You want to start up a franchise, but you’re worried about how to invest your cash or indeed having the money to put into the business. Where do you start?

Tom Endean, marketing manager at the British Franchise Association, says the first thing is to be as sure as you can that the franchise you are investing in is bona fide.

The bfa operates an ethical franchising scheme which means franchises bearing its stamp of approval have been vetted. The vetting process is voluntary – franchises apply for membership of the bfa and get the logo to put on their website. However, as it is a voluntary process, non-membership does not signal that a franchise is not ethical. It may mean, though, that you need to do more research to check the smallprint and see whether, for instance, if you have built up the business and want to sell it on, you will get some sort of return on your investment.

Even for those franchises that are bfa members, though, Endean recommends doing a lot of research before you sign over any money and making sure it is the right business for you. “Even if it is a very good franchise business it might not be a suitable match for you,” warns Endean. You need to be sure it matches what you want in terms of work culture and hours and you need to be sure what it is actually going to cost you. With most franchises there is an initial fee and then an ongoing fee, which may be based on a percentage of your sales or on them supplying a core product, for instance, if you are a fast food chain.

Realism

The important thing is to be realistic about your costs, including your bills and mortgage. It is not just about looking at the first few months and being able to get the business up and running. You need to have a long term business plan which sets out realistically how long it will take you to make a profit and helps you work out how much working capital you will need.

To help you work out how much you are going to need, franchises should be able to give you information on what realistic earnings are for the business and how long it takes on average to make a profit. “Franchisors should be happy to talk to you about this,” says Endean. “If you are serious about investing in a franchise you could try to spend a few hours with another franchisee and sit down and talk about profit margins, how difficult it was to start making a profit and what the realistic earnings are.”

He says some people can fund their franchise business out of redundancy payments or savings, but many people need to look for finance elsewhere. “You could borrow from friends and family, but there is a danger you might not be able to pay them back if something happens,” says Endean. Banks are the obvious solution and only three are accredited by the bfa because they have specialist franchise departments. They are HSBC, RBS/Natwest and Lloyds TSB. “It’s all about knowledge and understanding,” says Endean. He adds that banks without specialist franchise services are likely to treat you like any other business start-up and most business start-ups have a high failure rate. However, franchises are much more secure in that they are already a tried and tested formula. Endean cites figures showing franchises are eight or nine times more likely to succeed than other start-ups. The specialists will look at your business plan and, particularly if the franchise is one which is recognised by the bfa, they are likely to know the brand and to know how realistic your business plan is in terms of turnover and timescales.

Recession

Endean acknowledges that all banks are more risk averse in the current economic circumstances than they were 18 months ago, but says they are also likely to look more favourably on lower risk investment options than they would have done 18 months ago. He says there has been “a significant increase in interest in franchise brands” in recent months as people use their redundancy money to set up businesses, but with reduced risk. “People want to trade with more secure businesses and to know that the company they are trading with will be around in six months’ time.” He cautions, though, that running a franchise is hard work. “If you want a 9-5 job, this is not the right thing for you. You need to be able to put the hours in, especially at first.”