- We’ve broken down the franchise buying process, as you are aware, buying a franchise means you are buying a tried/tested format, whilst we’d hope that this takes the guesswork away we must say take care, before you get dazzled by the bigger bank balances of the larger corporations you must do your own due diligence.
In theory it is presented that you can also save time and energy by not worrying about generating publicity to raise the awareness of your new venture but as much as your customers will know what to expect from a big chain, they don’t always flock to a brand name they haven’t realised has opened.
Having an established brand, proven market and a respected system of operation means that the battle could already half won for you before you even start your first day of trading. That is if all your facts are straight and you have looked at the business plan properly. The manner of response and quality of the information you prospective franchisor gives you can be a deciding factor in your final decision to purchase the franchise from that franchisor.
Gathering as much data on the sales potential of the market/territory you are going be operating in is critical and identifying future potential will be the backbone of the business.
- Use every resource available including demographic data from the Office of National Statistics, Trade Associations, Local Chamber of Commerce, Local Enterprise unit, Councils for town and borough.Look at the competitive information in annual report of brand leaders and request market information from the franchisor regarding the rationale for defining a territory.
- Crunch the numbers on your own and test the figures as your franchisee gross margin and the relationship to the royalties compared to net margin. You simply should walkway from a franchisor asking you to pay an 8% royalty on a gross margin percent is in 20 to 30% region. Check how long you should be in business before breaking even and what this period will cost you. Factor in extra for a safety margin.
- The requirements regarding any PR or advertising fund will be of interest. Is the fund fully operational? Ask about the franchisees task in the administration and use of PR and marketing fund monies.
- Complete in depth due diligence on the franchisor’s financial statements with a focus on the source of revenue and any positive or negative trends. As stability is important in terms of the franchisor being able to service and support its franchisees– you must check the levels and source of capital.
- Interview current franchisees and ask for a list of terminated franchisees. Again verify the numbers by finding out what time frame they found when getting to reach break-even. After some coughing & spluttering they will say we are slow but its all different now… Its not! Have a prepared list of questions and you then must ask each franchisee and the franchisor the same questions. Then work out the facts for yourself.
- Asking the franchisor if they have ever been in or are in any sort of litigation will be of help and it might be worth checking the franchisees out with a litigation type question.
- Insist that you meet with the CEO or managing director in order to understand their role in the day-to-day operation of the franchise. What is their strategy for growing the franchise network and what is the longer term vision and then ask what happens at the end of franchise term? Can I carry on or do I have any restraint of trade? Would you see yourself getting on with the directors and would you be comfortable to have them in your home socially…
The above are some of the points to get you started, it might also be worth considering your personal passion and how your passion is aligned with your business.
This is about your life and the choices you make must be your own and of course you must get some good professional advisors to support you.
You would also be sensible to seek the help of a franchise broker, just like an insurance broker or a stockbroker they tend to discover your appetite and match you to the best franchise for you and your income requirements