Sarah Robertson, group operations director at TaxAssist Accountants, explains what to ask a franchisor before deciding to join the network
Trust is key to any business and before investing time and money into a franchise, you must be satisfied your franchisor is being open and honest with you when answering your questions.
One of the best ways to begin your research is to call the franchisor and see if there’s a rapport between you. An informal chat on the phone will give you a better insight into what operating the franchise entails and whether it matches your aspirations and skills.
If you like what you’ve heard, your next step should be to attend a discovery day, as this will give you the chance to pursue a more involved line of questioning.
Any reputable franchisor will be delighted to receive probing questions, as it will give them - and you - a chance to see and hear firsthand their enthusiasm for their business model and their interest in you.
The franchisor will be impressed if you have already carried out a certain amount of research before your visit and know about the franchise’s history, its business model and their ideal franchisee profile.
Ideally, you will come away from the discovery day with a full understanding of what is expected of you to successfully run your own business. Remember, you’re investing in a franchise’s proven model, but it will be up to you to put in the hours and effort to establish it.
To help you better comprehend those crucial early days, you need to be aware of what the operating hours will be and whether there are any specific premises/ equipment requirements.
You need to ensure you go into the franchise well funded - the initial franchise fee will only form part of the money required. You will need to factor in working capital and living costs while you’re building the business in the early days, as well as staffing costs and ongoing fees to the franchisor, such as management service fees.
Request a breakdown of what is included in the franchise fee and, to give you a better understanding of the potential, ask for the franchise network’s performance figures, how long it takes to break even and any payback points. You should also ask about any franchisee failures.
To help you carry out your research thoroughly, request contact details for all franchisees and be wary of a franchisor that only allows you to have contact details for a select few franchisees to call.
You should always ask your accountant or bank manager to check any figures, but bear in mind a go ahead from a financial professional is no assurance of success. They will merely be confirming the figures provided look okay on paper, not giving you their precise knowledge of all the risk factors involved with the franchise you’re interested in.
You should also ask to see details of the franchisor’s finances or obtain a bank reference. What are the company’s main sources of income? If it looks like the initial franchise investment fee, you should think again. A reputable franchisor’s incentive should be to earn from the ongoing success of its franchisees, not the sale of licences for its business model.
Value for money
A management service fee is usually a percentage of your turnover or profits, so scrutinise how this will affect the profits in any financial forecasts. The fee should cover ongoing franchisor support, so see if the promised level of support you will receive sounds like a good deal.
For instance, some franchisors help generate initial business for their franchisees and provide business from day one. Alternatively, the franchisor may take total control of this process, providing franchisees with a constant flow of business, so they can concentrate on providing the service.
Marketing is an important part of a franchise’s success and it’s quite simple to check if a franchisor delivers what they promise, as there will be a certain level of brand recognition. Even if you may not have previously heard of a company before looking at franchising, one of your friends or colleagues should have.
A good franchisor will provide not only initial training, but ongoing courses, so that the network remains up to date with any legislation or professional changes.
Be sure to check whether the training includes any staff you may employ as your business grows. You will also need to know if the franchisor requires all staff to be trained by the head office or support centre and, if so, how much of this cost you are expected to meet.
Other franchisors may want you to train your own staff, so you’ll need to know if all the course material is included in the initial franchisee training and manuals.
Their answers to your questions are likely to inform most of your decision making, but make sure you speak to a range of franchisees, as their feedback on the realities of running the franchise will be invaluable and confirm what the franchisor has told you.
Ultimately, no matter how good the business opportunity appears, you need to feel comfortable with the directors and key members of staff of the franchise, as they will be key to the success of your franchise.
Never be afraid to ask tricky questions about the business, always scrutinise the answers you receive carefully and don’t be rushed into making any decisions.
Check the small print
Before you sign on any dotted lines, make sure you receive a copy of the franchise agreement in advance, so you can have a lawyer affiliated with the British Franchise Association go through it with a finetooth comb and ensure any queries you have are satisfactorily answered.
It’s highly unlikely any clauses in the agreement will be changed, but there may still be questions you would like addressed.
At TaxAssist Accountants, we offer a standard franchise term of five years. Make sure you know how long you’re tied in to a franchise agreement and the terms for renewal. Ensure you understand the basis on which you can sell the business and any restrictions that may apply.