The importance of due diligence in selecting a franchise - by David Williams, The Royal Bank of Scotland

Article by David Williams Q.F.P.

The Royal Bank of Scotland

With an ever increasing selection of franchises to choose from it is paramount that a potential franchisee undertakes as much research as possible and takes their time making the decision. The decision to purchase a franchise is not to be rushed into, as there are many aspects to investigate, questions to be asked and professionals to consult.

Over half of franchisors advise us that recruiting franchisees is their biggest barrier to growth, given the stable economy and the range of franchises now available. New franchisees, on the whole, are making a positive decision to start their own business by purchasing a franchise, rather than being forced into a new direction following redundancy.

Taking your time to select the right franchise is imperative. Franchisors may offer attractive incentives for a decision to be made quickly, but be sure you don’t make any commitments until all your investigations have been carried out. Existing franchisees also caution that in a third of all cases, projections can be over-stated. Whilst perhaps this is understandable given the economic climate, asking existing franchisees how they are actually performing will assist in your assessment.

Before signing any legal agreement, or making a financial commitment, thorough research is vital. You must satisfy yourself that your chosen franchise is a well-established concern with a proven track record and satisfied, successful franchisees. To find out if the current franchisees are satisfied with the support provided, obtain a full list of the franchisees. The named list should match the number of franchisees the franchisor states they have. Any less and they may be providing you with a list of the satisfied, or good performing franchisees only or they have misled you in the number of franchisees they have. When you have the list speak to as many of the franchisees as possible to gauge what they really think about the franchise, how are they performing and the training and support they receive from their franchisor. It is also a good idea to visit franchisees to get a better understanding of the way the business operates at first hand.

This is not as easy with a new franchise, particularly if you are their first. In this instance you must satisfy yourself that the franchise has been piloted and the results provided to you. The franchisor should also have, or have used, people with a proven track record in establishing a new franchise and with experienced in the industry.

It is advisable to seek appropriate professional assistance including a suitably experienced solicitor that is affiliated to the British Franchise Association, who will be able to explain the clauses in the legal agreement to you. It is unlikely that the franchisor will amend any of the clauses, but you should be aware of the implications. To use an analogy, you should not buy a house without a survey, so do not buy a franchise without having the legal agreement checked.

An assessment of the franchisor’s financial stability should also be undertaken, to ensure that they have the funding to support the franchise network. You can do this by asking your accountant to review their accounts or by obtaining a status enquiry on the franchisor through your own bank.

RBS lends to franchisees through a network of accredited Franchise Managers, who are based across the UK. They have all completed a training course, have a detailed understanding of franchising and mix this with the knowledge of the location in which they operate.

When dealing with a potential franchisee the Franchise Manager will want to know not only which franchise you want to purchase but details about yourself, as it is the individual and not the specific franchise that we assess. This is because your success will be determined by the amount of commitment and enthusiasm of you.

The Bank will lend up to 70% of the total start-up costs for a franchise, although this may be nearer to 50% for a less established concept. In view of the likely amount required, security, such as a second mortgage on your home, may be required. This will be discussed with you during a detailed meeting.

Before we are willing to lend, a business plan will be required and should include details about the franchise, the costs, the sector it operates in, their competition, both locally, regionally and nationally, your CV, your assets and liabilities and projected financial information. The Bank’s Business Software, including a template business plan can assist in drawing up your own plan. If you are buying an existing franchise business we would like to see the actual financial performance; the last 3 years would be helpful.

Many franchisors will assist in completing a business plan, however our Franchise Manager will expect you to know and understand the various statements and financial figures it contains. There will undoubtedly be questions about parts of your plan. The financial information, particularly the forecasts, will help you to assess the performance of the franchise in the early months.

It should be noted that any Bank will not warrant, endorse or recommend any franchise. The decision as to which franchise to buy is left to individuals who should undertake thorough research into the franchise.

RBS also provides a free Guide to Franchising and to ask David a free finance question, click here.

For further information on how RBS can support your franchise aspirations contact 0800 073 0265 (Text Relay 18001 0800 073 0265). Calls may be recorded.

Security may be required. Product fees may apply.
Over 18s only


Last Updated: 23-April-2014