If you’re planning on investing in a franchise, you need to be sure it’s the right one for you. And the only way to find out is to ask some probing questions.

Common sense will take you a long way in your research, but it’s always worth having a few questions up your sleeve, to help you make the right choice.

Here are a few questions you might want to ask:

The franchise

1. How long have you been franchising? – Think about their track record and the director’s background

2. What professional support have you had in developing your franchise? – Have bfa affiliated consultants and lawyers been used?

3. What is your financial strength? – Ask for last 3 years financial accounts. What capital has been invested and is the business profitable? Consider is the business financially sound?

4. Who is the main competition? – Is the market developing? How competitive is it? Does the franchise have a competitive advantage or unique selling points? What market research did they do?

5. How many franchisees are there? – Speak to several franchisees as part of your research?

6. What are your development plans? – Are there sufficient resources? Consider how future developments will impact on the franchisee?

7. How is your Head Office organised? – Management, accounting, sales support, administration. Is this a well organised and significant business?

8. Did you carry out any pilot operations? – If it’s a new franchise ask them to demonstrate its success

9. How many franchisees have failed? – What lessons have they learned? They should be prepared to discuss these failures openly.

10. How do you choose your franchisees? – What skills and attributes are they looking for and how selective are they?

11. Are you a member of the British Franchise Association? – If not why?

12. Can I take up references? – Bank reference or other reliable sources

Costs and projections

13. How much does the franchise cost in total? – What is included in the package and how much working capital will be required? Is there any additional expenditure? Consider is it value for money?

14. What are the ongoing charges? – Management service fee, mark up on goods or services, advertising levy, any other costs?

15. What are the key financial ratios? – Gross profit margin, typical overheads, projected net profit, stock turnover, debtor days and break-even figure. Are they realistic?

16. Can I see actual trading figures from existing franchisees? – Think about your own projections and are they realistic and achievable?

17. Are there any financial arrangements I should know about? – Vehicle and equipment leasing, supplier terms, national accounts, requirements to replace equipment or refurbish premises

18. Is there a minimum performance requirement? – Consider the consequences of not achieving the required levels and whether they are realistic?

Methods

19. Is the business seasonal? – When is the best time of the year to start trading?

20. Can I choose alternative suppliers? – Am I obliged to buy goods from your nominated suppliers? Are there minimum order levels?

21. Do you allocate exclusive territories? – Consider the size, potential, restrictions and suitability of any proposed territory.

22. For how long is the initial franchise licence granted? – Is it renewable? Is there a fee payable on renewal? What happens at the end of the term?

23. What restrictions will there be when I sell the business? – What penalties are there if the agreement is terminated early? Are these terms acceptable?

24. What marketing programme do you have? – What are the franchisor and franchisees obligations?

Support

25. What training is provided? – Consider both initial and continuing training. Who pays for it? Is it classroom or field based training?

26. What support do you provide prior to the business launch? – Does the franchisor assist with site selection, lease negotiation, design, refurbishment, equipment, vehicles, staff recruitment and stock? What level of business launch support is provided?

27. What ongoing support do you provide? – Who will deliver the support? Are there regular review meetings and field visits?

28. What support is available if you run into difficulties? – Has the franchisor past had experience of successfully supporting other franchisees with problems?

29. How often does the network get together? – Are there regular meetings and conferences where franchisees can share best practices?

30. Can I meet your Head Office team? – What experience do they have?

Bear in mind that this list is just a guide – and it is not exhaustive.

Think carefully about the question you want to ask in addition to these. If there’s one rule of thumb, it’s don’t take things at face value and if you are not 100 percent happy do not go ahead with the investment.

As part of your research, speak to as many existing franchisees as possible. It is likely that the franchisor will want to manage that process – and that is fine; but don’t let them cherry pick who you speak to. You should try to speak to a selection of franchisees including some of the best and worst performers. You may also wish to speak to someone who has recently established their business – they will have gone through the same process as you very recently so their experience will be invaluable.

It’s also worth speaking to franchisees who are more established. They will be able to point out some of the pitfalls to avoid and where you can expect your own business to be in two or three years time.

After marriage or buying a house, investing in a franchise is likely to be one of the most important decisions you will make. So don’t sign on the dotted line until you are ready to do so. And remember - if the franchisor exerts any undue pressure by saying someone else is interested in your area and you’re going to miss the opportunity unless you sign immediately, be prepared to walk away.

Banks with specialist franchise departments, such as Lloyds TSB are a good place to get independent expert franchise advice and support.

About the Author

Richard heads up the Lloyds TSB franchise team and is a regular contributor to trade publications and national press. He is on the panel of judges for the prestigious Franchise Marketing Awards and regularly speaks at franchise seminars and exhibitions. Lloyds TSB is an affiliate member of the British Franchise Association and is proud to support the growth of ethical franchising in the UK. It has business bankers in all its local business centres helping around 100,000 businesses start up every year.

Richard Holden
Head of Franchising
Lloyds TSB Bank plc
Tel: 07802 324018
E-Mail: richard.j.holden@lloydstsb.co.uk
Website: www.lloydstsb.com/franchising