So, you’ve decided that buying into a franchise looks like the right next step for you. Now comes the tricky bit, identifying a good fit franchise and ensuring you’re getting the best possible deal without falling prey to any unexpected costs, clauses or oversights.
From identifying promise and evaluating costs, to scrutinizing the legal nitty gritty, we’ve created a helpful guide that will help you sort the wheat from the chaff as you explore your options.
Let’s get started by looking ahead…
The Future: Evaluating Potential
Before you dive in and start looking at payment structures and legal obligations, you need to get excited about a franchise – and a particular franchise niche. This part of the assessment is all about evaluating potential by researching the current market, talking to people in the know and spotting promising opportunities before they become the next big thing.
Even for would-be franchisees keen to invest in a more pedestrian tried and tested niche, choosing a franchise with a bright future is pivotal to your future success. Before you pinpoint specific franchisors, take time to do your homework by:
- Reading industry publications
- Taking a look at what the biggest names in the sector are doing
- Investigating consumer trends
- Seeking advice from established figures in the industry via social media, email, networking and industry events
This information won’t just tell you whether or not you’re on the right track; it will also pay off when it comes to assessing specific franchise options, helping you identify those with promise and those which aren’t going in the right direction.
Once you have begun assessing individual franchisors, there are more specific ways in which you should evaluate potential. Most franchisors will provide projected turnovers and profits for your first few years. These may be based on best-case scenarios, which means it’s important to crunch the numbers yourself.
You may want to take on the services of a financial expert to help you assess the veracity of these claims, or you may wish to speak with existing franchisees to confirm whether or not the figures are accurate.
If potential economic red flags have been raised over the course of your research (such as a political shift or industry upheaval), make sure you speak with your prospective franchisor to get a feel for how they plan to address these potential problems and what impact they foresee them having on franchisee profits.
The Present: Understanding the Nitty Gritty
Now that you’re confident the franchise opportunities you’re considering have potential, it’s time to get down to the nitty gritty and assess whether or not they present a viable option for you. From the overall (and ongoing) investments you may need to make, to the legal structures that will be used, understanding the everyday reality of your prospective franchise is essential. Failure to understand structures could leave you seriously out of pocket or trapped in a system you are not comfortable with.
For this stage of your assessment, having an experienced franchise lawyer on hand is worth its weight in gold. Franchise agreements must be signed before a new business relationship can go ahead. Asking for a copy of the agreement earlier on in proceedings and going through it point by point with an experienced legal expert will ensure that you understand every part of the agreement, which could dictate:
- Who is responsible for marketing
- What level of control the franchise has over your operations
- Which suppliers you can use
- What restrictions are in place
- How are disputes resolved
- Your rights as a franchisee
At this stage it’s also crucial that you understand the pay structure you’ll be working with. These vary widely from franchise to franchise and may include:
- An up-front “buy in” payment
- Ongoing flat payments (monthly, quarterly or annually)
- A percentage of your profits (monthly, quarterly or annually)
- Restocking costs
- Location fees
- Administrative fees
Other fees may also apply, so keep your eyes peeled.
Once you have identified every cost and calculated what you will be paying to your prospective franchise, take a list of fees to your franchisor and ask them to confirm that you have not overlooked anything.
Next, compare these costs to those of similar opportunities to ensure you’re getting a reasonable deal. You could even use any lower rates you discover as a bargaining chip.
The Past: Discovering the Skeletons
You’re convinced the franchise has potential; you’re completely clued up and comfortable with all legal and financial aspects. Now, just one hurdle remains: inspecting the closet for any nasty skeletons.
Ensuring that the franchise you choose to work with is above board with a solid reputation is critical – and there are sharks out there. Before you sign on the dotted line, make certain you assess the franchisor’s history and do your due diligence by:
- Asking to speak with former franchisees – and not just those with positive stories. If the franchise won’t give you a complete list of contact details, ask why and proceed cautiously.
- Checking the business out via an official channel like Companies House in the UK and EDGAR in the USA. Look for bankruptcies and other financial or legal issues.
- Using these databases to confirm the profitability of a franchise by looking at annual tax returns and statements.
- Running similar checks on CEOs and directors at the franchise, keeping your eyes peeled for bankruptcies or evidence they have opened several companies over a short period, or regularly change company names – these can all be alarm bells which you will need to ask about.
Take care of the future, the here and now, and the past as part of your franchise assessment, and you should build up a detailed picture of the franchise you are considering, allowing you to make an informed decision about your business future.
“Ashley Fleming is a blogger, editor and marketer working in the franchising industry. He likes to share knowledge with would-be franchisees to help them choose the right business model. You can find some of his other franchising articles at the Tubz Advice Blog.”