Thinking of buying a franchise in the UK?
Here’s what you must know before you go ahead!
Franchising is on the Rise!
There’s no denying the fact that franchising has become one of the ‘hottest’ business models in recent years, with literally tens of thousands of people each year considering buying a franchise. We discussed in our What is Franchising page how franchising has evolved to become a multi-billion pound revenue generator for the UK economy. The real value that franchising brings about is, however, intangible and well beyond all quantitative analyses. Franchising allows individuals, families and generations to enter the business world and create employment opportunities for many others.
It is, hence, very understandable that more and more people across the UK have been looking for suitable franchise opportunities. If you can identify with this trend, you may first want to be doubly sure that franchising is the right choice for you . Next comes ascertaining that you choose the most suitable franchise opportunity from thousands of available choices. Now that you have a few potential franchise opportunities in your shortlist, it’s time to know as many things – good and bad – about them as you can. On this page, we will discuss what every would-be franchisee must know before finalising a franchise opportunity and writing a cheque to the franchisor.
Understand, Evaluate and Assess the Market
Franchising is not exactly a business – it’s more of a business model. Moreover, you – as a franchisee – will never really ‘own’ the franchise. Yet, there’s no reason to treat a franchise any differently than one would treat any other business.
What would you do if you had to establish your very own business?
You would first make sure it will make you money. And businesses make money by, let’s – for the want of a more fitting word – say, exploiting the market conditions. This typically involves creating new markets, capturing existing markets and constantly trying to match the demand with supply. So, when you are about to buy a franchise, you will need to know that:
There’s enough demand for the product or service your franchise will sell.
In other words – Ask yourself if you, your friends or your neighbours will want to by your product/service if it was needed.
The market you will be operating in is neither saturated nor utterly untested.
In other words – Don’t buy a franchise that will face stiff competition from dozens of other businesses in the area. For example – Yet another pizza restaurant in a mall swamped with pizzerias is a bad idea.
Your franchise, through its scope and size, will be able to sustain itself in the said market.
In other words – The investment you are about to make should be large enough to provide consistent, reliable and high-quality products or services to potential customers. You don’t want to run out of money within a couple of months and be known in the market for always flashing the ‘Out of Stock’ sign!
Examine the Opportunity
You will need to examine closely each and every candidate on your franchise opportunity shortlist. You can use the following bases to compare these opportunities:
This is perhaps the most important benchmark for a franchise business. The bigger the brand, the better the opportunity – it’s that simple. The importance of brand value in franchise businesses cannot be overstated. In fact, the very foundation of franchising as a business model stands on ‘encashing’ the brand value. Here are a few questions that can help you compare the brands of shortlisted franchisors. As an extension of this thought process, you can certainly come up with questions of your own.
- Is the brand easily recognisable?
- Does it carry solid market reputation for quality?
- Would you buy a product carrying this brand?
- Would you recommend this brand to others?
- Does the brand carry social goodwill?
- Does the brand keep itself relevant through advertising, marketing and regular presence in the media?
- Is the brand, in itself, as valuable as the franchisor claims?
For franchises that aren’t home based, few factors can be as vital as their location. Retail franchises, most of all, can link their profits directly to the footfall they receive.
Before you finalise a franchisor, it’s important to know what their stance is when it comes to deciding where you will run your franchise.
Will the franchisor select the location for you?
If yes, what will the process be?
If no, will you be able to, on your own, acquire (lease, purchase or share) a strategic location?
How will the expenses towards brand-oriented interior, architecture, furniture and upkeep be shared?
What will your exit strategy be regarding the location?
Business Strategy and Track Record
If we look at franchising as a ‘transaction’ between the franchisor and the franchisee, the value received by the franchisee is, along with the brand name, in the business strategy that has been developed, tried and tested to be successful over a long time. As a would-be franchisee, you will have to spend a lot of your time in getting to know and understanding this strategy. While you won’t get your hands on the sensitive business information before you buy the franchise, it’s possible – and much too important – to get an idea about how your franchise will be earning its revenue.
In the same vein, you will also need to ensure that you and the franchisor share important business ethics. Getting into an ethical conflict with the franchisor after you are open for business will benefit none.
Franchisors are expected to offer continued support to franchisees in operational, managerial, business and other relevant matters. This typically involves regular visits, clear communication, adequate training and efficient methods of troubleshooting.
Responsible franchisors go above and beyond these expectations to make sure that their franchisees don’t face many difficulties. Getting into business with a reliable, responsible, trustworthy and experienced franchisor can not only help avert several problems but also give your franchise business a great chance of succeeding.
You can head to the British Franchise Association’s website to verify your franchisor’s credentials.
Know Your Numbers
To know how much you can invest, how much you can afford to invest and how much you really should or want to invest is of utmost importance before you buy a franchise. A simple rule of thumb says that you should be able to raise by yourself at least half of the money required upfront. Many experienced franchisees go so far as to include the bulk expenses for the first three months, just to be on the right side of things.
Here’s a simple roadmap that you can tweak according to your preferences. Please note that this is just an illustration of financial management, and not a financial advice.
|Component||Description||Formula||Representative numbers (in £)|
|A||Money you have put aside as savings (preferably liquidated)
|B||Money you should keep aside for personal and family expenses (not to be touched)
|C||Money you can afford to invest upfront in a franchise: A – B
|= A – B||10,000|
|D||Money you want to invest in a franchise (A certain percentage – let’s say P of C)||= P x C||70% of C, i.e. 7,000|
|E||Money you can raise via external financing (up to 1.5 times your capital)||= 1.5 x D||10,500|
|F||Total you can invest upfront||= D + E||17,500|
This is just to show how you can go about managing your finances. The numbers you will come up with at the end such analyses will also help you narrow your franchise search down. To read more about how financing works for franchises, you may visit our Franchise Finance page.
Know the Franchisor’s Numbers
The next step is to know all about the numbers on the other side. Franchisors give out detailed fact-sheets and prospectuses to potential franchisees, and that usually is a good place to start. You may want to take a look at:
- Upfront franchise fee
- Projected operational costs
- Franchise agreement servicing fees
- Projected personnel costs
- Projected revenue for a given location
- Franchisor royalties, stocking fees etc.
- Advertising, marketing and networking costs
- Projected profits
It’s important to stay conservative while calculating returns on any investment, and franchise businesses are no exceptions. You can also request the franchisor to furnish the cost and revenue details of a few operational franchises in the area – preferably for the past 2 quarters. This will help you compare the ground reality with the numbers projected by the franchisor. Franchisors don’t always disclose these numbers, but it’s important to ask.
It’s always advisable to seek professional counsel from a qualified financial adviser.
Have the Legal Bases Covered
Franchise Agreements are legally binding contracts that can run for 3 to 5 years – even longer in many cases. So, it’s extremely important to make sure that you know and understand what you are getting into.
From the terms of renewal to terms of termination, each and every aspect of such agreements should be carefully assessed. You can hire the services of legal experts who specialise in drafting such agreements to help your cause.
It’s no secret – answers don’t come by if you don’t ask questions!
At all times, you need to remember that you are investing your hard-earned money in this business and you have every right to safeguard your investment. You can, perhaps, take comfort in knowing that many franchisors are adept at dealing with franchisees who have little to no practical experience in running a business. So, answering your questions won’t be much of a hassle for them.
Here are some sample questions you can ask your franchisor:
- Why do they think their brand is worth this much money?
- What’s the typical success rate for their franchisees?
- How long can and will it take to break even?
- How will the marketing and advertising costs be managed?
- Will there be a liaison for easier communication?
- How long will the training period be? What will it consist of?
- How will the staffing work?
- What are the downsides of getting into this business that you should know of?
- Are the recent financial reports for the parent brand available in the public domain?
- What have they planned to avoid the competition between their franchisees?
- Will there be any terms in the Franchise Agreement to prevent them from letting too many franchises work in overlapping markets?
- Where do they see the brand in next few years?
- What should you know about exiting the contract upon or before the agreement concludes?
- How dependent are they on their franchisees doing well?
- What percentage of their revenue comes directly from franchise fees?
You are right in thinking that there’s no way you will get the most honest answers to all of these questions. But that shouldn’t stop you. You can get in touch with franchisees who are already operational to know about their experiences with the franchisor. Here are some sample questions that you can add to your list:
- How do they describe their overall experience with the franchisor?
- Would they buy another franchise with the same franchisor if it were possible?
- How long have they been a franchisee?
- Have they broken even yet? If yes, how long did it take?
- Has the business followed the projected numbers to a fair degree?
- Has the business followed the projected numbers to a fair degree?
- Are they charged any fees that they didn’t know were a part of the deal?
- Have they enjoyed running this franchise so far?
- Do they plan on renewing the contract?
Following this template generally gives you a good picture of the franchise you are thinking of buying. Asking yourself why and how it can all go wrong – without being cynical – will help you avoid many potential roadblocks. You can visit our Pros and Cons of Running a Franchise to see what you should and shouldn’t be excited about before buying a franchise.