Buying a franchise

A complicated and in many ways frustrating task, buying a franchise represents what in our opinion can be the most complicated decision of your life. The wrong purchase could mean the difference between ultimate success and bankruptcy, thus it is vital that you get the correct advice and guidance before you 'take the plunge'

However, with approximately 34,000 operating franchisees turning over £9.65 Billion in 2003 and almost 97% of franchisees being in profit after five years compared to 45% of other independent business, buying a franchise business in the UK still presents a fantastic opportunity to succeed when you go it alone. (Source: British Franchise Association).

There are many different considerations that you will need to cover when you are contemplating buying a UK franchise business. They are as follows:

How much does the franchise cost?

The initial franchise fee will of course be your first consideration, can you afford it, is the franchise opportunity worth the money, what do you get for your money, these should all be questions that you must ask before you even proceed with a first franchise meeting, but there are other fees which will need to be investigated and addressed by the franchisor.

For instance the royalty, or as we prefer to refer to it the franchise management fee, this is normally set between five and ten percent of your franchise businesses gross turnover, but can, dependant on the levels of support received from the franchisor, be a greater percentage or even a fixed fee dependant on the franchise.

Either way you must be careful not to accept a management fee that is too great, else you may not make any money from your franchise business at all.

Is the franchise business viable?

There are many definitions of what a viable business actually is. A true representation of this is often the previous trading history of the franchisor, or the 'Franchise Pilot Operation'.

If the franchise pilot operation has not been proven over a sustained period of time and the business method itself has not been tested in full you should seriously consider the viability of the proposition that is before you before buying a franchise.

In short you should always ask yourself this question.

'Can you honestly see that this franchise business will be a success for you in the territory that you want to trade in?'

Does the franchise company have a national brand or corporate image?

Think of the 'Big M' used by McDonalds, or the fluorescent colours used by Dyno-Rod, you should be looking to purchase a franchise from a company that shares a similar strength of brand.

This brand should be continued and reiterated in all stationery, shop signage, vehicles, marketing and advertising to ensure that your target market as a trading business can relate between you and the national brand you have bought into. This way you stand a better chance of your customers being more likely to come to you instead of your local competitors.

For instance, if two McDonalds opened for business in the same street, one in the traditional, worldwide brand image, the other fitted out in bright pink colours. which one would you choose to buy your burger from?

How successful has the franchise business been?

In relation to the question of viability you must question the franchisor's previous success in business.

This can be done in many ways, such as checking the company's trading history, for example, how long has the business been trading, what increases in turnover are shown since the company opened for business, has the company relocated to bigger premises and even how many staff does the company now employ in relation to its original set up.

Each of these points will assist you in assessing the success of the franchise company, however, it is always advisable to check the franchise company's trading accounts where and when they are available, or at least question the plausibility of any cash flow or income projections that have been provided by the franchisor.

How do the products and services offered by the company compare in the market place?

You must imagine yourself opening for business within a highly competitive market place, because unless the opportunity is positioned within a niche market that is exactly what you will be doing.

In order to succeed in a competitive market you must be able to offer products and services that are competitively priced in the current market place.

For example, you open a chocolate shop franchise, but all of your chocolates are almost double the price of your nearest competitor, unless your chocolates are of a supreme quality you simply will not be in a position to compete.

To avoid this you must research the market as deeply as possible, you must visit your franchisors competition or in the least make enquiries about their products, services and most importantly their pricing.

This said, it is always important to consider the franchise company's services against those of your competitors in terms of quality, standards, delivery and ongoing 'after sales' support and services. To help you with this we provide the following examples:

You purchase a restaurant franchise, you offer waiter/waitress service, licensed premises, good wine and excellent food, just down the road from your new restaurant is a 'greasy spoon' café, offering all day breakfasts at a fraction of your prices, clearly there is little or no comparison between the two businesses.

You purchase a photocopier supply and service franchise, you offer a massive array of after sale 'value added' services and attempt to build long term relationships with your clients. In one quotation you are up against a sales only or 'box shifting' competitor, they are cheaper than you, but offer no service or after sales care.

Once again there is little comparison because the choice goes with the client, do they just want to buy cheap and run the risk of it all going wrong, or do they pay a little more and ensure the machine will always be supported.

What supporting financial information has the franchisor provided?

In most cases a franchisor will present the prospect (potential franchisee) with cash flow or income projections.

It is important that you understand that almost every projection will be for 'Illustration purposes only' and thus should be viewed with a sceptical eye.

Ask how the projections have been created by the franchise business and what opinions have been reflected in the figures that have been provided. For instance, if a pilot operation has only been trading for one year, but you are presented with a two year cash flow it is obvious that year two has been created from the unproven projections of the company itself, this is an opinion of what you may be able to achieve as a franchisee.

The best examples of projections will show the proven figures generated by the franchise pilot operation over the course of its trading history. It should allow for slight reductions in those figures, given that a new franchisee will have a distinct lack of experience in the franchise business and as a final thought an excellent projection will show not just cash flow, but profit and loss and sales receipts on separate spread sheets.

What track record does a franchisor have of franchising its business?

The majority of franchise opportunities that you make enquiries into will already have franchises set up and trading, however a minority may have only just started franchising themselves.

If the franchisor has been franchising for some time it is recommended that you research the number of trading franchisees and their locations prior to attending a meeting with the franchisor, however, it is important that you realise each of these existing franchisees businesses are their livelihoods and the interruption of you contacting them for a reference may cost them dearly.

Therefore, after you have attended a meeting with the franchisor and decided to proceed with the opportunity you should request a point of reference from the franchisor so that you may discuss the opportunity, if the franchisor does not or cannot provide the contact details of an existing franchisee, start to worry.

In the case of a franchise company that has only just launched its franchise opportunity it is not always possible to benefit from the references of others. Whilst you must consider the plausibility of the opportunity far closer it can often be advantageous to join a franchise network that is in its early stages of development.

To start with you will benefit from the cheaper initial franchise fee offered by franchisor's when thy are attempting to entice their first few franchisees, but you may also benefit from a much closer working relationship with the franchise company, remember that at this stage the franchisor needs you just as much as you need them, you will be used as a reference to others thus the franchisor will do everything in its power to ensure your success.

Either way, this is an important consideration; you must lend much time to it in order that you make the right decision.

Is the franchisor a member of a franchise association?

Good franchise companies will strive to become a member of a franchise association and in turn will act in accordance with any relative guidance or membership criteria.

The majority of countries that actively promote franchising will now have some form of franchise association, in Canada the Canadian Franchise Association oversees a number of franchise operations offering various services and guidance.

Franchise UK is specifically aimed at franchising in the United Kingdom therefore the British Franchise Association is our main point of focus.

The British Franchise Association or BFA have many stringent policies in place for every one of their franchise members, involved in these policies are the associations criteria for membership, these differ for the associations provisional, associate and full members but in the main cover such items as the viability of a business, and its compliance with the European Code of Ethics for franchising.

To a potential franchisee, a BFA member presents a good and viable franchise opportunity and therefore will provide a good basis to proceed with the opportunity.

This is not to say that non members are any less viable but you should always question why the company is not yet a member of the British Franchise Association.

What training and support is provided by the franchisor?

Quite simply, the training and support that is given to you will be fundamental in the operation of your franchise business. Without the correct guidance you may run the risk of failure.

With this in mind we would recommend you consider the following:

How long is the initial or franchise induction training course?

In your opinion does the length of the franchise training course provide enough time to learn the business methods?

What are the contents of the initial franchise training course?

Do you feel that the contents of the initial training relate directly to the operation of your business?

What learning material will you be provided with during the franchise training course?

Are you permitted to retain this material after the course has finished?

Does the franchisor offer any form of ongoing development program to ensure your knowledge stays with you after the course has ended?

Are refresher courses available to you?

What other training and development is offered by the franchisor?

Does the franchisor extend ample support to its network to enable any efficient answering of your questions or queries?

Does the franchisor continue to operate the franchise pilot operation so that new incentives can be tested before their release to your business?

Does the franchisor, and its support team have an accurate knowledge of the franchise business to provide information to you as and when it is required?

What system does the franchisor have in place to handle disputes and complaints?

What does the franchise agreement contain?

Even the largest of franchise companies will rely heavily on its franchise agreement, aside from the European Code of Ethics and the recommendations of franchise associations such as the BFA, the franchise agreement represents the one true legal document between the franchisor and the franchisee.

A breach of the terms laid out in this agreement could result in either party pursuing the other for damages or indeed termination of the franchise operation itself.

Therefore it is vital that you check and understand your obligations under this document and comply with them at all times, if you do not understand or are unsure of the meaning of any clause of the agreement you should raise a query with the franchisor prior to completing your purchase of the franchise.

In short get legal advice from a qualified solicitor or consultant.

Is a Franchise Operating Manual provided by the franchisor?

Regardless of its format, whether on line, downloadable, or in hard copy it is Franchise UK 's opinion that every business format franchise should provide an operating manual to its franchisees.

Not only does an operating manual provide information and guidance on the business and method it will, in may cases, form a fundamental tie with your franchise agreement and on occasions these ties, if ignored, can be deemed as a breach of the entire agreement by a franchisor.

In keeping with this, you must remember that a franchisee's operating manual contains far greater content and more important information than, say an employee's manual. Therefore it is not a case that you read it when you can, you read it immediately, then re-read it to make sure your understanding of its content is good and full.

What franchise pack will you received when you become a franchisee?

Yet another important consideration when purchasing a franchise, is what exactly will you get for your investment?

The actual answer to this is difficult to say, not the least because the benefits of any franchise pack will depend on your chosen industry. For example, if you are buying a gardening franchise an industrial lawnmower will be a major advantage, or in the case of a cartridge refill company the cartridge refill machine and kit would save you considerable expense and enable you to operate your business immediately.

On the other hand if you are opening a computer franchise and can purchase such stock at trade, the supply of a PC and Monitor as part of your initial pack may almost be pointless.

In truth you should be looking at how the franchisor invests into the launch of your franchise business, the marketing they will carry out for you, and the training you will be provided with. These will help you to operate the franchise to your full ability and help to ensure new business and turnover from day one.

What are the terms of resale and renewal of the franchise?

Of course this is probably not the first thought on the mind of a potential franchisee, however you should lend some thought to it before you decide to proceed.

In some cases a franchise business may not actually be under your full control, the franchisor may retain rights to customers and contracts or may even retain an ongoing interest in your generated revenue or capital appreciation.

Where this or other such appreciations are evident you must ask whether or not this franchise business is yours, or if you are simply a glorified salesperson.

You should find out what terms the franchisor has for resale, for instance, can you sell on your franchise and solely benefit from the proceeds of sale?

Equally you should discuss renewal of your franchise agreement with the franchisor, are you actually permitted to renew the franchise agreement at the end of each term, and if you are, how much will it cost you to do so?

Do you have ample funds in place to support the business?

This is vital to the success of your business and you must keep in mind that any realistic business will not be in profit until at least its second year of trading. It is because of this true fact that you will need to ensure the business is adequately funded to support any loss that it may incur.

Many businesses have been forced into liquidation because of a simple lack of funds to pay its creditors.

Therefore you must plan your business finances carefully, make sure that you have additional funds to provide your business with working capital and where possible you should arrange additional sources of funding just in case your business needs to draw on it in the future.

What financial support is available from the franchisor?

It is often, and quite sadly the case that the answer to this is none. But a good franchisor should, in our opinion offer support with funding proposals, sources of lending and the weight as a company to assist you with any business funding proposals.

On some occasions a franchisor may offer their own funding, lease back on equipment or even a business contingency plan, which in many cases adds an immense amount of value to the overall franchise business proposition.

What franchise territory can you trade in?

Contrary to popular opinion the size of a franchise territory does not always matter, it is truly dependant on the type of business you are choosing to purchase.

If you are choosing a restaurant franchise and any advertising and marketing is conducted centrally by the franchisor you may not be granted and in reality probably do not need an actual franchise territory.

But, if you are operating an outbound sales franchise you will need a decent size franchise territory to trade within, this is simply to ensure that you have ample prospects to support your business.

The second consideration of your franchise territory is the geography of the area and your general knowledge of it. For instance you live in Central London but the only available territory is in Bromley, is the time spent commuting to and from your own business really making sense, coupled with this is also your knowledge of Bromley and the target market within it.

Can I actually do the job?

The most important factor of all, which in truth only you can decide.

If you have spent all of your life working as an IT Engineer and are considering a franchise in direct sales you must ask yourself if you are going to be able to successfully sell products and services from day one, if you do not feel you can, and the training and support from the franchisor does not look to be helpful in these areas you may need to look for another opportunity.

Once these and any other considerations have been dealt with it is simply a case of confidence. If you do not feel confident about any aspect of the business and the franchisor cannot or does not provide a simple resolution to your queries you should look elsewhere.

The process of buying a franchise business

Many different companies will use an array of tactics to encourage you to join their franchise network but for the franchisee the process will remain similar regardless of the company's size or structure:

  1. Research the franchise opportunities that you are interested in.
  2. Enquire to the franchises that interest you and request more information.
  3. Assess the viability of the proposition based on your skills, abilities, available territories, financial position and ultimately whether you wish to open your business in the industry.
  4. Apply for an interview with the franchisor.
  5. If you have not already done so at the initial meeting request to see the set up of another franchise outlet.
  6. Request to speak to an existing franchisee.
  7. Complete your research and ensure you get a professional opinion of the franchise agreement and your obligations under it.
  8. Secure the territory and complete the purchase of your new franchise business.

To see how Franchise UK can help you choose and operate your franchise business see "click here".

 

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