Doing your homework before signing a franchise agreement

Given the commitment they are making, carrying out thorough due diligence is vital for any franchisee before they sign on the dotted line

Doing your homework before signing a franchise agreement

Typically franchise agreements are easy to get into but difficult to get out of. They usually involve a commitment of at least five years and will include restrictions that could impact on your future activities even a er the agreement ends. In light of this, it’s wise to do your homework and thoroughly investigate the franchise network before you sign.

Questions about the business model

When you purchase a franchise, you are essentially buying the recipe for operating a business, together with the training and support you need to help you put all of the ingredients together properly. This means it’s crucial that you choose a recipe for a successful business, not a damp squib. All the basic questions that apply to an independent startup apply to a franchise – questions about the product, market, competition and customer will all need to be answered.

In addition, you will need to satisfy yourself that the model has been fully proven. Ask how long the business has been operating as a franchise and check whether it has been tested in locations with similar demographics to the area you’re considering. A business that is successful in a busy, city-centre location won’t necessarily achieve the same results in a rural one.

Additionally, how robust is the demand for the products and services that the business offers? A franchise that specialises in selling Christmas crackers will clearly experience seasonal demand and the business model will need to be able to account for that. Similarly, if a product is the next big thing, how will the business respond when the subsequent next big thing comes along? Is demand for your product or service likely to continue for years to come?

Questions to ask about the franchise network

Franchisees’ fortunes are inextricably linked to those of the franchisor and the other members of the network. Franchisees will be relying on the franchisor to give them good advice about how to run the business, so it’s important that the franchisee knows who will be giving that advice and what their credentials are.

Knowing how many franchisees have joined or left a network can provide valuable clues as to the viability of the business. Naturally, warning flags will be raised if a significant number of franchisees have left in recent times unless the reasons for them leaving can be properly explained and justified. Most networks will expect some leavers each year as franchisees retire having, hopefully, made their money. However an unexplained or significant number of leavers may suggest that there are problems in the network.

Equally, be wary of a network that is growing too fast. If it’s taking on a significant number of franchisees in a short space of time this may point to a franchisor that is more interested in selling new franchises than it is in supporting the business owners it already has. In addition, if the number of franchisees is growing then the number of support staff at head office ought to be growing too, so ask about plans to recruit additional support staff

The finance bit

You will need to make sure that the maths adds up. This includes creating a business plan with a detailed cash flow forecast and pro t and loss projection. If the franchisor provides information to help with this, make sure you verify the figures independently. Be clear on how the figures that the franchisor is providing have been calculated and remember that much of this data will be estimates, not fact. It’s also often helpful to create multiple versions of the business plan, changing the figures each time. This will help you see how sensitive the bottom line is if, for example, costs turn out to be higher than anticipated or if you don’t achieve the level of sales you were hoping for.

Sources of information

The franchisor’s glossy recruitment literature will provide a good starting point but potential franchisees should never rely on this alone. Financial information in particular should be independently checked and verified. Additionally, a quick Google search will be helpful in seeing the sort of publicity that the network attracts – both good and bad. The network you choose ought to have a buzz about it for the right reasons.

One of the most valuable sources of information will be the other franchisees. So you should aim to speak to as much of the existing network as possible before you make your final decision. Reputable franchisors will give potential recruits a list of all franchisees in the network and invite the potential recruit to choose who they would like to speak to. Be wary if a franchisor will only let you speak to certain individuals or gives you a very short list of franchisees to call.

Plenty of fish in the sea

When it comes to franchising, there really are plenty of fish in the sea. Potential franchisees can and should be discerning when it comes to choosing their network and there are plenty of sources of information that are worth looking into. After all, putting effort and research into choosing the right opportunity for you could make all the difference between choosing the recipe for an impressive souffl√© or a plate of undercooked tripe.”

Kate Legg
Kate Legg