Check Before Cheque

Refer to this checklist when researching your franchise opportunities of interest.

The Franchise Prospectus should contain:

• Business background of Directors and key Executives
• Description of the franchise
•  Breakdown of the initial investment required
•  Details of other payments due to the franchisor
•  Guidance on raising finance
•  Requirements for franchise owner’s participation
•  Terms for termination/renewal of agreement
•  Number & success rates of existing franchise owners
•  Franchisor’s site selection/approval rights
•  Overview of guaranteed training and support
•  Financial statement from the franchisor
•  Details of the franchisor’s professional advisers

What to find out from the franchisor:

•  Financial health and track record of the company
•  The company’s franchising history
•  Results of the pilot operation (if applicable)
•  Current number of franchise owners
•  Permission to talk to existing franchise owners
•  Company’s main source of earnings
•  Value, appeal and long-term viability of product/service
•  Head office commitment to support
•  Full details of the initial training programme
•  Additional training costs to the franchise owner
•  Total size of the franchise investment requirement
•  Realistic estimate of working capital needed
•  Bank and other references
•  Territorial practices and exclusivity terms
•  National and regional advertising practices
•  Exclusivity of product supply contracts
•  Franchisor’s margins on product supply
•  Target obligations
•  Realistic franchise owner profit and loss figures
•  Management Service Fees
•  Restrictions on franchise owner’s operations
•  Franchisor’s launch assistance programme
•  A sample of the Franchise Agreement
  

Be wary if the franchisor:

•  Tries to get you to sign a Deposit Agreement to reserve a territory
•  Does not offer an automatic right to renew your agreement
•  Has a very short-term contract
•  Pressures you to ‘act now’ before the cost goes up
•  Tries to trade you up to a higher fee
•  Demands large front-end licence fee
•  Promises huge profits with thin investments
•  Promises ‘easy sales’
•  Promises profits by sub-franchising
•  Promises large income working from home
•  Fails to give statistics on sales and profits
•  Evades identifying Directors or principals
•  Has no data on financial track record
•  Cannot give plans for future development
•  Has incomprehensible contract or vague territories
•  Is vague about support and training
•  Has a name similar to a well-known business
•  Is ignorant of competition
•  Has weak advertising
•  Avoids detailing your financial obligations
•  Tries to meet only in a hotel or has poor head office premises
•  Is evasive about access to existing franchise owners

The Franchise Agreement must cover:

•  Description of exact training and support offered
•  Precise price, commissions and rental fees involved
•  Precise boundaries of the franchise territory
•  Obligations to the franchisor
•  Rights to renew or extend beyond original term
•  Your rights to sell/transfer ownership of franchise
•  Terms and conditions for terminating contract
•  Heir’s rights in the event of your death