Text: Nicole Canning. Article from the December 2011/January 2012 issue of Your Business Magazine.
Make sure you ask all the right questions first …
While the Consumer Protection Act guards the rights of franchisees more than has historically ever been the case, there can be no better protection than arming oneself with knowledge ahead of making a franchise purchase. Buying a business can be just as emotional a decision as buying a house or car, so be sure not to gloss over the finer details of the agreement by placing greater emphasis on the anticipated outcomes – such as the desire to build a successful venture or enjoy a better lifestyle.
It only stands to reason that the more you know about franchising, and about the particular franchise you are considering investing in, the more effective due diligence you can undertake; and the fewer surprises you can expect down the line. Here are the various elements to consider, along with some pertinent questions to find the answers to…
The potential Franchisee
If you haven’t owned your own business or franchise before, start off with some self-evaluation in terms of your experience, skills, personality and working style. Ask yourself:
- Are you ready to be an entrepreneur: more work, longer hours, more risk, more responsibility?
- Successful franchises tend to be owner-run. Are you willing to be hands-on in your business?
- What is your industry background and experience? A franchise provides a proven business model, which works well for those who prefer less risk and less independence. Does this suit you?
- Are you passionate about the sector that the franchise you are evaluating is in?
The potential Franchisor
When you buy a franchise, you’re entering into a long-term partnership with the franchisor. The success of your venture will be inextricably linked to their vision and decisions, so it’s essential to know who you are getting into relationship with. Extract some information on their background and standing with the following questions:
Their credentials
- Who makes up the franchisor management team? Is the franchisor a one-person company or a corporation?
- How long has their business been in operation and when and why did they decide to start franchising?
- What is their industry background, experience and training?
- Are they members of FASA?
- How seriously have they investigated you, in terms of your ability to successfully operate the franchise at a profit to both them and you? Often their level of interest in you is a good indication of their motives for franchising.
- Does their business culture and personality seem to match yours?
Their success
- Is the franchisor successful, in terms of having built up a profitable business model? (Obviously you will want to scrutinise the figures but it is worth asking on a general level).
- Are their franchisees profitable? How long did it take them to achieve a successful profit margin? (Again, this should be verified through financial statements).
- What is the success rate of existing franchisees? How many franchisees have gone under/sold their businesses in the last few years? (Be sure to ask about the franchisee rather than the store, as stores can change hands and therefore not reflect potential “issues”).
- What are the company’s expansion plans and where will other new franchises be located?
- Are there any achievements or awards that the franchisor can boast of?
- Do they have any past litigation records or prior bankruptcies?
- What can the franchisor help you achieve that you wouldn’t be able to individually?
- What threats do they see in the current market and what strategy do they have in mind to deal with this?
Their reputation among other franchisees
- Asking franchisees about their experience with the franchisor can be extremely enlightening. Be sure to interview a cross-section of franchisees from different locations, including single and multiple unit owners, as well as those who are new to business and those who have owned their franchises for a long time. Speak to franchises outside of those recommended to you by the franchisor, and ask them:
- Does the franchisor have a reputation for honesty and fair dealing among franchisees?
- What is the relationship like between franchisor and franchisee?
- Have they held up their end of the obligations regarding ongoing support, assistance and training?
- Do they feel that the franchisor exercises the right amount of control, or too much or not enough?
The Franchise Agreement
This contract is the cornerstone of your relationship with the franchisor, and will form the basis of decisions regarding any future misunderstandings or disputes. The importance of reading, scrutinising and understanding this agreement, together with the disclosure document and business plan, cannot be over-emphasised. Review the paperwork very carefully with your attorney and be sure to present any discrepancies, questions or concerns to the franchisor. Get clarification in writing and don’t assume that the franchisor is responsible for something not stipulated in the agreement. Some questions to think through include:
Location
- Is the franchisor offering you an exclusive territory for the length of the franchise agreement? Or can they sell a second or third franchise in your market area?
- Do you have the right of first refusal to adjacent areas?
- Will they assist you in finding a location for your operation? (And assist with site evaluation and lease agreements).
- Do they sublet space to franchisees?
- Have you met the field representative who works in your territory area? As you will be working together, it’s important that you get along.
- What is the proximity of competition, and what are their respective strengths and weaknesses?
- Are they currently operating in areas with similar demographics to your proposed territory?
The costs
- Does the franchisor provide financing?
- What is the total investment required and will you receive a breakdown of all the costs you stand to incur?
- Are there any fees in addition to those described?
- How much working capital will you need, and what help will you receive in preparing proper projections?
- How does the franchisor use the initial franchise fees?
- If you decide to terminate the franchise agreement, are there any costs involved?
Training and support
- What is the extent of the training and support on offer?
- Do existing franchisees feel that they have benefitted sufficiently from this channel?
- Is the training and support provided in line with the franchisor’s fees?
Compliance and regulations
- Are there any obligations to the franchise company, such as supplies that have to be purchased through them?
- Are there any restrictions on what items you may sell?
- Are there any exceptions or conditions on the use of trademarks/symbols/names that the franchisor has?
- What are the terms of the agreement regarding termination, modification and renewal conditions?
- How long is an approximate time to wait between signing the contract and commencing with trade?
- How do they handle grievances with existing franchisees?
Marketing
- Does the marketing strategy outline how the business is going to attract new customers?
- What is your role, as franchisee, in funding and facilitating local marketing?
- Are there detailed advertising plans for the future, including time frames, budgets, tools etc?
- Are there any contributions to advertising/promotional costs that you are expected to make?
- Are you obliged to undertake advertising and promotions of your own, at your own expense? Is help offered in carrying this out?
Info you should receive
- Make sure the franchisor supplies you with the following information:
- Actual, average, and forecasted sales
- Actual, average, and forecasted profits
- Actual, average and forecasted earnings
- Existing franchisees and their names and locations
- Number of franchisees, financial statements and litigation history
- Contact details of suppliers and other operators involved
- Access to the operations and procedures manual prior to signing the franchise agreement
There are many different types of franchises, so not all these questions will be relevant. They will, however, get you thinking around the various angles involved, some of which may not have been fully clarified by the franchisor. Perhaps the last word of advice is to take your time before you commit to anything in writing. No responsible franchisor will pressurise you to make a quick decision, and the moment you are urged to sign in a hurry, you should terminate negotiations at once.
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