Carl Reader, director of d&t Chartered Accountants and Strategic Advisors, explains how to appraise a franchise
With a seemingly endless list of franchise opportunities, selecting the right one can often be a daunting task for any prospective franchisee. Having advised a large number of franchisees, here are the key points I believe all franchisees should think about before signing on the dotted line, presuming you have narrowed down your search to a specific sector:
Make sure you compare like with like
It might surprise you to hear that there are no standardised methods for franchisors to quote initial investment levels within their literature - one franchisor might just quote franchise fee, whereas another will quote total investment required.
Before disregarding any franchisor, make sure you obtain full details of exactly what the total investment level is, including any working capital required to cover the initial trading requirements. You should also consider whether the initial projected franchisee profits are sufficient to service your living requirements. If not, you need to consider this as part of your investment for the initial period of trade.
How stable is the franchisor?
Before investing in a franchise, you should make sure you do your due diligence on the franchisor. Does the franchisor have the backing of a large corporate or is it effectively a start-up in its own right? Is the franchisor itself profitable? Does the franchisor appear to have a solid support team?
How credible is the franchisor?
Related to the stability of the franchisor is its credibility. As there is no statutory regulation of franchisors, the onus is on you to perform your own due diligence in respect of the business opportunity offered. Is the franchisor a member of the British Franchise Association? If so, it has put its processes under external scrutiny and demonstrated a proven track record in franchising.
Get some feedback from existing franchisees
Often the best source of information on a franchisor comes from existing franchisees. Make sure you contact existing franchisees and find out a bit more about the reality of running a franchise. Many will be happy to share their experiences, both good and bad. It is important to contact a random sample. An ethical franchisor will suggest franchisees who entered the business in similar circumstances to you. However, there is always the risk of the franchisor only providing you with positive testimonials. Online research can also be performed, but bear in mind that people tend to only protest when there is something to protest about and anonymity can potentially lead to unscrupulous individuals attempting to undermine a competitor.
What is the unique selling point of the franchise?
In an ideal world, franchising should be a win-win arrangement, whereby the franchisee is more profitable than an independent would be and the franchisor achieves more than it would by running the operation as company owned.
In order for you to be more profitable than an independent, it is essential you understand the USP of the franchise. Does it have pre-existing brand penetration in the way high street chains such as McDonald’s and Costa Coffee have? Does it have a technology advantage that allows you to be more efficient? Does it take care of certain key business processes? Comparing the key factors in each franchise can demonstrate the value of each, which provides a useful guide to the suitability of the franchise.
Do you get along with the franchisor?
Let’s be honest, it comes down to this. If the finances stack up and the opportunity seems right, the main thing is then to consider whether you can work with the franchisor for the length of the agreement. A 10 year franchise agreement is longer than many marriages - if you approach the relationship in this way, you will be well on your way to making your franchise a success.
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