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Essential steps in assessing your franchisor

The assessment of the franchisor is a very important part of the process of making up one’s mind about whether or not to take up a franchise and if so which to choose.

Do not assume that just because someone calls himself a franchisor, it means that he really is one.

Many who perpetrate frauds will often try to lull the unsuspecting into believing that what they offer is a franchise when it is not. One should not allow one’s self to be misled, particularly by these promoters of spurious schemes who suggest that disproportionately high rewards will follow.

It is quite common for a person with a business to be approached by someone who feels that he would like to become a franchisee of that business. This is very often the first time that the owner of the business has heard of franchising and in such a situation he is totally unprepared and quite incapable of offering a viable franchise. Frequently, the response by the owner of the business is to rush out and ask his solicitor for a franchise contract.

There is, of course, more to franchising than a contract. That, in a sense, comes last after the commercial viability of the business as a franchise has been properly structured and established. So do not make the mistake of trying to rush the owner of a business into selling a franchise. There have been cases where an approach from a prospective franchisee has acted as a catalyst for the creation of a new franchise. But from the planting of an idea to the establishment of a viable franchise can take a considerable amount of time. Indeed, very few properly structured and piloted franchise systems can be ready for marketing in less than two years from the time the idea is first conceived.

If you, as a prospective franchisee, believe that the business is attractive you must be patient and wait until the owner has had the opportunity to develop a proper franchise system in which it would be safe for you to invest. Otherwise, you may well be contributing to your own downfall.

Most of the franchise systems on the market are likely to be at different stages in the development and maturity of their franchise. The more franchisees there are, the easier will be the task of assessment because there will be many franchisees to whom you can talk about what the franchise and franchisor have done for them.

In situations where the franchisor is just getting off the ground, greater care is needed in making a choice, but this does not mean that one should not take up such a franchise. New franchisees can and do provide splendid opportunities for those who take the trouble to investigate them properly and choose wisely.

Fundamental questions
What qualifies the franchisor to be a franchisor? What is there to suggest that it is able to discharge its promises and obligations?

To answer these important questions, the franchisor should be asked to provide the following information:

1. What is your business background and experience and that of your directors and principal shareholders (or partners)?

2. A detailed history of the development of the business to date.

3. What steps have you taken to prepare your business for franchising? (This and questions four to eight are particularly appropriate for a franchise which is in the early stages of development and will become less relevant as the size of the franchisor’s network grows.)

4. What knowledge or experience do you have of franchising and how did you acquire it?

5. How many pilot franchise operations did you establish before you began to offer franchises for sale?

6. How much of your own cash did you invest in establishing that your business was franchisable?

7. How can I be sure that you have adequately investigated the market place and that you have acquired sufficient knowledge so that I can be satisfied that I am investing in a thoroughly tested business which has had the experience of confronting and solving the daily problems which arise? Please explain why you consider that the number of pilot operations which you conducted was sufficient in numbers and range of locations or area of operation to prove that the concept works and that you are justified in commencing franchising operations.

8. Why did you decide to franchise, rather than develop your business by the expansion of your own operations?

9. What is the growth rate you are planning over the next five years?

10. What is your corporate structure? How well can it cope with the growth of your franchise network and what plans do you have for the expansion of your support staff and the development of your infrastructure?

11. Who are the senior executives who will be influencing and planning the growth and development of the franchise network and dealing with the franchisees?

12. Can you confirm that none of these senior executives has ever been:-

  • involved as principal shareholder or executive in a company which has gone into receivership or liquidation, or had an administrative receiver appointed or an administration order made against it?
  • bankrupt or made an arrangement with his creditors?
  • involved in a franchise company which has experienced business failure?
  • unsuccessfully involved in business as a franchisee?
  • convicted of a criminal offence (other than a motoring offence not involving imprisonment)?

13. Details of the following:-

  • a) How many franchisees do you presently have? May I have their names and addresses?
  • b) How many franchisees did you have 12 months ago?
  • c) How many franchisees, within the last two years, have:-
    • had their contracts terminated by you?
    • terminated their contract with you?
    • mutually agreed with you to terminate their contract?

14. How selective are you in choosing franchisees? Please explain your approach.

15. A copy of your latest audited accounts.

16. Can you confirm that there has not been any deterioration in your financial position since such accounts were prepared? If confirmation cannot be given, please explain why not.

17. Confirmation that you have made arrangements adequately to finance your activities during at least the ensuing year.

18. Are you a member of the BFA? If so, which category of membership?

19. Have you applied for membership of the BFA or to join its provisional or development listing and been refused?

20. Who are your bankers? May I take up a reference from the bank for at least the level of my proposed investment?

21. Do you have any franchisee finance arrangements with any of the banks? If so, with which and may I have details?

22. Please provide at least two financial and business references, other than your bankers.

The views of existing franchisees and the experience they have had with their franchisor are always very important. However, and particularly (but not exclusively) in the case of early franchisees, beware of any franchisees who may have caused, or largely contributed to, the problems of which they complain.

You should take advice from your solicitor and accountant and they will help you place the replies you receive in perspective. But whatever the replies and advice you receive, you must satisfy yourself that the franchisor you decide to join is one who will provide you with a long-term business relationship and one in whose judgement you feel that you can rely.

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