10 questions to ask when buying a Franchise
So – you have decided to buy a Franchise – this meeting is not a one-way street, while the Franchisor wants to know about you, it is also your opportunity to find as much as you can about the company, the people who run it and the way in which the Franchise is operated. Here are 10 questions to ask when buying a Franchise:
1 How long has the company been operating? When was the franchise network established and how many franchisees are there?
It may be that the company is long established with many successful franchisees so that you can ask for financial information on both the company and the franchise network. However, all franchised companies have started somewhere and it is sometimes good to get in right at the beginning when the franchise may be at lower cost and you can be instrumental in helping the Franchisor getting the network established.
2 What exactly do I get for my Franchise fee?
Most Franchisors will charge an initial package fee made up of the license to use the trade marks and brand name, and a launch and marketing support package, which should include in depth training, operating manuals and everything you need to launch the franchise. The Franchisor should be transferring their knowledge, knowhow and operational systems to you so that you can quickly replicate the business in another location. You may also be supplied with equipment and a starter supply of stock.
3 How will you support me while I set up the franchise, and what ongoing support will you give?
No successful franchisor is going to ignore their franchisees and should have the launch programme and an ongoing support programme in place and the Head Office staff to deliver it. You will probably pay a Management Service Fee (MSF) for the ongoing support, based on a percentage of revenue, and need to feel that this fee represents good value for money. Ask for details of the ongoing support programme and the cost of MSF.
4 How much will I need in additional funds for premises fit-out, stock or equipment and how can I source this?
A good and well organised Franchisor will have arrangements with the major banks and maybe asset finance lenders to help you raise the necessary finance. The Franchisor should have given you an indication of possible revenue and earnings based on existing company owned and franchised outlets from which you will make your business plan. The initial fee plus any additional costs must be realistic both in terms of the first year’s earnings and the ability to cover loan repayments, but also likely earnings over the life of the Franchise and likely value when you come to sell. You must take advice from your accountant.
5 Is the supply of raw product, finished product, or any component which is bought in, sustainable over the life of the Franchise and beyond?
If you are entering into a lengthy term and want to be able to sell on a profitable business with a future then the source of the products or service you are selling must still be available at a reasonable price. Any doubt on sustainability should ring alarm bells.
6 How long is the Franchise term, what are the renewal arrangements and costs?
The Franchise Term will vary according to investment and type of franchise – a big ticket hospitality franchise might be a twenty-year term; a lower cost lower revenue franchise will probably be five years. You should be able to sell your franchise on, with the Franchisor’s permission, or renew at the end of the term. Most Franchisors renew without further cost other than professional fees, but it is important to know what your options are.
7 What are my revenue streams?
You will be selling product or services for a price – ask for details of pricing, cost of materials, any head office charges surrounding the sale. Ask for details of competitors’ pricing – and do your own research. What other revenue streams are there – maybe you are selling a product and can offer an installation service, or a servicing agreement. Are all these revenue streams liable for the management service fee.
8 What marketing is carried out by Head Office for the benefit of the Franchisees?
Although you will be responsible for local marketing, and will need to set aside a percentage of your revenue for this, your Franchisor should be conducting national campaigns to keep the company message fresh, appeal to likely customers, and generate business for both company owned and franchised outlets. Some Franchisors have a central marketing fund to which all franchisees contribute, some pay for central marketing from the management service fee.
9 Can I have a list of existing Franchisees to talk to?
If a Franchisor freely offers a list and encourages you to talk to any franchisee then they are clearly proud of their network – even if they say they have one or two who are not representative of the whole network, then this is honest – but beware of the Franchisor who will not give details or actively discourages you from contacting existing franchisees.
10 Tell me about your competitors?
The Franchisor should know their competitors, where they are in terms of price comparisons, service delivery, and particularly activity on the area or territory you are looking at. What is the biggest competitive threat and what is the biggest opportunity? Are there any changes on the horizon to the market or the franchise offering within that market? What impact will any changes have on the company?
In the course of your meeting you will also cover a lot of other subjects, but these are my top ten to ensure that you are buying into a genuine successful business.
And finally – ask for a copy of the franchise agreement, management accounts from a typical anonymous franchisee and sight of the Franchisor’s last accounts. You will almost certainly have to sign a Non-Disclosure Agreement to be given this confidential information or you may have to arrange for these to be sent to your accountant on a confidential basis.
That was my 10 questions to ask when buying a Franchise – find out more about buying a franchise here.
© Richard Langrick, Ashtons Franchise Consulting
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