Buying a franchise? Make time for the scary part – Money and legals!

When you are first thinking about buying a franchise, it can be a daunting process

Buying a franchise? Make time for the scary part – Money and legals!

How can you make sure that you choose the right one, will you get the support you need to succeed? There are so many to choose from and although it is exciting to think about having a business of your own and taking control instead of working for someone else, it is also a huge leap into the unknown.

In my recent series of articles, we’ve looked at the following areas:

Ten Things you MUST do Before You Buy a Franchise –

Discover Your Ideal Franchise –

Do the Research! –

Now we need to look at the financials and the legals. Yes, I know, these are the scary parts you might want to skip but without understanding both, you will have much less chance of success.

Once you have done your research outlined in my previous article, you will be in a better position to prepare some projections for the first few years, including profit and loss and cash flow forecasts. You will need to present these forecasts to a bank to obtain any finance that you need to get started but you may find that your franchisor has templates to help you. At Revive! we have templates which help you to build a three-year profit and loss and cash flow forecast. The templates include the costs you are likely to incur and help you to understand how the business works and the timings for some of the costs and income, vital to help you understand the cash flow.

As you build your business plan, start by focusing on the projections for your sales and profits and make sure that you understand what they mean. If you are forecasting sales of, say, £150,000 in Year 1, how will you get there? How will sales come in on a daily/weekly/monthly basis, will your business bring in occasional large sales or daily small purchases? Do you need to factor in a few months of little or no income at the start? Can you fund your personal expenses until the business is strong enough to allow you to pay yourself a wage? 

This will vary depending on the type of business you will be operating and how quickly you will be able to find customers and build your sales. Some franchises need more working capital as it takes longer to make your first sale. You also might need to obtain premises which can increase costs and often take longer to be ready for launch day than you think. These factors will all have an impact.

Prepare a full list of your personal outgoings to show how much money you will need to take out of the business for your personal needs. What if the business is slow to build, how could you deal with that? Do you have any contingency funds if things don’t quite go to plan? Is this going to be your only source of income, or do you have a partner earning money to help support the household?

Even if you don’t need funding to start your franchise, you should still prepare a business plan and many franchisors will expect this as one of the stages of accepting you as a franchisee. The franchisor should be able to give you an idea of whether you are being realistic with your forecasts.

Make sure you understand the sales and profit figures, you should have an idea of how long the business should take to break even and become profitable. If you are going to a bank for funding, they will expect you to know what you are asking for and show that your new business should be able to repay the loan.

As well as understanding the finances, you should also familiarise yourself with the legal contract that you are going to sign to become a franchisee. It will often be 50 pages plus of legal clauses but as it sets out your obligations as well as telling you what the franchisor should be providing, it really is a vital document!

My strong advice is to pay for a British Franchise Association lawyer to review it for you and provide their detailed report about the various clauses so that you are fully aware of what you are signing up to. The report will often provide you with further questions to satisfy yourself about what could happen and your franchisor should be able to provide answers to help you understand the key issues.

Although the franchisor is highly unlikely to make any changes, as all the franchisees should be on the same agreement, you really need to understand what signing the contract is committing you to do (or not do, there will be some restrictions too).

Owning a franchise business can be a fantastic route to taking control of your future but like everything in life, it needs your full commitment.

If you have the grit and determination to build a business, alongside a franchisor who will guide and support you, you should have everything you need to be a successful franchisee!

Cathryn Hayes
Cathryn Hayes