How to buy a franchise
Manzoor Ishani, senior consultant solicitor with Sherrards, details the 10-stage process
Any prospective franchisee who seeks professional advice will be advised that once they’ve made one of the most important decisions in their life, which is whether to start a business, the next decision is almost equally important, which is what sort of business to go into.
Service or retail business?
There are pros and cons. If you’re the sort of person who doesn’t want to work anti-social hours, a retail business that operates during fixed hours would suit you better.
However, a retail operation that needs to operate from a fixed location requires taking on lease obligations, employing staff and carrying stock. On the other hand, if you’re in the service business, it’s quite likely that working fixed hours alone will not be sufficient.
Much, of course, depends on the type of service business. If you take a carpet cleaning business as an example, this will invariably mean working antisocial hours. On the other hand, you’re quite likely to be working from home with little or no need to pay rent or carry a large stock of products.
Decide how much you can afford
There is usually a choice of franchises in the same line of business and they don’t all cost the same. For example, there’s more than one carpet cleaning franchise available. Moreover, there are many service franchises available, so the logical thing to do is look at what’s available for sale in your price range.
Do your homework
Obtain as much detail from the franchisor as possible. Where the franchisor provides financial illustrations, study these carefully to satisfy yourself that the income shown satisfies your needs and requirements. However, bear in mind that they are only illustrations and may be optimistic.
While reviewing the information supplied by the franchisor, contact your bank manager if you think you’ll need a loan and discuss with them whether, in principle, the bank will lend you the money you require for the type of franchise you’re contemplating buying.
Most banks now operate fairly sophisticated information systems, whereby bank managers have access to a central office from which they can obtain detailed information about many franchises, which will enable them to make a decision.
Consult a solicitor, who’s experienced in franchising, to review the franchise agreement and advise you on it.
If you and your solicitor are satisfied with the agreement, consult your accountant for advice about the financial aspects of the franchise. By this time, you should have some idea of the sort of premises you’ll be occupying or your trading territory.
The franchisor may have produced some financial projections for your particular business. If not, your accountant will help you put together profit projections and, if necessary, a business plan in support of your loan application with your bank.
At this stage you’ll probably be asked to sign a franchise agreement. You should be guided by your solicitor as to the timing of signing the franchise agreement, which should be conditional on you securing satisfactory premises and a bank loan.
Where retail premises are involved, serious effort should be made at this stage to secure satisfactory premises and you should start talking to your franchisor about the details of converting the premises into a franchised outlet.
Finalising the lease
By this time your bank should have responded to your application for a loan. If the answer is ‘yes’, you’ll be in a position to push those involved into finalising the lease for the premises. It’s important that you do not enter into a binding commitment to take on premises until you have your bank’s agreement to the loan and you’ve signed the franchise agreement.
Conversion and training
Once you have completed the acquisition of the premises, you can commence converting the premises into a franchised outlet and going on the franchisor’s training course. After stage five, the sequence of events leading up to when you’re ready to open for business will vary, depending on the nature of the franchise and the level of support forthcoming from your prospective franchisor.
The important thing to remember is that there will come a time when you have to make three significant commitments to three different parties:
To the franchisor by signing a franchise agreement or an agreement to purchase a franchise. To your landlord by signing a lease or an agreement to take a lease of the premises or in the case of a mobile franchise, signing a lease, hire purchase or purchase agreement for a vehicle.
To the bank to take up the loan. Having selected a franchise you wish to buy, there are a number of matters to which you have to attend before you can open for business. What you need to do will depend on the nature of the business you’re contemplating.
The above is a general guide to the steps and the order in which they might be taken and should help you to complete the transaction more efficiently, both in terms of costs and in your time and effort.
Wherever possible, you should aim to synchronise these different transactions so that you undertake the three commitments simultaneously.
About the author
Manzoor Ishani has specialised in franchising for more than 40 years, is a former member of the legal committee of the British Franchise Association and is co-author of Franchising in the UK and Franchising in Europe.
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