figures out, but a go-ahead from these people is no assurance of success. They are merely confirming the figures look OK on paper, not their precise knowledge of all the risk factors involved with your selected franchise opportunity.
You should also ask to see the franchisor's finances or obtain a bank reference. What are the company's main sources of income? 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 franchise owners, not the initial sale of licences.
This is earned through the management service fee - typically a percentage of your turnover or profits. However, examine closely how this affects the profits in the franchisor's financial forecasts. This levy pays for ongoing franchisor support, so compare it with the level of support you will be receiving and decide whether it represents a good deal.
If the franchisor is the sole supplier of the products, services or tools used by the franchise owner, find out how profitable this is and whether it is taken into account in the ongoing management service fee. Are the supplies priced above or below the market rate? The answer will significantly affect your competitiveness.
You should have a good idea of the role you will play in operating the franchise, specifically whether you will be required to be hands-on in delivering the service or taking a more managerial role. You must question yourself on whether this corresponds with your own ambitions, and then question the franchisor on the potential for you to step back from this if you see yourself expanding the business further down the line.
Many franchisors recognise this desire and offer the opportunity to expand the franchise licence after you have established a successful operation. This could enable you to increase your territory or even become an area development franchise owner and grant sub-franchise licences - in effect becoming a franchisor in your own area.
Most franchise brochures should provide you with some basic information about the franchisor, but make sure you fill in any gaps when you question them further.
- How long has the franchise company been established and what is the background of the founder?
- How long has the franchise company been posting profits?
- When did it begin franchising and how successful was the pilot?
- How many franchise owners are in operation?
- How fast is it growing and how many will complete the national network?
Is there an exclusive territory provided in the franchise contract? If so, how is it defined? Many franchisors use postcodes to define a territory, but check out how many potential customers are in your territory. Your franchisor may require you to conduct your own market research into your own market; certainly you should at least be doing some research to check the franchisor's figures. Do this before any agreement is made.
Also, check the exclusivity of your territory. Some franchisors offer a territory exclusive of other franchise owners, but leave open the possibility of opening a company-owned operation. It is best to go into the agreement aware of whether the franchisor is able to open a competing store in the same city at a future date.
Your initial training is likely to be included in the initial investment fee, but does that include staff training? If you are starting as a sole trader, you may begin taking on staff as your business expands. 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?
Alternatively, the franchisor may require you to train your own staff. If so, is this covered in the initial franchise owner training and manuals?
Initial and Ongoing Support
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 franchise owners and provide business from day one. Alternatively, the franchisor may take total control of the sales process, providing you with a constant flow of business and leaving you to concentrate on providing the service.
- Does the franchisor operate field support managers?
- Who will make on-site visits to your business to help you cope with any problems? How regular will the visits be, particularly in the early stages of the business?
Also, consider how easily available this support is in a crisis. Some franchisors provide their personal mobile number to every franchise owner, while others operate helplines.
Your peers in the franchise owner network can also provide support. How does the franchisor encourage this? Such initiatives as a franchise owner intranet, or regional and national franchise owner conferences are excellent methods of forging closer links within a franchise owner network.
Any business requires marketing and, as a franchise grows, it can begin national campaigns. This is one of the responsibilities of the franchisor and when it begins to conduct such campaigns, the cost will need to be absorbed by the franchise owner network, which benefits. If the franchisor is not already levying a national marketing fee, when does it plan to?
Alternatively, the franchisor may charge an administration fee on every national lead passed to you. Again you will need to take this into consideration in your own forward financial planning. Around 16 per cent of franchise owners polled in the 2010 bfa/NatWest Franchise Survey claimed their relationship with their franchisor is not satisfactory.
Of those 16 per cent, three quarters blamed lack of direct support, while two in five stated the "franchisor not keeping initial promises" or "lack of communication with the franchisor". A third claim that there is a lack of franchise brand marketing/promotion, while a quarter attribute unsatisfactory relationships to "personal reasons".