Buying a successful franchise.
Owning a franchise can be a rewarding way to earn a living. Done correctly it can carry less risk than starting a new business on your own.
The success of a franchise business is largely dependent upon the involvement and business experience of a franchisor who is committed to the system’s success and who is financially sound and of good reputation. You can improve your chances of buying a successful franchise, by asking the franchisor some important questions before deciding to proceed.
Did the franchisor personally operate an outlet (as a pilot) before it commenced franchising?
If so, the franchisor will understand the day to day operation of the business better and the frustrations that franchisees may have. The details of the pilot scheme will also give you an indication of how successful it was and you should ask to see the financials. Franchisors who have previously run their own outlets can find it initially difficult to switch into the role of supporting and assisting franchisees. You should ask the franchisor what they can offer you that other franchisors do not offer.
Does the franchisor have any other franchisees?
You should contact a sample of existing franchisees to assess their performance to date and their feedback about the franchisor.
Has a franchisee ever failed?
If a franchisee has failed you should enquire as to why. If possible, speak to both the franchisee and franchisor about this. Also ask the franchisor if they have bought back a franchise that was failing before it actually fell over.
Does the franchisor provide financial projections?
Disputes often arise from financial projections and it is important that you ask the franchisor what assumptions the projections are based on. Be weary of financial projections given by the franchisor for other existing operations which are in a busier location than the intended location that you will operate from. You should ask to see actual accounts which confirm the franchisors financial projections and ensure that they are relevant are these to the proposed territory or site.
What support does the franchisor give you?
The support of the franchisor and adequate training by the franchisor of its franchisees is crucial for the ongoing success of the system. Your enquiries should include asking whether the franchisor will work with you in the franchise after the sale and if so how long they will do so for. You should also find out what continuing training the franchisee will provide and how much this will cost.
What advertising initiatives are there and how are they paid for?
Advertising and marketing is essential to any franchise system. The franchisee will be expected to pay a percentage of its revenues to the franchisor as a marketing fee. Details of this fee and how it is to be spent are important information to consider. In terms of the advertising itself, how are marketing and advertising decided upon and what input do you get? Is the marketing and advertising appropriate to the customers that you are trying to attract?
The above are a sample of questions you may wish to ask a franchisor. You can speak to one of our Commercial Law Team if you would like to see a more comprehensive list of questions.
