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Five Things Franchise Owners Need To Know And Questions They Should Ask

By March 6, 2015 No Comments
Five Things Franchise Owners Need To Know And Questions They Should Ask

FranchisingFor those without an original business idea, but who want to be their own boss, franchising can be the answer. Investing your money in a pre-existing business model that’s been put through its paces can be the path to independence, a decent income, and professional success.

There are persuasive reasons for taking the franchise route into business. The UK boasts 39,000 franchise outlets, and more than nine out of ten are profitable, according to the British Franchise Association (BFA). Evidence suggests franchises are impressively robust in rougher times. During the economic downturn, the UK franchising sector saw its revenues increase by 20 per cent, BFA and NatWest research found. The number of franchise businesses also grew by seven per cent between 2008 and 2013.

So, franchises are lower risk, resilient, and ripe for expansion. That’s one of the reasons Boost Capital chooses to support them with funding for franchises. But there are some key questions franchisees should ask to get the most out of their enterprise.

1. What is the background of the franchise?

Thorough research of a franchising concept is vital. Look at the BFA’s website for accredited franchisors, and visit as many franchising exhibitions as possible. Ask tough questions of franchisors – and existing franchisees – about the number of franchised businesses the operation runs at present, whether they have evidence of support services or back-up they offer, and what their criteria are for choosing franchisees. The more rigorous their selection process, chances are, the more professional the outfit. In particular, ask:

  • How long has this franchise outfit been running?
  • What number of business failures has the entire operation experienced?
  • Is it possible to meet existing franchisees, and can you choose which ones you meet?
  • What is the franchisor’s own cash investment in the business? This should give you a sense of their commitment.

2. What are the likely costs?

When running any business, of course, money matters. Many people turn to savings to cover the initial costs of a franchise, while others get a franchising-specific bank loan. Some choose a specialist lender like us at Boost Capital for business funding, particularly when they want to grow. But you need to get calculations clear from the outset – the up-front costs, and what that investment includes. Be certain about any subsequent capital costs incurred, what they will cover, plus any fees charged, and what you get in return. Also:

  • How much working capital will you need?
  • What is the gross profit margin, and what are the expected costs on arriving at a net profit? Don’t forget to calculate your own pay, and any depreciation on assets.
  • Can the franchisor provide genuine accounts to prove their financial projections?
  • Does the main franchise have any financing arrangements in place for franchisees, and, if so, what are the terms?

3. Do you understand what running the business involves?

Of course, you need to think about the day-to-day aspects of the operation. Consider whether the business is seasonal, and if it’s serving an established market, a new one, an area that’s on the up, or perhaps in decline. You want to know if training will be provided, and whether it’s part of the fee already paid. Plus, there can be other hidden costs:

  • Are you obliged to buy stock or equipment from the franchisor, and, if so, at what cost? Also, is the franchisor getting a commission on goods or materials the franchisee buys?
  • Some franchises maintain a minimum fee or minimum purchase of goods regardless of the state of your sales. Is this the case, and what happens if you disagree?
  • Is any advertising or marketing support provided as part of the franchise deal, or is the business owner responsible?
  • Is any help provided with book-keeping?
  • What happens if something goes wrong? Establish the help the franchise offers in times of crisis, or poor trading.

4. What is your role?

Because a franchise works to someone else’s blueprint, franchise owners have less autonomy than a regular entrepreneur. It’s likely there’ll be constraints on aspects of the business, down to opening times, the ways you can market the enterprise, even where it can operate – some franchisors insist on choosing sites, and premises. Also, ask:

  • How will you be kept informed of any news or developments – via a point of contact at the franchisor, a newsletter, seminars, or meetings with other franchisees?
  • Once the business’s equipment has been paid for, do you own in it in full?
  • Are there rules in place about when you must redecorate your business premises, or replace equipment? Is the franchisor responsible, or you?
  • Do restrictions exist on what you can and can’t sell?

5. What are the opportunities for growth?

We’ve talked on this blog before about the challenges franchisees face when looking to raise capital to expand their franchise operation. But when many ambitious franchise owners have their system and staff in place, they decide to take on a further branch. There are some fundamental things to consider:

  • Can you really afford to grow? There will be further payments to the franchisor, and other costs, so can you fund these from existing capital reserves, savings, or a loan?
  • Are you expanding by acquiring an existing franchise? In this case, you need to check the business you’re buying. Is it a good going concern?
  • Does any new opportunity have real growth potential? Get professional advice when undertaking proper due diligence on an existing operation. Equally, properly crunch the numbers if you’re setting up a new site. Talk to your accountant, an independent franchise expert, or an acquisitions specialist. Your local chamber of commerce can offer advice, as will trade organisations, or business bodies, such as the Federation of Small Businesses, or the Institute of Directors.
  • Will your franchisor allow you to expand? There may be clauses in your contract that limit what you can do, so read the small print to avoid putting your present business at risk.

These seem like a lot of questions to ask, but you want to be sure you’re doing the right thing. And don’t stop there. Consider how you can get out of the franchise agreement if necessary. What happens if you decide you want to terminate the contract with the franchisor? Can you sell the business on, or are there restrictions in place? How long is the franchise granted, and what happens when that period expires? These are all details that should be in the franchise contract, and you should have a copy for reference.

Franchising can be a great way to run a business. Just make sure you’ve been thorough, and quizzed the franchisor about all aspects of the enterprise. Then, you can enjoy running a tried and tested company with great prospects for success.

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