ADVICE FOR FRANCHISEES

A good franchisor wants you to be happy and confident that you are making the right decision and will welcome your enquiries as evidence of your good sense Be cautious if the franchisor attempts to deny you the time to do your research and tries to rush you into a decision

The BFA offers a free online training course which will help you to learn about important legal and financial considerations, as well as what franchisors look for in a prospective franchisee www thebfa org/discover-franchising

Research

Review financial information on the franchisor, including its audited accounts

In the case of a new franchise, you should look carefully at the performance of the pilot operations If there are no pilots, you are entitled to ask what you are getting for the franchise fee and how the franchisor can demonstrate the feasibility of the franchise

Talk to the franchisor about the performance of existing franchisees and the franchisor should be willing to let you have a list of franchisees to contact

You should do some research into the market for the products/services in your chosen area and what the future growth could be The franchisor may have carried out market research in your area, but you should also do your own, ensuring that you understand what the business potential is and can identify and understand the strength of your competition

Support

Critical to your likely success or failure is the level of support and training provided by the franchisor, both at start-up and on an ongoing basis

Support from the franchisor can include accountancy packages and advice, national and local advertising, regular communication and meetings with other franchisees, new products, service and market information, and ongoing training Most franchisors will put on annual national conferences, and some have franchisee associations

There should be a comprehensive operations manual, which gives you guidance on all aspects of running your operation An important aspect to consider is what help, if any, does the franchisor give in respect of any staff recruitment and staff training you may have to undertake

Some franchisors will train your staff for you while others will train you to train them, and many will provide some training and guidance about general employment issues You will also need to consider the legal and regulatory issues, particularly in relation to the public and employees, such as insurance, health and safety, tax

Your franchisor should be able to signpost you to some support services if necessary and should keep up to date with any changes that may occur from time-to-time in the laws and rules that could affect your business

Franchise contract

The next step is to consider the legal implications of the franchise contract This is a very important document as it sets out the rights and obligations of both you as a franchisee, and your franchisor You should receive a copy well in advance It is strongly recommended that you seek independent legal advice on the contract from a solicitor specialising in franchise agreements

You would not normally expect a franchisor to amend the terms of the contract to suit you as franchisors generally prefer to have a standard contract for all their franchisees However, having the contact vetted is not a waste of time as it is important that you fully understand its terms and limitations. If you do not like the contract, you are, of course, free to walk away

Financing

The next step is to examine the financial aspects of the franchise These broadly speaking fall into two categories – the start-up costs and the projected income and profits Looking at the start-up costs first, it is important that you identify the total amount of money required to get the business going, including any working capital you will need

Against the costs will be set the amount of cash you can put into the venture, leaving the sum you will need to borrow It makes sense to do a full review of your own personal financial situation, ensuring you know how much you need to take out of the business regularly to pay yourself.

You must be prepared to take a realistic view of what type of franchise you can afford as you will need to put in a stake yourself, the bank will not lend 100 per cent of the funds required

Having established the start-up costs and your borrowing needs, you will then have to look at the potential earning power of the business on a realistic basis Does it justify the level of investment that it calls for and how long will it take you to recover the investment?

Projections

You will need to ensure that any profit and cash-flow forecasts prepared by the franchisor for your franchise cover all the likely costs, including borrowing and that they are based on realistic figures, normally the performance of existing franchisees This is also a good opportunity to look at fees you need to pay on an ongoing basis

Borrowing money

Deciding to start a franchise is a big step and one of the hurdles for many, is approaching the bank for finance Of course, there is a lot of work to do to before you, or your bank, part with any money You will need to research your chosen franchise thoroughly, making sure that it is the right one for you and that you are fully aware of what is involved

You will also need to ensure you can afford the franchise you are interested in, and that the business offers a good return on your investment Decisions on how much you are prepared to invest, and whether you will draw on savings or financial support from your family, should all be made before going to your bank

You will find that for an established franchise system most major banks will lend up to 70 per cent of the start-up costs, while for new franchises the figure will probably be around 50 to 60 per cent

You should approach your bank having considered or prepared the following: -

● How much will you be able to borrow? Prepare a full list of your personal expenditure: mortgage, car finance, household bills, etc This will show how much money you will need to take out of the business for living expenses

● What security can you offer to back up your loan? You might, for example, have a life policy with some value, or have equity in your home

● Start preparing your business plan This is a vital document to obtain finance from the bank Your chosen franchisor will often help you with this As part of your business plan, you will need to prepare cash-flow forecasts for the first couple of years Your franchisor will help, but you need to be sure that you understand the figures, what they are based on, and how much turnover needed to break-even.

The bank will look at several things before agreeing to lend to your new franchise venture Although they will all have their own requirements and approach, this is a broad outline of what a funder will look at:

Who are they lending the money to?

The bank will look at your qualifications and track record; your financial resources; and assess whether they think you can run the business The franchisor will also have considered these qualities to ensure you are a suitable franchisee The bank may ask to see statements from your personal bank and will need to see your identification documents such as a passport if you are not already a customer of theirs

How much are you asking to borrow?

As well as considering how much you would like to borrow, the bank will also consider the purpose for which the money will be used, including working capital, stock, premises, or vehicles and of course the franchise fee

The funders will also consider whether there is sufficient demand for the product/service you will be offering and look at the type of finance you are looking for (overdraft, loan, or a package of financial services), as well as how much you are personally prepared to invest in the business

Normally, you will be expected to contribute towards the total start-up costs from your own resources, but it is important to get the balance right Often, start-up business owners underestimate how much they will need to borrow to make the business successful, so it is important to put a realistic case to your bank Your franchisor will normally help with setting out details of the start-up funds required and the preparation of cash-flow forecasts

Repayment: Funders will always look closely at how the business is planning to

Normally, you will be expected to contribute towards the total start-up costs from your own resources Often, start-up business owners underestimate how much they will need to borrow, so it is important to put a realistic case to your bank Your franchisor will normally help with setting out details of the start-up funds required and the preparation of cash-flow forecasts repay any borrowing so your plan should show how you plan to do this Will repayment come from future trading profits, after allowing for all your other financial commitments, or from the sale of an asset? Does the cash-flow forecast show that you will be able to afford to repay the loan? What assumptions have been made in the cash-flow forecast? What level of sales are needed to break-even and are they achievable? Is there a contingency plan for any setbacks?

Security: Depending on the amount of the borrowing, banks will often ask for some security for the loan This will only be used if the business fails to repay the borrowing but if you are providing a guarantee or a second mortgage over your property, you should take independent legal advice

As a potential franchisee, you should be in a better position than someone setting up a start-up business from scratch, especially if they have never been self-employed previously

You have the backing of a proven business format, plus the track-record of how similar franchisees are successfully operating their businesses, to show the bank in support of your loan application.

So, there we have it – the two sides to franchising – a business in which both need to be fully committed to their responsibilities to each other and both need to succeed if the franchise is to survive and prosper

Take the time to look at all the different types of franchise available and think carefully about what you would like to do

Running your own business is hard work, even with the support of a strong franchise network behind you so you should look for something that you will enjoy as you build your new future n