How To Evaluate A Franchise

The brochure promises a life of wealth and success beyond your dreams, this franchise opportunity looks too good to miss. What things do you need to think about before you sign on the dotted line?

Franchise terms vary greatly from business to business. Some require large amounts of money up front while others take a longer-term view and charge progressively more as the new business grows. Some franchisors keep the franchisees on a tight rein, closely monitoring their activities, while others are comparatively relaxed.

It is very important that you one hundred percent understand the terms of any franchise contract you are considering signing and that you are informed about the implications of any of the clauses. If you don’t fully understand, you should get a professional to explain the agreement to you and, in any case, you are strongly advised to get legal advice.

The more information you have at your disposal, the better informed you will be and the more sound your decisions will be. Knowledge is Power….

Before going into in-depth evaluation of the franchise proposition, you should ask yourself the following questions:

  • Am I prepared to lose some or all of my commercial independence by running a franchise business?
  • Does running a franchise business fit in with my aspirations and career ambitions?
  • Am I sufficiently interested in the product or service and market that I will be trading in?

If you spoke to a rep from the franchise business were you treated fairly and openly, were the profit projections measured and reasonable, were you given plenty of time to consider and were you offered confidential access to other franchisees? Are you open to purchase most items from your own suppliers or are you locked into only buying from certain traders for all of your products?
If the answer to any of these questions is no, you should consider whether buying a franchise is really for you and, if you are happy that it is, whether the franchise business you are dealing with is reputable and professional.

Once you have satisfied yourself that the franchise proposition merits closer scrutiny, the next step is to give it a detailed evaluation. This should cover the following main areas:

  • The franchise company
  • The contract
  • The financials
  • Other franchisees

You should summarise the main points in each of these areas and put together an overview of the whole franchising proposition. This will help you when it comes to deciding whether or not the purchase is right for you and will ensure that you will have taken into consideration all the points that you need to. It will also be useful when you seek professional franchise advice to have all the necessary information at your fingertips.

The Franchise Company

Find out all you can about the franchisor and not just from its representative. The franchisor will normally have prepared a prospectus with information on its business. Bear in mind that this is a sales pack and that it is designed to show the firm in the best light. Independently verify any information that you can and don’t take anything at face value. The sort of information you will want to know is as follows:

  • How long has the business been trading?
  • Is it a member of any specialist bodies (such as the British Franchise Association (BFA))?
  • How stable are its finances? You can ask to see a copy of its past audited accounts.
  • What are the franchisors long-term strategic plans? How many franchisees does it aim to have? By when? Has it got plans to expand regionally, nationally, internationally? How will this impact upon you?
  • What is the firm's reputation? Is it held in high regard within its marketplace and among customers and is its ethos one with which you are comfortable?
  • Find out as much information as you can about the company. It's also important to note how its reps have dealt with you so far. Have you felt pressurised into signing a contract? Have you been asked to put up a non-returnable deposit? Have your enquiries been satisfactorily responded to. Does the company strike you as being open, upfront and flexible?

The Contract

It is imperative that you get a legal specialist to check the contract terms. The contracts will have been drafted to protect the interests of the franchisor so you must ensure that there is an element of protection for you too. Remember that once you sign it’s legally binding.
The franchisor may take the view that the contract is non-negotiable and this is something you must take into account when assessing whether the terms are flexible enough for you to accept. Beware of verbal assurances and tacit agreements, these are not worth the paper they’re written on. Special areas to consider are:

  • The termination of the contract process
  • Whether you can sell the franchise to a third party and what restrictions apply
  • Whether you need to renew the contract, when and any restrictions that apply
  • What level of flexibility you have to source new suppliers or extend your product range
  • Do you have geographical exclusivity and will it stay that way?
  • Are you required to pay for advertising or promotional activity?
  • Training and support - ensure that this is clear, measurable and adequate.

Finances

You must be sure that the franchise business is financially viable before committing to a contract. The prospectus is likely to portray a rosy picture of massive opportunities, a wide market, plenty of willing customers; but you must be careful to base your decision on your own information.

Do some market research of your own. How strong is your competition and in what ways? Is your pricing structure satisfactory? Is your target market large enough to sustain a successful business?

Work out your costs. After you pay the franchisor’s fees, your normal operating costs, finance repayments (where appropriate), inventory purchases etc is there enough of a profit left? Will you get a satisfactory return on your investment? You should prepare a business plan in the same way you would when starting up any new business.

Bear in mind that banks and other institutions are much more willing to lend money for launching a franchise operation than for a start-up business that has no proven track record.

Other Franchisees

This is the best way to really gain an insight into what it is going to be like running your own franchise. Speak to as many other old and recent franchise holders as possible, at least 5-10 and get independent testimonials. Find out everything you can about what the franchisor is like to deal with, what the contractual restrictions mean in practice, how much support you are likely to get from the franchisor and how the franchisees feel about the market, the future, the products etc.

Once you have all this information in your possession, you will be in a position to make an informed choice as to whether you want to pursue this, or any other franchise. If you do decided to follow up further, you should speak to your accountant, solicitor or other business advisor to get guidance and help.

  • Daniel

    You’ve helped me understand better the terms of a franchise agreement. I’m thinking of giving this a try in a few months and I need to know everything I can about this. I like the ones that don’t ask for a lot of money upfront because I want my initial investment to be minimal. If things work out that’s awesome but if something unpredictable happens I don’t want to lose a lot of money. Any ideas of some interesting franchises?

  • Isaiah Evans

    I have a friend that didn’t pay attention to what he was signing and ended up with a bad franchise that ate up a lot of his money. I feel sorry for him and don’t want to make the same mistakes. Hopefully I’ve learned something from his failure. Your article is a good place to start learning more about this and I can now easily spot a few of the mistakes he made. If he would have done a bit of research before agreeing to those terms things would have turned out a lot differently.