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Evaluating a Franchise
How do you decide whether or not a franchise is worth investing in? There are a number of points that should be considered when assessing a franchise.
The first step is to assess the franchisor and its business. When you take up a franchise you are entering into a long term business relationship and it is very important that you spend some time looking into the background and performance of your prospective partner.
These enquiries should be backed up by financial information on the franchisor, including the audited accounts. Your accountant will comment on the accounts for you and a bank reference on the franchisor, obtained for you by your bank, might be helpful.
Information on the performance of the existing franchisees should be forthcoming and the franchisor should be willing to let you have a full list of franchisees to whom you can talk or visit.
In the case of a new franchise you should look carefully at the performance of the pilot operation. Then there is the nature of the franchise business itself - you should ascertain whether or not there is a market for the products or services in your chosen area and what the future market is likely to be.
So having established the soundness of the franchisor and the business you should then look at the strengths and weaknesses of the franchise operation. Critical to your likely success or failure is the level of support and training available from the franchisor, both at start up and subsequently.
There should be a comprehensive operations manual which gives you guidance on all aspects of running the franchise operation. An important aspect to consider is what help, if any, does the franchisor give in respect of any staff recruitment and training you may have to undertake.
The next step is to consider the legal implications of the franchise contract.
As this document will be legally binding once you have signed it, you should receive a copy well in advance. We strongly recommend that you obtain independent legal advice on the contract from a solicitor well versed in franchise agreements, preferably a British Franchise Association affiliate.
Having got this far, and assuming you still wish to proceed, the next step is to examine the financial aspects of the franchise. Broadly speaking, these fall into two categories - the start up costs and the hoped for income/profits. Looking at the start up costs first, it is important that you identify the total amount of money required to get the business started, including any ‘working capital’ needed.
Against this sum will be set the amount of cash you can put into the venture, leaving the sum you will need to borrow. You will then have to consider what assets, if any, you or the business might have available as security for the required loan.
You must be prepared to take a realistic view of what might be a practical possibility in borrowing terms - whilst unsecured borrowing might be possible in some circumstances for a good franchise it is, for example, unlikely you can borrow say £90,000 towards a franchise costing £100,000, especially if you have no security. Having established the start up costs and borrowing requirements, you will then have to look at the potential earning power of the business on a realistic basis. Does it justify the level of investment and can you recover your investment?
Having satisfied yourself on these points you will have to get down to the detail, ensuring that any profit forecasts and cash flow forecasts prepared by the franchisor for your franchise are sensible.
This is also a good opportunity to look closely at matters, such as how the franchisor takes its income and what other fees may be payable. The last hurdle then remaining is to take the projections and your business plan to your bank and to convince them to lend you the money!
One final point. Whilst the steps outlined above might appear time consuming and tedious, you must remember that taking on a franchise is likely to be a very important and major step in your life. So it is worth taking the time to assess the franchise properly and get as much professional advice as possible on how to do so.