Vanessa Wheeler and Vanessa Challess Dines are commercial law experts and give you the information you need if you are thinking of taking up a franchise.
A franchise can be a great opportunity to run your own business. It can be a much quicker start up than a traditional business. You get the benefit of the franchisor’s market share, brand awareness, advertising, business management and know how – plus ongoing support from the franchisor. The banks may be more willing to lend you money to fund your business if it is an established franchise and because the business is already established the risks of failure are likely to be reduced. The down side can be that the actions of the franchisor directly affect you including insolvency, you may have to pay a mark up or royalties on goods or services provided by the franchisor or their nominated supplier, and your business is likely to be heavily regulated and controlled by the franchisor.
Before you even get a prospective agreement looked at by a solicitor ensure you do your own research and background checks – solicitors call this ‘due diligence’.
You should thoroughly research the franchisor.
1. Financial checks
Check the franchisor’s credit rating and look at their last set of accounts, these should be available on Companies House. Make sure that the franchisor has a well established presence and that you are not propping up a new business venture. Also, have a look at your finances: will you need to borrow from the bank to purchase this finance? Consider your liabilities here. Find out if you have to purchase goods or service from the franchisor or their nominated supplier – and what mark up and/or royalties apply?
2. What is it about the franchise that is so attractive?
Exactly what is the franchisor promising to offer in the way of advertising and support? Talk to current franchisees and find out whether the franchisor has met expectations. Consider what it is about the Franchise that is attractive and whether you could offer the service yourself?
3. Existing franchisees
Try to speak and visit as many of these as possible. How long have they been with the franchisor, what are the problems to date. Is the franchisor meeting their obligations ? Are the other franchisees making a profit? Do they plan to renew? Talk to existing franchisees regarding how the franchise has gone financially. Make good use of the internet and social media. If you can find some former franchisees, you could try to find out why they gave up the franchise.
4. Research the local market
Is the product or service needed in the area in which you are marketing it or is the area already saturated? Who are your competitors? How easy is it for competitors to enter the market? How strong is the franchisor’s brand? Is there an exclusion zone that would stop other franchisees of the same business setting up? Could you use existing business contacts to support the franchise ?
5. Research the online market
Go on the internet and using social media search for possible problems with the franchisor and the business, just as you would search for reviews of your planned holiday destination. And are the franchise customers happy with the service? A franchise is a big commitment and you should use all the tools at your disposal to check it out thoroughly before committing.
6. Renewal & exit strategies
If you sign up and later on, your circumstances change or you want to exit or sell your franchise business, you will need to know what your options are. There are often restrictions on the franchisee’s ability to sell or transfer the business. Make sure you have discussed this with the franchisor and that you are happy to sign up to the minimum term before you take on the commitment. You should also discuss what the position is in relation to renewal at the end of the franchise term and in what circumstances renewal would not be an option for you.
*Vanessa Wheeler and Vanessa Challess Dines [pictured] are solicitors specialising in franchises. For more information on franchises, go to our Franchise Opportunities section.