If you are considering buying a franchise you may have received lots of marketing material from franchisors who are keen for you to sign a franchise agreement. I have worked with many reputable and successful franchises over the years and know how much effort and resources are put into developing presentations and Discovery Days that showcase opportunities. I also know that buying a franchise inevitably means committing considerable funds, as well as several years of your life! This is why, when it comes to fulfilling your business goals, finding out exactly what an opportunity offers, in contrast to what the pitch promises, is vital.
I would advise not relying solely on marketing material and slick presentations supplied by recruitment teams. Franchise agreements clearly need in-depth scrutiny, but I feel that deserves a whole blog post of its own. In the meantime, here is my tick list of suggestions that I recommend potential franchisees work through…
Talk to existing franchisees
The recruitment team you are dealing with may recommend a couple of franchisees for you to speak with, which can be very useful, but do your research and try and reach out to a couple more. You could do a Google search to find out which franchises are in your area, check the website for franchise contact details, or see if there are any details in the media or on LinkedIn regarding new franchisees who have launched in the last year or so. Ideally try and talk to a cross-section such as a new franchisee, one who has been operating for a few years, and a long-term franchisee who may be considering their exit strategy. Here are some questions to ask:
- Did the financial projections you were shown match the reality of how your business operated in the first year or two?
- How long did it take before your business broke even and you could pay yourself a salary?
- Were there any unexpected costs after signing up?
- How have you found support you receive from Head Office?
- Do you think the monthly franchise support fee is worth the money?
- Are there good opportunities to network with other franchisees and share ideas?
- If you had the chance to join this franchise again, would you do it?
- Are there any other franchisees you recommend I speak with?
Do the numbers add up?
When it comes to financial forecasts, you may find that the data you receive refers to average annual turnover within the network. In my experience average turnover is not the most accurate indication of how the majority of franchisees are performing. This is because there could be a few high-flying franchisees in the network with huge turnovers that push the average figure up. Turnover for the majority of franchisees could paint a different picture. For this reason, ask to see details of the network’s turnover range rather than average. This will enable you to see what the top quarter of the network achieves, and how this compares to the bottom quarter. Ensure all franchisees, including those who have closed or sold up, are included in those annual turnover figures. This information will give a more accurate reflection of how the entire network is performing.
Build your own forecast
I would advise that potential franchisees do not base their decisions purely on financial forecasts supplied by the recruitment team. It is worth taking time to work out for yourself what your rent would be, staff salaries, start-up costs, predicted sales and your own salary. In addition, most new businesses need back up funds to help them through the first few months of trading, so ensure you have sufficient working capital to cover this.
New technology
When scrutinising a franchisor’s proposition AI can be a useful tool. It is possible to copy any financial projections you have been provided with into Claude or Chat GPT and ask what assumptions these numbers depend on. You can also ask AI what happens to profitability if sales were to come in at 20% below forecast or costs were to run 10% higher. Remember that AI is not infallible, so do not solely rely on this to obtain accurate predictions. There may also be confidentiality clauses that prohibit you from uploading the franchisor’s financial forecasts.
Once you have gathered all the additional financial information, collate it with the franchisor’s financial forecast and arrange to go over it in detail with your bank’s franchise team. It is likely that the bank may have previous experience of the brand and will be well-positioned to offer expert advice.
Key takeaways
- Do not rely solely on marketing material and presentations from franchise recruitment teams – speak directly to existing franchisees, not just those recommended by the franchisor.
- Ask existing franchisees whether financial projections matched reality in year one, how long it took to break even, and whether there were unexpected costs after signing.
- Ask to see the network’s turnover range rather than the average – including franchisees who have closed or sold up – and build your own forecast covering rent, salaries, start-up costs and working capital.
- AI can be a useful due diligence tool: ask it what assumptions a franchisor’s projections depend on and test what happens if sales fall 20% or costs rise 10% – but check for confidentiality clauses first and do not rely on it alone.
- Once you have gathered all additional financial information, collate it with the franchisor’s forecast and go over it in detail with your bank’s franchise team.
