Should I Franchise?
Franchising dates back to at least the 1850s. Modern franchising came to prominence with the rise of franchise-based restaurants. This trend started initially in the 1930s with traditional sit-down restaurants like the early Howard Johnson's, and then exploded in 1950s with the development of fast food chains, of which McDonalds and more recently Subway have been the most successful worldwide.
Franchising is a unique way of doing business and before entering into a franchise agreement you MUST do your homework. People often compare the franchisor-franchisee relationship to that of a marriage. They will talk about the "honeymoon" period and how the franchisor and franchisee are a "partnership".
Wrong. The Franchisor is the senior partner.
When things are going well and the relationship is smooth every one is happy. It is when things are not going so well and every business, franchised or not will go through tough times - that nature of the franchisor / franchisee relationship is tested.
Before you commit to a franchise look at the history of the business; who are the principles of the business what is their background? Speak to as many franchisees as you can not just the ones the franchisor gives you the details of. Ask them how efficient the head office is, what happens if there is a dispute between franchisees or a franchisee and the franchisor? Does the franchisor support individual franchisees if a competitor moves into their territory? Is the support the franchisor promises forthcoming or is there no real franchise support? How is the marketing contribution spent? Ask lots of questions. You are about to invest a great deal of money into business make sure you are happy and that the answers and information you are given make common sense. Find out all the negatives. If you still believe in the model then go ahead. If everything seems too good to be true it usually is. My advice is to walk away.
The Franchisor should tell you about the difficulties in running your own business. At Dominos Pizza in the UK they actively discourage franchisees at the interview stage. They paint a picture of very long hours, very hard work and the importance of being hands on. If the prospective franchisee is still determined to go forward that is great if they pull back, thats fine as neither party has wasted much time.
Be under no illusions - being a franchisee is hard work. Of course there are the benefits of a proven system, the brand, the training, the support, the marketing and the development of the business through the input of the franchisor and the franchisees. At the beginning all your fees will look like great value for money. Its two years down the road when you (hopefully) have a successful business that you will start to resent the fees.
Make sure you look at the numbers carefully. Most franchisors will present attractive returns in their sales brochures. Make sure you budget for loan repayments if you need loans. Many franchisors will require that you refurbish your operation every 5 7 years. This is a cash cost and you will need to budget for it.
EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) figures are all very good but actually you have may have to pay Interest. Depreciation whilst not a cash figure on the Profit and Loss should be taken into account as that is probably the amount you will need to invest in refurbishing and upgrading your operation.
Ask if there are any hidden costs within the franchise. Does your franchisor charge you administrative fees or delivery charges if they supply you? These are not problems as long as you know about them up front and they dont come as a shock to you.
There are certain fundamental questions that every prospective franchisee needs to ask. The list below is a good starting point. It is not exhaustive and in no particular order but it will ensure you cover the major issues. Once you have asked one question others will come to mind ask the questions. Do not be shy or accept an answer that does not make sense. Make a list of all the questions you want to ask a checklist and keep on asking until you are satisfied. This will be one of the most important decisions you will ever make. This is not a job this is YOUR business.
How long has the business been established. Where is the Head Office? Who are the principles? Have they ever been bankrupt? How long have they been in business? How long have they been franchising?
How many outlets do they have company owned and franchised? Look up reviews of the business. Do lots of internet searches find out the real reputation of the company, not just what the franchisor tells you.
Under which country and or state law is the franchise agreement governed?
What are the fees initial fees and ongoing royalties? How are they calculated? What is the marketing contribution? Can fees be raised at any time? What are the payment terms for the fees? What if your business is going badly how will the franchisor help? They may not - so make sure you have enough working capital to survive a slow start.
What is your investment expected to be? Are there any hidden costs? What EXACTLY is included? Does it include pre opening expenses? Working capital? What if there is an overspend that was not foreseen?
Finances ask to see some actual accounts of franchisees those that have low, average and high sales. Walk away if these are not provided the franchise name may be hidden but you really should see full management accounts of a range of franchisees before committing. Is the projected labour cost? Is this realistic does it include your salary or are you working for free?
Do you have to buy products and services exclusively from the Franchisor? If not are there nominated suppliers or can you buy the same product at the best possible price?
What are your obligations? This will include adhering to the system and agreeing to use all proprietary information for the sole benefit of the franchise, payment of fees, maintaining the systems standards, allowing inspections and audits of your business, non-compete agreements, what products or services are you allowed to sell and your general your legal obligations such as insurance.
What are the franchisors obligations? Is the franchisor responsible for site selection and shop fit (if applicable)? What training will you be given? What on going support is there? Does the franchisor have the infrastructure to provide the support in terms of people and systems? What is the operating manual like ask to see it.
Territory ensure you are very clear as to what territorial rights you have, whether or not they are exclusive and if there is a disagreement what are the procedures for resolving conflicts.
Property who holds the head lease? Is there a property management charge?
Renewal, termination and selling your franchise what is the term of the franchise agreement? Is there an automatic renewal? Are there renewal fees? What if you want to sell does the franchisor have to approve the buyer? What exactly does that mean? Can the franchisor terminate your agreement? Under what circumstances?
Finally make sure you have 1000% backing from your family. Starting a franchise like starting any business is very hard work. I repeat this is not a job. If you think it is all very lovely and you are now the boss and can sit back and give orders, think again. In fact any franchise worth having will probably insist you are hands on. And so you should be. Your husband, wife, parents and children - all those who are close to you must know that you will need to be committed to the business. If you cannot make that commitment, dont franchise. Get a job.
Good luck and if you need any more advice please contact me at
maurice@lanbury.comor call me on +44(0) 7860 431546
Maurice Abboudi
Lanbury Associates
4, Manchester Street
London
W1U 3AE
United Kingdom
