10 Rules for Investing in a Franchise
Prospective franchise owners should put together a shortlist of potential franchise investments and whittling it down to the best franchise opportunity for their own circumstances and ambitions. Here are 10 rules to follow this process:
Gain an Understanding of the Business Format Franchise Model
Read books and articles in franchise magazines, consult franchise websites and call anyone you know involved in the industry to develop your knowledge about what to expect from a franchise. Learn to distinguish Business Format Franchises from other business opportunities, product licences and distribution schemes so that you can identify genuine franchises. You will discover that not everyone is suitable to become a franchise owner - you will need to learn about the role of the franchise owner and decide whether you will fit into it.
Set out your Initial Criteria for the Business
It is important to decide on your criteria for making a decision first, so that you can clearly approach any franchise opportunity with the right questions in mind. For example, you will need to ask yourself: Can I work within the framework of the franchise? What financial commitment am I prepared to make? What personal commitment am I prepared to make? How much money do I need to be earning? What are my key skills? What are my interests? Am I suited to managing a team of employees?
Initial Information Gathering
You will need to spend some time researching the franchise market to identify the opportunities that tick the boxes for the questions that you have asked yourself. Places to gather your initial information includes franchise magazines (such as The Franchise Magazine), franchise websites (such as this one), the British Franchise Association and franchise exhibitions. From these sources you will be able to get an overview of the business as well as guidance on franchising.
Create a Shortlist of Franchisors and Request Further Information
Having completed your initial research you will have a shortlist of the companies that you feel you are best suited to. Now is the time to make those companies aware of your interest and request a Franchise Prospectus. This can be done on this site by registering and requesting further information. By reviewing the quality of the franchise's material and how quickly it responds to your request you will gain a first impression as to their level of professionalism.
Research the Companies of Interest
Having received and reviewed the materials sent you will need to do some research on the business concept. This is the point to do some research into how the brand is perceived in its marketplace, how tested and proven its success is through the pilot and existing franchise owners and whether there is a potential or proven demand for its products or services in your area. It is also important to gauge the level of competition for its product or service in your area, and if so, how successful they are. Consider if there is sufficient demand for another brand to operate.
As well as researching the products, services offered and their demand in your area you should also research the company's background - how long has it been trading, how successful is its company-owned operations and what is the background and business experience of the company directors?
Meet With the Franchisor
It is now time to meet with the head office teams of the brands that are of most interest. Contact the franchisor and arrange to meet them at their own offices - by doing this you get to see their operations and meet with more than just the person responsible for franchise owner recruitment. After all, you wouldn't want to hand over your life savings to someone you had only met in a coffee bar or motorway service station! This also sends a message to the franchisor that you are willing to make the personal commitment to travel to meet with them.
The meeting with a franchisor is much like a two-way interview. Before you meet with the franchisor you will need to set out your own agenda and what you want to get out of the meeting. Have a list of questions that you want answered and don't be afraid to ask them. Your aim should be to walk away from the meeting with a sound understanding of the business model, the franchise offering and the franchise owner's role.
The meeting is also the opportunity for both parties to get to know each other and to get a feel of what it would be like to work together. To this end you will want to create a good first impression by dressing appropriately, demonstrating that you have researched the business, and showing knowledge of their sector and competitors, franchised and non-franchised.
Speak to Franchise Owners
This is the crucial part of your due diligence. Having met with the franchisor you will need to speak with as many existing franchise owners as possible to get their views and experiences. Obtain a complete list of franchise owners when you meet with the franchisor and arrange a convenient time to contact them. It is important that the list is complete to ensure you are going to get an unbiased perspective, not just end up talking to the best performing franchise owners. Find out what attracted them to the franchise, how long they've been trading and how long it took them to become profitable. Also, get their views on the franchisor - how supportive is head office and has it fulfilled its obligations?
Meet Your Bank Manager
You will find that your bank will be much more willing to lend towards your investment in a franchise than they would on a new business startup. This is because they recognise that franchises come with a proven track record, and your business plan and financial forecasts are based upon previous performance of a pilot or existing franchisees rather than conjecture. Many banks will lend up to 70 per cent of the initial franchise investment, and the main high street banks have specialist franchise departments to provide additional added value to people borrowing to invest in a franchise.
Before you Sign, Get a Legal Opinion on the Franchise Agreement
Invest the money on getting a lawyer to look the contract over before you sign on the dotted line, it could save you a lot more money if you find clauses in it which you object to. While most franchisors will not negotiate the contract, it is important to go into the relationship with your eyes open, and with any potential legal boundaries taken into account when making your financial projections for the business.
Don't forget this is a contract stipulating a commercial relationship, so when selecting your legal advisor try to give preference to one with an understanding of commercial issues. There are a number of very experienced franchise lawyers in the UK who will be able to give you a deeper understanding into reasoning behind the standard and clauses in a franchise agreement.
Get Assistance from a Franchise Matchmaking Service
Due to a change in British Franchise Association regulations, specialist companies are now permitted to offer franchise buyers a new service to help with your search. Services such as FranMatch are free to use and work with you helping you in your research, providing advice to help you prepare for meetings and are available to answer all of your questions in a pressure free non-sales way. You should consider using such a service to help you in completing your due diligence and finding the business that suits you best. As you will be parting with your own hard earned money you will want to make sure you have the best advice to find the business that is right for you.