Assessing your franchisor’s business proposition
The business of the franchisor has to be investigated. This investigation should be concerned with securing answers to the following issues.
- How is the business structured?
- What will the franchisor do to assist the franchisee into business?
- What are the operational factors which are relevant and have to be considered?
- What are the detailed procedures for getting into the franchise?
- What are the on-going services and how will they be provided?
At this point in the investigation the franchisee should be trying to ascertain the “nuts and bolts” of the franchisor’s operational system and his methods of working.
In most cases, the franchisor will provide the franchisee with the services mentioned in chapter five in order to assist the franchisee in obtaining his premises and preparing them for the opening.
However, there can be cases in which the franchisor offers what is called a “turnkey” operation. This means that the franchisor obtains the site and fully refurbishes, shopfits and stocks the store before handing the franchisee the “key” against payment of the cost. In a turnkey operation, the franchisee, who will receive his training whilst his shop is being prepared, does not get involved in any way in the construction and fitting out work, although the franchisor will keep in close contact with him during construction and will keep him in the picture and consult with him about what is being done. The franchisee will, of course, be responsible for the cost of the fitting out, equipping and stocking of the business.
The following questions should be asked:-
1. What is the total cost of establishing a business under your franchise?
2. What does this cost include?
3. What capital or other costs will be incurred by me in addition to the cost of establishing the business?
4. Do I have to pay a deposit? If so, on what terms? Are there any circumstances in which if I do not proceed, I will lose my deposit, or any part of it? If so, please explain.
5. What initial franchise fee do I have to pay? What is it for?
6. How much working capital do I need? What is the basis for your calculation of this requirement?
7. How long will it take to set up the business from the time we sign the contract to when we actually open?
8. What initial services do you offer?
9. What training facilities are there and where do you provide them? How long will the training last and what will it include?
10. Who pays for the training? Who pays the expenses I incur in attending for training, including fares and hotel accommodation?
11. Do you provide training facilities for my staff. If so, on what terms? If not, who trains them, and if I have to do so how am I provided with the means to do so?
12. What level of gross profit margin should I expect to achieve? Please itemise the expenses which I shall expect to incur? What level of turnover do I need to achieve break even and how long should it take to reach that level?
13. May I see actual accounts which confirm, or fail to confirm, your projections? Can they be relied upon? Or are they merely illustrations?
14. What financing arrangements are available and what terms for repayment will there be? What rate of interest will be required and will the bank or finance company want security?
(Note – The questions which relate to financial performance will probably be answered in a qualified way. Very few franchisors will be prepared to make representations or give warranties of what financial performance will be achieved. A franchisor should be prepared to disclose actual figures which have been achieved, in his operations or by franchisees, although he should not identify any franchisee who achieved the figures without that franchisee’s consent. No franchisee should rely upon any financial projections as being a guarantee that they will be achieved. There can be many reasons why they are not achieved including the franchisee’s own deficiencies. No franchisor can prepare projections for franchisees because no one can set targets which are dependent on the performance of a third party. The would-be franchisee must prepare its own projections which are a reflection of what he thinks he is capable of achieving).
15. Is the business seasonal? In the case of a relatively new franchise involving a seasonal business, particular attention should be paid to whether the pilot testing was of a sufficiently long-term nature to be certain that seasonal factors have been taken into account. In the case of a longer-established franchise, the position should be more clear.
16. What opening support staff do you provide?
17. Do you provide an opening launch of the business? If so, what does it consist of?
18. How do you make your money?
19. Do you charge on-going franchise fees? What are they and how are they calculated?
20. Do you make a mark-up on product sales to your franchisees?
21. If so, how much, and what protection do I have against unfair and unjustified increases?
22. Do you take any commission from suppliers of goods or materials to a franchisee? If so, please provide details.
23. Do you receive any other income or commissions from other source based upon business dealings with your franchisees? If so, please provide details.
24. Will I be obliged to maintain a minimum continuing franchise fee, or to purchase a minimum amount of goods? What happens if I fail to meet this commitment? How do you calculate these commitments?
25. What advertising and promotional support do you provide?
26. Do I have to contribute to advertising and promotional expenditure which you incur? If so, how much? Do you provide an auditor’s certificate or other proof that the sums you receive for advertising and promotional expenditure have been spent for that purpose?
27. What point-of-sale and promotional literature do you supply, and what do I have to pay for it?
28. What help will I receive in local advertising and promotions? What will it cost me?
29. Will I be able to obtain and motivate a sufficient number of competent staff? Will they require specialist skills and are such people readily available?
30. Which of the following continuing services will you provide after the business has commenced:-
- research and development,
- market testing,
- negotiation of bulk purchasing terms for the benefit of franchisees,
- field support,
- performance monitoring,
- general business advice,
- advertising, marketing and
31. Are there any other continuing services provided? If so, please provide details.
32. Which of your field support staff will be my link with you after I have opened the business?
33. Can I meet him/her?
34. Can I meet some of your other field support staff?
35. Can I meet your head office team?
36. How long have they each been with you and do they have service contracts which will ensure continuity?
37. Please explain the procedure which you will adopt to get me ready to open for business?
38. Will you find me a site, or do I have to find it myself?
39. Will I own the equipment which I need to operate the business?
40. How soon will I have to spend money on replacing equipment or re-modelling my premises?
41. How many times in the past and at what expense to franchisees have you required re-equipping or remodelling to take place?
42. What will be the opening hours of my business?
43. What systems do you have for keeping franchisees in touch with you and each other?
44. Do you publish a newsletter?
45. Do you hold seminars?
46. Is there a franchisee association within your franchise system?
47. How will I cope with my accounting and record keeping?
48. What restrictions will there be on what products I can sell?
49. Do you provide instructional and operational manuals?
50. What will you do if by a clear mistake you misjudge my site, and it does not produce the anticipated figures, resulting in a loss?
51. What would happen if I ran into operational problems which I was unable to solve? What help would I get?
52. How can I be sure you will do what you promise?
Ethical trade body
The British Franchise Association (BFA), formed in 1977, has given a formal structure to franchising and raised standards of ethics and business practice. Full membership is open only to franchisors who have been operating successfully and have franchised outlets established successfully over a period of time.
The franchisor is investigated before being admitted to membership and he must accept and observe a strict code of ethical behaviour.
The BFA has a disciplinary procedure, which can be invoked against a member who acts contrary to its code of ethics, or otherwise engages in questionable practices. The BFA publishes a useful guide, The Ethics of Franchising, which explains the principles of ethical business behaviour in franchising.
The BFA has also established arbitration and mediation schemes to be available to assist in the resolution of disputes between a franchisor and franchisee. The BFA can be contacted at www.thebfa.org.
The prospective franchisee must weigh up and consider the advantages and disadvantages of franchising described in the earlier chapters, as well as the replies to the questions posed in those chapters, before making the decision on whether or not to enter into any specific franchised business venture.
A decision must also be made as to whether the advantages, such as the established business format, training and support provided by the franchisor, are worth having in return for surrendering some independence and submitting to the degree of outside control which is inherent in a franchise transaction.
The prospective franchisee must decide whether the particular franchisor is the right person with whom to do business. Also, he must decide whether he is personally and temperamentally suitable for this type of relationship.
The prospective franchisee may also consider the advice of his local bank manager, or a businessman whose judgement he respects. He should also certainly discuss the matter with his immediate family.
When all these relevant factors have been weighed up, the legal issues and the franchise contract considered, and proper professional advice has been taken, the prospective franchisee has to make his final decision. If he is not able to make his decision with confidence, after having heard all that his advisers have to say, he should consider whether he is, indeed, capable of running his own business, whether franchising is right for him and whether the particular business is the right one for him.