8 Rules For Assessing A Franchise Opportunity
Andrew Pena, Managing Director of bfa affiliated law firm Cubism Law, examines 'Franchise Opportunities' – what's the best franchise for you and what should you be looking for?
Rule 1 – Check out the financial position of the franchisor
Surprisingly, and in many cases, an individual makes a decision to invest in a franchise without any real due diligence into the background of the company into which they are investing.
So, understand who you are dealing with and carry out a full search on the company you are proposing to do business with.
Rule 2 – Check out the people behind the franchisor
A franchisor is only as good as the people that run the business. So you need to understand who you are dealing with and their track record in franchising. You should ask for full CVs of all the key personnel and obtain appropriate references.
Rule 3 - Understand the business
A franchisor will always have a well considered presentation on its business and the benefits of its franchise. It is always best to prepare fully for that meeting with a list of key questions so that you can get a deeper understanding of the business.
These questions should aim to allow you to fully understand (1) their business and systems, (2) your role as a franchise owner, (3) how much time do you need to commit to the business, (4) the amount of your investment (including the working capital requirements), (5) your likely returns, (6) their current franchise base (including names and contact details), (7) the percentage of franchise owner failures/terminations and the average lifespan of each franchise.
Rule 4 – Understand the numbers
Many franchisors provide projections on the likely returns for the business. These should never be taken at face value. You should always question the numbers and understand the basis for the projections. The British Franchise Association’s (bfa) Code of Ethics requires an affiliated franchisor to show the basis for any projections and to state whether they are actual performance figures or average performance figures.
Rule 5 – Speak to the franchise base
The bfa’s Code of Ethics requires an affiliated franchisor to provide full details of all their franchise owners – including contact details, terminations and disputes. You should approach as many of these franchise owners as possible to get a more rounded view of the business and profitability.
Rule 6 – Get the Franchise Agreement checked out
The Franchise Agreement will govern your relationship with the franchisor so you need to be satisfied that it will properly protect your position as franchise owner. As a general rule, most Franchise Agreements are drafted in favour of the franchisor but you need to make sure that the clauses drafted allow you to ensure that the franchisor will meet the appropriate obligations. You need to go into the relationship with open eyes so always get your Franchise Agreement checked by a bfa affiliated lawyer.
Rule 7 – Get your business plan checked
Before committing, you should also speak to a financial specialist who can provide you with an independent view of the business opportunity. Is your business plan achievable and what will be your realistic net income (after all expenses) if you run the business.
Rule 8 – Think clearly not emotionally
Buying a franchise will always be a step into the unknown. The key is not to get caught up in the emotion and excitement of the purchase. Ensure you take the step consciously having fully and accurately investigated, analysed and tested (1) the quality of the opportunity presented and (2) your ability to run that type of business.