Mark Scott, director of franchise development at NatWest, offers some tips for researching a franchise and securing start-up funding
Are you considering a new career direction? If you’re thinking about setting up in business, franchising could offer you a solution.
However, just being part of a highly recognisable brand isn’t a formula for success on its own, as all franchisees must be committed to their business and have the desire and enthusiasm to make it a success.
Size of the market
According to the latest NatWest/ British Franchise Association survey, which found the industry has grown 10 per cent in the last two years and just under 50 per cent in the last 10, there are now over 900 different franchises from which to choose and clearly not all will be recognised brands.
It’s therefore important that if you’re looking to buy a franchise, thorough research is undertaken into the business before signing any legal agreement or making a financial commitment.
You must satisfy yourself that your chosen franchise is a proven, well established concern with a track record of success and satisfied, successful franchisees. To find out if the current franchisees are satisfied with the support provided, obtain a full list of them from the franchisor.
The named list should match the number of franchisees the franchisor states it has. Any less and it may be providing you with a list of the satisfied, or good performing, franchisees only.
When you have the list, speak to as many franchisees as possible to gauge what they think about the franchise and the support they receive from the franchisor. It’s also a good idea to visit some of the franchisee to get a better understanding of the way the business operates. This is particularly valid when buying a retail franchise.
This is not possible with a new franchise, particularly if you are the first franchisee. In this case, you must satisfy yourself that the franchise has been piloted and the results provided to you. The franchisor should also have, or used, people with experience in establishing a new franchise.
Always seek appropriate professional advice, including from a suitably experienced solicitor and preferably one who is affiliated to the British Franchise Association, who will be able to explain the clauses in the legal agreement to you.
It’s unlikely the franchisor will amend any of the clauses, but you should be aware of the implications of them. To use an analogy, you wouldn’t buy a house without a survey, so don’t buy a franchise without having the legal agreement checked. The cost will typically be between £400-£500.
Assessing the franchisor’s financial stability will reveal whether it has sufficient funding to support the franchise network.
NatWest, the first bank in the UK to establish a dedicated franchise department, lends to franchisees through a network of accredited franchise managers, who are based in local branches and business centres across the UK. They have a detailed understanding of franchising and mix this with an understanding of the location in which they operate.
When dealing with a potential franchisee, a franchise manager will want to know not only which franchise you want to purchase, but details about yourself, as it’s the individual and not the specific franchise that we assess. This is because your success will be determined by your commitment and enthusiasm.
Banks will typically lend up to 70 per cent of the total start-up costs of a franchise, although this may be nearer to 50 per cent for a less established concept. In view of the likely amount required, security, such as a second mortgage on your home, may be required. This will be discussed with you during a detailed meeting.
Before we are willing to lend, a business plan will be required and should include details about the franchise, the costs, the sector it operates in, competition, your CV, your assets and liabilities and projected financial information. If you’re buying an existing franchise, we would like to see the actual financial performance; the last three years would be helpful.
Many franchisors will assist in completing a business plan. However our area franchise managers will expect you to know and understand the various statements and financial figures it contains, as there will undoubtedly be questions about parts of your plan.
The financial information, particularly the forecasts, will help you to assess the performance of the franchise in the early months.
It should be noted that a bank will not warrant, endorse or recommend a franchise. The decision as to which franchise to buy is left to individuals, who should undertake thorough research into the business.