Suki Dehal, franchise development manager at Lloyds Banking Group, explains what you need to think about before buying a franchise
Many people have seen the potential in franchising by investing in a wide range of different franchise models.
When looking at the latest industry statistics, figures show that franchising’s contribution to the UK economy currently stands at over £15 billion, which gives a good indication of the size and success of the industry.
However, before parting with your hard earned savings there are a number of considerations you should make to ensure the opportunity you’re researching will be right for you.
Total investment costs
Firstly, as a prospective investor you should always ensure you can afford the business before progressing too far. Franchisors will be able to advise you of the total investment costs, including the proposed working capital needed to set up the business.
Most banks that specialise in the franchise sector are able to support your purchase by lending between 50-70 per cent of these total costs, with the remainder needing to come from your own personal savings.
Not only this, but you should also ensure the business can continue to allow you to meet your personal household commitments in the first year or two without causing any pressure. Banks will review both business and personal finances to ensure there won’t be any issues and you should plan to have additional reserves in contingency in case of need.
Research is vital
Typically, when looking at different franchises there are numerous routes to view brands, including websites, posted prospectuses, discovery days and video conferencing. All these avenues allow you to understand more about how a model works and gives you an opportunity to speak with the franchisor directly.
Use these opportunities to ask challenging questions to ensure you’re comfortable with the ambitions of the business and the culture promoted by the franchisor.
Purchasing a franchise is a big decision, as it commits you for a set period of time. Therefore, it’s essential to make sure you don’t leave any stone unturned. Lloyds Bank has created a list of 30 key questions for you to ask franchisors and will help provide a checklist of all the key considerations you should factor into your decision making process.
When finding out about some of the 900-plus franchise brands that operate in the UK, you should ensure you have researched not only the operating model, but also competitors in the same sector and fully appreciate the unique selling points and culture within the network.
Different franchise brands will offer differing levels of support, so ensure you understand the key skills needed to be successful to maximise your probability of success.
If you’re looking at a newer brand, there may be a greater risk, as the company may have a shorter track record of success. However, this may allow the franchisor to dedicate more of its time and resources to supporting your business personally.
Conversely, an established network may provide more reassurance in its track record to date, but require a larger franchise fees and utilise larger teams to deliver support on a regional basis.
Speaking to franchisees
One of the most useful ways of understanding how a business operates is to speak to existing franchisees within the network. Although the franchisor may wish to manage this process, you should be able to speak to as many franchisees as you want to during your research.
Try to speak with a variety of different franchisees from both sides of the performance spectrum to understand the different challenges they face.
Also, see if there are any franchisees with similar backgrounds to you to see what skills they needed to improve in order to run their businesses successfully.
When speaking to prospective investors, one of the common themes we see are individuals proposing to purchase businesses on their own without any involvement and support of their family and loved ones. We would see this as a huge oversight that can have severe ramifications for your business.
You will be looking to invest in a business that will take a considerable amount of time, effort and money to grow successfully, usually for a period of between 5-10 years minimum.
Such a big decision should be made with the full support of your family, so ensure they understand the commitment and long-term objectives of your business.
Involve your family in the discovery days and meetings with the franchisor to gain their backing, which will subsequently allow you to concentrate your entire efforts on growing your business, particularly in the crucial first year.
Finally, when you’re satisfied with your research and have chosen to proceed, you’ll need to pay a deposit. At this stage the franchisor will provide you with a copy of its franchise agreement to sign before commencement of the training programme.
This legal document will create a binding set of obligations for both you and the franchisor for the pre-agreed term, with potentially hazardous penalties if you fail to follow them.
With this in mind, it’s essential you take the appropriate legal advice from a British Franchise Association accredited solicitor, who will check the franchise agreement for you.
The agreement will usually be heavily weighted in favour of the franchisor. This is to ensure it’s able to hold franchisees to account and that standards are maintained within the network.
Lloyds Bank has helped to develop an online training programme in conjunction with the British Franchise Association to support your research phase, which can be completed at your own leisure free of charge.
It covers all aspects of buying a franchise, including legal considerations, financial awareness and advice from established franchisors. Speak to the Lloyds Bank franchise team if you would like any further support with your business ambitions.