5 Top Tips For Researching A Franchise

Suzie Mccafferty, managing director of platinum wave, has some top tips for researching a franchise

There’s a lot more to due diligence these days than a quick check on Companies House to see if the franchise brand you’re interested in is solvent.

It was perhaps inevitable that the internet would become, among many brilliant things, the greatest source of gossip on the planet. Use this to your advantage and do your research on any franchise and franchisor you’re interested in. As with any gossip of course, you need to be mindful that not everything will be true and there are always at least two sides to any story.

USE YOUR JUDGEMENT

For example, if you find an old post on Facebook from an ex-franchisee lambasting their former franchisor, use your judgement. Is this an isolated case? Has the franchisor engaged in this war of words? Is this negative example outweighed by positive ones? If you’re worried about things you’ve read or heard, bring them up with the franchisor.

Make your own mind up about whether the information is marketing hype or genuine facts. Franchisors need to be careful these days about what financial projections are claimed. Any turnover or profit numbers need to be substantiated and based on actual results.

Likewise, any guarantees and buy-back deals need to be examined carefully, with special attention given to the small print terms and conditions. If it seems too good to be true, it probably is.

While not every franchise is a member of the British Franchise Association - and there are many excellent brands that are not - you can take comfort from the fact that those who are members have had their accounts scrutinised by experts in the industry to ensure they reflect the business’ finances accurately.

Buying a franchise is probably one of the largest investments you will make in your lifetime. You would not buy a house without getting a survey, so having a franchise checked out is vital. Get a copy of the franchise’s accounts from Companies House and see if the numbers stack up. Also, run a credit check on the business using one of the many commercially available services.

If finance is not your forte, get your accountant or solicitor to help you interpret the numbers. Preferably, you should appoint a specialist solicitor or accountant who understands franchising, as a high street solicitor is unlikely to have the in-depth knowledge required. Relevant contacts can be found on the bfa website.

EXISTING FRANCHISEES AND DISCOVERY DAYS

Speaking to existing franchisees is vital and any ethical franchisor should be happy to facilitate this. If not, ask yourself why. A franchisor should be willing to let you choose who to speak to, not someone who has been cherry picked to give a positive story.

No franchise system is ever perfect and franchisees will have one or two gripes to tell you about, but on balance the positives should outweigh the negatives. If anything sticks out as a problem, ask the franchisor to address it.

Attending a discovery day is a great way of getting to know more about the franchise. Franchises are built on relationships. You are normally signing up for a minimum of five years, so if after meeting at a discovery day you have doubts about the people, the model or both, it’s probably best to walk away.

FINANCIAL PROJECTIONS

I have spoken previously about financial projections. Get your financial adviser or accountant to go over these with a fine-tooth comb. Even with the best franchises, it can take some time to set up the business and start to generate revenues, so be realistic in terms of how much money you will need in the early stages to meet your business and personal needs.

In my experience, too many franchisees fail in the early years because of cash flow, not lack of business or customers. Make sure you have sufficient working capital and contingency funds to see you through the peaks and troughs.

The time to think about this is when you are borrowing funds to purchase the franchise. Banks will often lend up to 70 per cent of the franchise fee and working capital requirement, so make sure you get your borrowing requirements right first time - you don’t want to be going back cap in hand six months later.

LEGAL AGREEMENT

Every franchisee is required to sign a franchise agreement, yet it’s common knowledge that a franchisor will rarely if ever alter the terms of an agreement. Why then would you need a specialist franchise lawyer to review it if it can’t be changed?

The main reason is educational. As a franchisee, you need to know what your responsibilities and obligations are and a good franchise lawyer can explain this to you. What happens if halfway through the agreement you fall out with the franchisor? What if you want to sell the franchise early? If you break the terms of the agreement, can the franchisor close you down? You want to go into any legal agreement with your eyes wide open.

CHECK THE MARKET

Choosing the right franchise is very often common sense. It is vital to do your own market research into the business sector you are thinking about entering. The key thing to look for is sustainability. Will there still be a demand for this service 10 or 20 years down the line? If the franchise is in a niche market or is a passing fad, it may not offer the long-term prospects you require.

Whatever information you’re looking for, there are plenty of places to turn for help. Once you’re satisfied you have found out everything you need to know to make a decision, it comes down to a combination of heart and head. Everyone’s different of course, but I like to get both heart and head behind any major decisions I make. Good luck with yours.