What Do I Ask The Franchisor?
Your meetings with the franchisor prior to signing will be some of the most significant in your life and your chance to put him in the 'hot seat'.
Treat them like you would treat a date with a potential life partner - you don't want to make a bad impression but you don't want to end up tied to a badly structured or downright dishonest franchise.
There are a number of areas where you need to get the franchisor to spell out what will be expected of you, and what will be provided to help you achieve it. Question every assumption, starting with the financial forecasts. How conservative are 'conservative estimates' - what assumptions are they based on? What growth have current franchisees been achieving? How long should the business be expected to take to break even? How much working capital will you need?
Have your accountant or bank manager check these figures out, but a green flag from these people is not an assurance of success. They are merely confirming that the figures look OK on paper, not their precise knowledge of all the risk factors involved with your particular franchise opportunity.
You should also ask to see the franchisor's finances, or obtain a bank reference. What is the company's main source of earnings? If it appears to be the initial franchise investment fee, warning lights should be flashing. The franchisor's incentive should be to earn from the ongoing success of its franchisees, not the initial franchise fees from the sale of licences.
This is earned through the management service fee - typically a percentage of your turnover. However, examine closely how this affects the profits in the franchisor's financial forecasts. This levy provides for ongoing franchisor support so compare it with the level of support you will be receiving and decide whether it represents a good deal.
If the franchisor is the sole supplier of the products, services, or tools used by the franchisee, find out how profitable this is and whether it is taken into account in the ongoing management service fee. Are the supplies priced above or below the market rate? The answer will have a significant affect on your business's competitiveness.
You should have a good idea of the role you will play in operating the franchise, specifically whether you will be required to be 'hands-on' in delivering the service, or take a more managerial role. You must question yourself on whether this corresponds with your own ambitions, and then question the franchisor on the potential for you to step back from this if you see yourself expanding the business further down the line.
Many franchisors recognise this desire and offer the opportunity to expand the franchise licence after you have established a successful operation. This could enable you to increase your territory or even become an area development franchisee and grant sub-franchise licences - in effect becoming a franchisor in your own area.
Most franchise brochures should provide you with some basic information about the franchisor, but make sure all gaps are filled. How long has the franchisor company been established and what is the background of the founder? How long has the franchisor company been posting profits? When did it begin franchising and how successful was the pilot? How many franchisees are in operation, how fast is it growing and how many are required to complete the national network?
Is there an exclusive territory provided in the franchise contract? If so, how is it defined? Many franchisors use postcodes to define a territory, but check out how many potential customers are in your territory. You don't want to be investing in the proverbial Newcastle territory of a coal retailing franchise. Your franchisor may require you to conduct your own research into your market, certainly you should at least be doing some research to check the franchisor's figures. Do this before any agreement is made.
Also, check the exclusivity of your territory. Some franchisors offer a territory exclusive of other franchisees, but leave open the possibility of opening a company-owned operation. It's best to go into the agreement aware if the franchisor is able to open a competing store in the same city at a future date.
Your initial training is likely to be included in the initial investment fee, but does that include staff training? If you are starting as a sole trader, you may begin taking on staff as your business expands. If so, will the franchisor require all staff to be trained by the head office and, if so, how much of this cost will fall on your business? Alternatively, the franchisor may require you to train your own staff. If so, is this covered in the initial franchisee training and manuals?
Launch And Ongoing Support
The justification for the ongoing management service fee is the support of the franchisor, so check you are getting value for money. What support initiatives does the franchisor provide?
For instance, some franchisors operate a sales department in order to generate initial business for their franchisees and provide business from day one. Alternatively, the franchisor may take total control of the sales process, providing you with a constant flow of business and leaving you to concentrate on providing the service.
Does the franchisor operate field support managers, who will make on-site visits to your business to help you cope with any problems? How regular will the visits be, particularly in the early stages of the business?
Also, consider how reachable this support is in a crisis. Some franchisors hand out their personal mobile number to every franchisee, while others operate helplines. Support can also be provided by your peers in the franchisee network. How does the franchisor encourage this? Such initiatives as a franchisee intranet, or regional and national franchisee conferences are superb instigators of franchisee co-operation.
Any business requires marketing, and as a franchise grows it can begin national campaigns. This is a function of the franchisor, and when it begins to conduct such campaigns, the cost will need to be absorbed by the franchisee network that benefits. If the franchisor is not already levying a national marketing fee, when does it plan to? Alternatively, the franchisor may charge an administration fee on every national lead passed to you. Again you will need to take this into consideration in your own forward financial planning.
The top two dislikes for franchisees are paying ongoing fees and having to adhere to the franchise system, the ongoing fees covering the costs of the continued support of the franchisor and the franchise system being the proven method of achieving success - so it is clear that many of these people have entered into the franchise agreement without a real understanding of what franchising is, with their eyes shut. Ensure your eyes are open.