Knowledge Centre

1.1

1.2 A franchise is usually based on a proven business idea. You are basically copying a product or service which the franchisor has already shown can work (but see 3).

• It is easy to check with existing franchisees whether the business really works.
• A good franchisor will continuously research and update the business idea.

1.3 You may be able to use a recognised brand name.

• You will benefit from any national advertising or promotion undertaken by the franchisor. This is often funded by additional management fees.
• You will also be able to use any trademarks the franchisor owns.

1.4 A good franchise operation will give you full support. Typically, this includes:

• Introductory training, usually covering general skills (eg bookkeeping), as well as training for that particular business.
• Help in setting up the business such as finding suitable premises.
• A detailed operations manual which tells you how to run the business.
• Ongoing support and advice.

Top franchisors often provide a franchise award manual. It will contain all the information needed to conduct due diligence.

1.5 You may have exclusive rights in your own territory - depending on the type of business - this will be covered in the legal agreement.

• There will still be competition from other related businesses.

1.6 Financing the business is likely to be more straightforward. It can be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven start-up.

• Some franchisors have relationships with banks and can help you borrow money, and local enterprise initiatives may supply start-up finance.

2.1 The cost may be more than meets the eye.

• You pay a fee to buy into the franchise (often £5,000 to £10,000, but it can be as much as £250,000).

  You also have the usual business costs (premises and equipment, stock and other supplies). Some of these will be bought from the franchisor.

• You pay a continuing royalty on sales, or a management fee, regardless of whether you are making a profit or not. This can be a fixed amount or a percentage of sales or a mixture of both.
• Some extra costs may be charged separately.

  For example, a contribution towards the franchisor's advertising costs or fees for the training you receive.

As a possible future franchisee, you need to be happy that the franchisor's services will justify all these costs, which will continue even after you have set up.

2.2 You have to agree to operate within certain limits.

The contract between you and the franchisor will usually regulate what you are allowed to do.

• You cannot change the business.

  For example, you cannot introduce new products to suit your local market.

• You can only sell your franchise to a buyer approved by the franchisor.

2.3 Your relationship with the franchisor means you are exposed to certain risks which are outside your control.

• The risk of the franchisor failing to fulfil its obligations (eg providing support in the form of brand advertising or training).
• The risk of the franchisor going out of business.
• The risk of the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with (see 3.2).
• The risk of actions by the franchisor or other franchisees giving the brand a bad reputation.

3.1 What is the business? You need enough detail to give you a broad understanding of the business concept.

• What trading locations or territories are being offered?
• Who are the competitors?

  A good franchisor should provide a realistic assessment of the competition.

• What steps does the franchisor take to extend and update the business concept?

3.2 Who is the franchisor?

• How long has the business been going?
• How long has it been a franchise?

  Many franchisors are members of the British Franchise Association (see 6.1). If yours is not, why not?

• What experience and achievements do the key people have?
• How solid are the franchisor's finances?

  Ask for three years' audited accounts and a bank reference.

• How many UK franchisees does the franchisor have?

  If all its franchisees are abroad, or only a few are in the UK, this indicates the concept is not well-established in this country.

  Ask how the concept has been piloted. If it has not, why not?

• How many franchisees have failed?

  Check the reasons for failures.

• Is the franchisor completely independent?

  If not (for example, if the franchisor is the UK licensee of a US company), check what the original owner's rights are and how these could affect you.

3.3 How much support will you receive?

• What training is provided at the start?
• Will you get help to set up the business?

  Some franchisors will provide advice on the premises and equipment you need, legal support (eg with planning permission), and so on.

• What continuing support is provided?

  This can vary widely from almost nothing to full support.

• Can you get help when you need it?

  The franchisor may have support staff you can telephone whenever necessary.

• Does the franchisor pass on its market research to you?

3.4 What are the terms of the franchise agreement?

• How long will the franchise agreement run (typically five to ten years)?

  Check whether you have an option to renew the franchise after this time and if there is a further cost.

• Will you have exclusive rights in your area for the full term of the franchise?
• What conditions and restrictions are there if you want to sell the franchise?
• What happens if you die or cannot continue in business for some reason?

4.1 What are the costs?

• How much is the up-front fee?

  Good franchisors will usually make most of their profits from the continuing stream of royalty payments from successful franchises.

  The initial fees should only reflect the costs of franchise development and administration.

• How much will you need to invest?

  Check that the franchisor's figures include realistic costs.

  Ask whether items you buy through the franchisor (eg a sub-lease on premises) will include any mark up.

• What percentage royalty is payable and how is it assessed?

  Some franchisors reduce the percentage payable once a set turnover is reached. By growing the business over that threshold you can increase your profitability.

• What price is charged for materials bought from the franchisor (eg stocks)?

  The franchisor may mark up the prices. Alternatively, you may benefit from the franchisor's buying power.

• What other charges (eg promotions, training) will you have to pay?

  Find out exactly what you get for your money.

4.2 What financial performance can you expect?

• What actual returns are existing franchisees achieving (see 5.3)?

  Be aware that the earliest franchises may have cornered the easiest or most profitable territories.

• What financial returns are projected for new franchises?

  Projections of very high profits from a small investment are probably unrealistic.

5.1 Visit the franchisor. Ask specific questions about anything which is not clear from the prospectus.

• Do the people seem honest and open?
• Are they trying too hard to sell the franchise to you? Do not allow yourself to be hurried into making a decision.

5.2 Get a sample contract for your lawyer to examine.

• Never enter into any franchise agreement without legal advice.
• Use a lawyer who has experience of franchises ie one who is affiliated to the British Franchise Association.

5.3 Visit as many franchisees as possible - this will help you find out what the risks and opportunities are.

• Ask them how their business is going, what they think of the franchisor, and what problems they are having.
• Insist on a full list of all present and past franchisees, including any that have failed.

  Beware of franchisors who refuse to reveal this information.

5.4 Carry out your own market research in your proposed territory. Even if the business works elsewhere, you need to be sure it will work in your area.

• What possible customers are there?
• What competition is there?
• What are the long-term prospects?

5.5 Prepare a business plan, just as you would for any other start-up business. Base this on your market research and on your own financial projections - not those provided by the franchisor.

• Consult your professional advisers for any help you need.

6.1 Contact the British Franchise Association (bfa) (01235 820470).

• The bfa publishes a variety of handbooks and supporting information, including a full list of bfa members (franchisors and advisers).
• For further help and advice visit www.whichfranchise.com or www.franchiseadvice.com.

6.2 Talk to your bank.

• Most banks have franchising specialists and can offer information and advice.

6.3 Read the trade press. Publishers include:

• Franchise Development Services (01603 620301).
• Franchise World (020 8605 2555).
• Business Franchise ).

6.4 Keep an eye on the rest of the press. Many franchisors advertise in the business-opportunities sections of national papers.

• Many of these advertisements are for untried franchises or multi-level marketing schemes, which should be approached with some scepticism.

6.5 Go to franchise exhibitions. There are major annual franchise exhibitions in Birmingham and London.

• The BFA can provide details of specialist and regional exhibitions and also run regular seminars for prospective franchisees.

6.6 You may want to talk to franchise consultants. Reputable franchise consultants generally work on behalf of the franchisor to develop the franchise package.