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How to assess a franchise?

Written by: Timur Sultanov

Article Overview: Buying a franchise is like buying any business: you must do your homework. Franchises are not always what they seem. All franchisors begin by sending you an information pack. This pack should set out all the major features of the franchise, and should be carefully read before any meeting is arranged.

How to assess a franchise?

Issues you are looking at are:

- How much does it cost?

- What do you get by way of training, equipment, supplies, is a must to contact customers, etc., for this fee?

- What is the ongoing support - advertising, marketing accounting, product, helpline, etc.?

- What are the income projections?

The information pack should include general information about the franchisor, including a general history and how long it has been in business, as well as the number of franchisees currently in the network. It should also include details of its accountants, solicitors and bankers.

There should also be a detailed description about how the franchisees work on a day-to-day basis, which will give you an idea as to whether you will enjoy it.

The only way to assess whether a franchise is value for money is

to check it against the other franchises in the same business. It will also be a question of whether you feel the financial rewards adequately reflect the effort and money invested.

If you like the idea and feel it is worth taking further, then you will need to arrange a meeting to begin the process of checking it all out.

Checking it out

The information pack will probably look very impressive.

The principles in franchising are fine for those people they suit, but beware. Quite frankly, whilst there are many good ones, a lot of franchises are a waste of money.

These are some of the steps you should take before you commit to proceed:

Talk to the competition

Even if you have decided that one company looks much better than the others, it is worthwhile having at least a phone call, if not a meeting, with a couple of others before the meeting with the favourite. Ask them why their opportunity is better than the one you like. You can then tackle your first choice about the issues they bring up to see if they can satisfy you. If not, perhaps you haven't selected the right one!

Check the income projections in detail

Even if you have never looked at business projections before don't be afraid to look into the figures. Preparing business projections is largely down to common sense. Go through the income and expense lines, one by one, to understand what assumptions they have used in arriving at the figures, and consider whether they sound reasonable to you. Obviously every business will be different, but let's take an example to demonstrate in general how to approach the assessment of the projections. The example is not based on any detailed knowledge of the business in question, but is intended simply to demonstrate the approach.

Free of charge you can do a search on the company name or number (by law these must appear on the official notepaper of the business), and this will show the date the company was formed, and whether the accounts and annual return are up-to-date. For a small fee, you can download the latest annual accounts. This will provide a check on how well established they are, and how financially sound.

Choose a good solicitor

Most franchisors will not vary their standard franchise agreement. This is quite reasonable given that they cannot have different franchisees on different terms. However, you should have a specialist solicitor check out the agreement you are being asked to sign, so that he can at least explain it to you so you know exactly what you are letting yourself in for. If the agreement is unreasonable, he will advise you.

Franchises are a specialised area, and you should find a solicitor with appropriate expertise.

Buying an established franchise business

When you buy an established franchise business you will need to follow all the steps described in the following chapters for assessing how much you can afford to spend, assessing the business and calculating what you think the business is worth. However, because it is a franchise there are extra factors to consider:

Check out how well the franchise works

You will need to carry out all the steps covered earlier for checking out the franchisor and how well the franchise works.

You should be given profit & loss account figures for a number of years (at least two preferably) which, if reliable, will show you how profitable the business has been. Hopefully a large part of the risk has been taken away by the fact that the business has been established and proved to have made money. However, you will still need to satisfy yourself that the franchisor/franchisee relationships are good, and the support provided adequate, because you are new to the business and will need support at least as much as the vendor did when he started. You will need more support in a way, because the business is already up and running, so there is no gentle early build-up. You will be expected to go on the training course, and will need that to be good, just as much as the vendor did.

The vendor is not going to tell you he is selling because he is fed up with the franchisor, or with working hours twice as long as he had been told, so you need to speak with other franchisees in just the same way as you would if you were starting a new franchise outlet.

Check the value

When you buy a new franchise from the franchisor, the fee is fixed and you take it or leave it. However, when you buy an established business the vendor will expect an enhanced price based on the proven profitability of the business and the goodwill created thereby. Obviously there will be scope for negotiation, and you will need to satisfy yourself that you are paying a fair price. The difference compared to a non-franchise business is the fees payable to the franchisor. The franchisor will expect to approve you as the new owner, and will normally charge some or all of the following fees:

• An administration fee for checking you out.

• A training fee for your training course.

• A legal fee for entering into a new franchise agreement with you.

In my view these fees, with the possible exception of the legal fee, should be paid by the vendor, or deducted from the agreed sale price.

Negotiating the deal

In addition to signing the franchise agreement with the franchisor, there will be a sale/purchase agreement with the vendor. You may wish to negotiate additional support from the vendor, and other terms.

Related Articles
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Hello I am a franchise expert - Hello, I recruit franchise owners for successful franchise concepts based in the USA. Many of my franchises are looking to expand north to Canada in all major centers. I enjoy networking and answering questions about franchising. If anyone is interested in the franchise world or looking to buy a franchise then contact me. I have a wealth of information and like to help. Thanks for your time. Michael Somer
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