The Beginner’s Guide to Sizing Up a Franchise

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Run through our checklist of precautions to safeguard your investment and give your new venture the best chance of success.

The advice of specialist lawyers, accountants and successful operators can protect even the newest comers when they’re considering a franchise opportunity. Here are 10 top tips the experts recommend for beginners venturing into the franchising sector.

1. Make sure the business is suitable for a franchise

Your first step should be to check that the franchisor has a proven record and there is demand for its product in your area. Some franchises are worth little because the product is a fad, relies on the skill or contacts of the original operator, or requires too much training for you and your own staff. It might offer low profit margins or be pitched at a saturated market. Remember, too, that some successful foreign franchises don’t really work in other countries.

2. Be sceptical

A reputable franchisor won’t put you under pressure to commit yourself in haste. Pushiness is the first indication that a business is looking to expand at all costs, rather than grow its brand family.

Some so-called ‘franchises’ are little more than a distributorship deal or a trademark licence granting a right to use a brand with no transfer of real expertise to the franchisee. There are a small number of operators who set up then shut down franchises that are simply aimed at making money from franchisees.

“There should be no reason for a franchisor to try and close an agreement that fast because it’s very important that there is a fit with the potential franchisee,” says John Nelligan, master franchisor at Business Doctors Ireland, a small-business consultancy franchise. “It’s crucial that franchisees understand the market, that they understand what franchising is and that they know that this franchisor-franchisee relationship can last over many years.”

3. Research the franchisor

Make sure the franchisor’s financial accounts are available to you and that you have evidence of a track record of its success. Be wary of new operations, especially where the franchisor has not run its own outlets. Examine the firm’s financial records to make sure it’s profitable enough to keep its commitments, and visit its head office – don’t be swayed by an impressive website alone.

“You want to make sure that your investment of time and money is being well spent and that you’re investing in a franchise model that can generate the types of financial return you are targeting,” says Peppe Santoro, solicitor and notary public at Venture Legal Services, a Dublin-based commercial law firm.

4. Identify mistakes to learn from

Many new franchisors will have started out as the owner or operator of the business they are hoping to grow. Early franchisees should make sure to have frank and open conversations with the people who were there from the start. That way, it will be easier to identify potential bumps further down the road.

“A confident franchisor should be able to point out many of the pitfalls they have experienced so that the intending franchisee doesn’t have to make the same mistakes,” Santoro says. “In a way that is one of the strongest advantages of taking out a franchise rather than setting up from scratch: you get to learn from others’ mistakes at no or low cost.”

5. Talk to existing franchisees

An ethical franchisor should be willing to give you a full list of franchisees rather than direct you to only two or three ‘pet’ operators. It’s best to speak to both high and low performers and a new franchisee that has recently gone through what you are about to experience. You could also contact a former franchisee that has recently left the system, to find out if they encountered any problems.

“It’s crucial that franchisees understand the market, that they understand what franchising is and that they know that this franchisor-franchisee relationship can last over many years”
 

John Nelligan, master franchisor, Business Doctors Ireland

“The reason a franchise succeeds is because a franchisee has invested in that belief or vision,” says Barry Connellan, managing director of Franchise Development Solutions International. “It’s hugely important to speak to existing franchisees that have been with the business for over a year and where a real relationship has been established.”

6. Check out the franchise agreement

This should be more than a simple off-the-shelf document. It should be 40 to 100 pages long, clearly setting out the obligations and rights it imposes on both sides. The franchisor will almost certainly refuse to vary it because the same agreement tends to cover all franchisees, but you need to understand the details and, if necessary, agree a legally binding side letter to include any promises you have made that are not in the agreement.

7. Scrutinise the fine print

Read the small print carefully to ensure you won’t be locked into fees you can’t afford if the business underperforms. Check the agreement hasn’t set unrealistic minimum performance targets. Also look out for onerous conditions on your ability to sell the franchise or renew it on fair terms after the initial period of, say, five years. If you must buy from the franchisor or certain suppliers, find out if the franchisor earns a commission on those supplies – if so, that should reduce the other management fees you pay.

8. Consult a specialist lawyer

In the Republic of Ireland, there is no formalised legal definition of what constitutes a franchise agreement. All the document must do is reflect the terms of the agreed deal and contractually bind both parties. There are a relatively small number of Irish lawyers and law firms that specialise in inspecting franchise agreements, and while they will charge for their scrutiny, franchisees should see this fee as an investment in the future of their business.

9. Check the level of support you’ll get

A genuine franchise should offer extensive initial training and ongoing support, including marketing and advertising, sales advice, design and product development, quality control and, in many cases, attractive supply agreements. A more established franchisor also provides you with a stronger brand and more valuable market presence.

10. Be careful about paying a deposit

If a franchisor requires you to pay a deposit when exploring a new franchise relationship, make sure it is fully or partially refundable if you walk away. Any non-refundable portion should be limited to the actual costs the franchisor incurred in dealing with you.

“Until you have completed all of your due diligence, any deposit should be refundable and ‘subject to contract’,” says Santoro. “That way, if you are given a franchise agreement to sign that doesn’t meet your expectations, you will be able to back out at less cost.”

 

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