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6 Questions You Need To Answer Before Investing In A Franchise

6 Questions You Need To Answer Before Investing In A Franchise

Matt O’Neil, Head of Recruitment at Expense Reduction Analysts UK, reveals the questions you need to answer before investing in a franchise

With nearly 1,000 franchise brands in the UK and Ireland, purchasing a franchise can be confusing at the best of times. So how do you choose the right one?

There are six recurring principles that need to be addressed before you buy the business you feel is right for you. You should be able to answer yes to all of these before parting with your hard earned cash and investing it in a franchise.

Does the franchise have a strong and recognisable brand?

When you buy into a trusted brand, you stop saying “I” and start saying “we”, as you immediately become part of that brand family. Contrast this with starting your own business. It can take years for people to know who you are, where you’re based and even longer to build a history of testimonials and brand credibility with your client base.

Joining a trusted franchise brand will give you instant brand strength, awareness and kudos. All the franchisor’s good news stories become your good news stories. You inherit all that history and instant brand credibility, rather than having to reinvent the wheel yourself. That’s the power of the brand and it’s worth its weight in gold.

Can you follow a proven formula?

The British Franchise Association and banks advocate that franchising is all about following the model the franchisor has put in place. This is important, as one of the two main reasons franchisees fail is that they don’t follow the franchisor’s formula for success.

The franchisor will have based the model on an existing tried and tested business that has its own trading history, set of accounts, VAT returns and established processes. These procedures should be recorded in manuals, so that this know-how or intellectual property can be transferred to you, the franchisee. You then need to apply the principles of the business model, along with training from the franchisor, and plug them into the territory you plan to operate the business in.

Just like baking the perfect cake, the franchisor has established a successful recipe. All you need to do is use the same ingredients and cook them for the correct amount of time on the right heat and you will have a successful end product.

The franchisor has established and built an existing business, ironing out the wrinkles and any issues that crop up. The business system has been recorded in the manuals and training programme run by the franchisor. If you follow the system and add the magic ingredient - hard work - you too should be successful.

What you shouldn’t do is buy a franchise and start telling the franchisor what to do, that you know better or, worse still, start doing your own thing. Remember, the franchisor has developed a brand and will want you to comply with the business system associated with that brand. If you don’t like following a system, don’t buy a franchise.

Is there an established market for the products and services?

This sounds like I’m stating the obvious, but you will be amazed by the amount of people who can be impressed by a big stand at a franchise exhibition, glossy brochures and pictures of actors and models who are paid to look excited about a new business opportunity.

Or a prospectus containing tables of figures, cash flow projections and carefully worded disclaimers that may be based on some truth, but not necessarily the whole story.

You must satisfy yourself that the business you are buying into has an established marketplace. It may have a great market in America - or whatever country the master franchise is based in - but will this be the case in the UK? You could be the first to bring a new concept into the country and make a fortune, but there is also the risk that the demand for the product or service may not transfer.

This may be a risk worth taking for someone who can afford to lose money if it doesn’t work out, but ask yourself:

• Can you afford to gamble your life savings?

• Is demand for the business you are buying into based on a densely populated city only?

• Will it work for you in the location you live, particularly if you live in a provincial seaside town or area of natural beauty filled with fresh air and sheep.

How can you follow a tried and tested formula if there isn’t one to follow? A safe bet may be to stick with a proven business system with proven, established markets that can be backed up by facts and figures verified by existing franchisees.

Agreed, someone has to be the first franchisee of a new concept, but are you prepared to take that risk? If so, I would suggest leveraging that risk by negotiating a lower entry fee and smaller investment and extra support as the foundation franchisee.

Can you afford it?

Don’t get carried away by a business you think has been designed just for you that’s £20,000-£40,000 more than you can afford.

Will the franchisor reduce the price? Ethical franchisors rarely, if ever, reduce the franchise fee. They want all their franchisees to start on a level playing field. Doing bespoke deals only causes the franchisor grief and disunity in its network.

The franchise fee should generally recover the cost of recruiting the franchisee, a license fee to trade and the rest should be reinvested back into the launch of your new business. Ask yourself: what part of the support package do I not want to receive? The answer should be that you want the entire support package.

Decide what you can afford before you start looking. This will help you avoid overstretching yourself and enable you to choose the business that will suit your pocket.

Remember, the second most common reason why franchisees fail is because they come into business underfunded. In other words, they can afford to buy the business, but can’t afford to run the business and still be in business 12 months later.

It’s important to establish what the true cost of starting the business is. As well as the initial franchise fee, have you taken into account legal fees, premises and working capital (the money you will need to run your business before you start making a profit)? How long will it be before you can start to draw a wage from the business? What are you going to live on during the start-up phase?

Speaking with other franchisees of the same business will help you understand how much money they needed and how long it was before they started making a profit or drawing a wage. You will get a number of different answers, so speak to as many as you can and you will get a good idea of what the average is.

Only once you have determined what the total set-up costs will be will you know the true level of investment required. Banks will generally lend up to 70 per cent of this figure, requiring a 30 per cent stake from you (depending on your circumstances and the track record of the franchisor you are evaluating) and proof from where this is coming from (ie, not another loan). There are various forms of funding available - most franchising banks publish what these are on their websites.

Will you earn enough from the franchise?

If you’ve answered yes to the previous four points, it’s time to determine what you will earn from the business.

It’s great if the business you are looking to invest in has a strong brand, a proven formula, an established marketplace and you have checked you can afford to buy into it. However, there’s little point in spending your life savings if the business will not produce the kind of income that’s in line with your needs, wants and aspirations.

There are three things you need to keep in mind:

• Your aspirations. Will you be happy with a man-and-van franchise earning £25,000-£40,000 per annum if you come from a white collar background earning a six-figure annual sum?

The lifestyle will be very different and may seem attractive, but in two years’ time when the novelty has worn off, will you become bored or find the business unchallenging? Worse still, it’s likely you’ll still be working as many hours as you were before, but for a lot less money.

There is nothing wrong with man-and-van franchises and many are quite lucrative. The point is, will the business produce for you financially and stimulate you mentally if that’s what you’re used to?

• Don’t believe your own hype. What makes you think you will achieve higher earnings than the existing franchisees if there is no evidence of this within the existing franchise network?

You may be talented and driven and take the business beyond what has been previously achieved, but common sense should prevail. It’s far better to base your business plan on what Mr Average is producing, rather than dream of what might be achieved when there is no current evidence to prove otherwise.

• Make sure you verify what the earnings are. This can only be done by speaking with a wide variety of franchisees of the same business you are looking to join. Don’t be taken in by the high earners. They may be few and far between or there could be other reasons why they are earning more, such as their location or time in the business.

Remember, you can learn just as much from someone who is not making it work as you can from those who are

Have you got what it takes?

Ask yourself:

• Can I see myself running this business? Do you have the acumen, determination and drive to run your own franchise? Is it the kind of business that’s suited to you and your background? Are you willing to get your hands dirty, roll up your sleeves and get involved?

If you’ve sat behind a desk for 25 years, is that realistic? Do you have the physical and mental stamina needed to run the type of business you are considering? Do you have the basics covered? For example, there’s no point considering a van-based franchise if you don’t have a driving licence.

Ask your partner, close friends and members of your family whether they can see you running this business. If they say no, you should listen to the reasons why.

• Do I have the support of my family? When you have a bad day, will your partner be supportive and remind you of all the positive reasons why you gave up working for someone else and help you to refocus. Or will they be negative and say: “I told you so”? The latter can be very demoralising.

It’s important you involve your partner in initial discussions, meetings and decision making, so they understand what’s involved and the commitment required by you. Make sure you have their full support.

• Do you have the motivation? The franchisor is providing a business format for you to follow, but won’t run the business for you. If you can’t get up in the mornings, don’t buy a bakery franchise where you need to start at 3am. If you want to spend weekends with your family and friends, a retail franchise may not be the best option, as they are usually open seven days a week. If you don’t like getting dirty, a business that involves cleaning bins or clearing drains won’t work for you either.

• Will you enjoy doing it? If you don’t enjoy doing something, you won’t do it for long. Picture where you want to be in five or 10 years’ time. It will help to focus your mind. Is the answer running the business you are about to buy?

Being your own boss can be great fun. Just make sure you consider each of the principles above carefully. All six points covered can and must be answered before you invest in a franchise.

 

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