There’s a lot more to due diligence these days than a quick check on Companies House to see if the franchise brand you’re interested in is solvent. It was perhaps inevitable that the internet would become, amongst many brilliant things, the greatest source of gossip on the planet, so use this to your advantage and really do your research on any franchise and franchisor you’re interested in. As with any gossip of course, you need to be mindful that not everything will be true, and that there are always at least two sides to any story. If you find an old post on Facebook for example, from an ex franchisee lambasting their former franchisor, then use your judgement – is this an isolated case? Has the franchisor engaged in this war of words? Is this negative example far outweighed by positive ones? If you’re worried about things you’ve read or heard, bring them up with the franchisor.
Use your own judgement on whether the information is marketing hype or genuine information. Franchisors need to be very careful these days about what financial projections are claimed. Any turnover or profit numbers need to be substantiated and based on actual results. Likewise, any guarantees and buyback deals need to be examined carefully with special attention given to the small print terms and conditions – if it seems too good to be true……!
Whilst not every franchise is a member of the British Franchise Association and there are quite possibly many excellent brands that are not , you can take comfort from the fact that those who are members have had their accounts scrutinised by experts in the industry to ensure they reflect the business’s finances accurately. Buying a franchise is probably one of the largest investments you will make in your lifetime. You would not buy a house without getting a survey so having a franchise checked out is vital. Get a copy of the franchise’s accounts from Companies House and see if the numbers stack up. Also run a credit check on the business using one of the many commercially available services. If finance is not your forte get your accountant or solicitor to help you interpret the numbers. Preferably you should appoint a specialist solicitor or accountant who understands franchising as a high street solicitor is unlikely to have the in-depth knowledge required (supplier contacts can be found on the bfa website).
Speaking to existing franchisees is vital and any ethical franchisor should be happy to facilitate this – if not ask yourself why. A franchisor should be willing to let you choose who to speak to, not someone who has been “cherry picked” to give a positive story. No franchise system is ever perfect and franchisees will have one or two gripes to tell you about, but on balance the positives should outweigh the negatives. If anything really sticks out as a problem, discuss it with the franchisor.
Attending a discovery day is a great way of getting to know more about the franchise. Franchises are built on relationships. You are normally signing up for a minimum of five years, so if after meeting at a Discovery Day you have serious doubts about the people, the model or both, then it’s probably best to walk away.
Get your financial advisor or accountant to go over any financial projections you’ve been supplied with, with a fine tooth comb. Even with the best franchises it can take some time to set up the business and start to generate revenues so be realistic in terms of how much money you will need in the early stages to meet your business and personal needs. In my experience, too many franchisees fail in the early years because of cash flow not lack of business or customers. Make sure you have sufficient working capital and contingency funds to see you through the peaks and troughs. The time to think about this is when you are borrowing funds to purchase the franchise. Banks will often lend up to 70% of the franchise fee and the working capital requirement so make sure you get your borrowing requirements right first time – you don’t want to be going back cap in hand six months later.
Every franchisee is required to sign a franchise agreement yet it is common knowledge that a franchisor will rarely if ever alter the terms of an agreement. Why then would you need a specialist franchise lawyer to review it if it can’t be changed? The main reason is educational – as a franchisee you need to know what your responsibilities and obligations are and a good franchise lawyer can explain this to you. What happens if half way through the agreement you fall out with the franchisor? What if you want to sell the franchise early? What happens if you break the terms of the agreement – can the franchisor close you down? You want to go into any legal agreement with your eyes wide open.
Choosing the right franchise is very often common-sense. It is vital to do your own market research into the business sector that you are thinking about entering. The key thing to look for is sustainability – will there still be a demand for this service 10 or 20 years down the line? If the franchise is in a very niche market or is a passing fad it may not offer the long-term prospects you are looking for. Whatever information you’re looking for, there are plenty of places to turn for help. Once you are satisfied you have found out everything you need to know to make a decision, it comes down to a combination of heart and head. Good luck!