It is surprising how few prospective franchisees do any financial checks on the franchisor itself. There are a number of checks that it would be wise – actually essential – to carry out:
- Ask the franchisor for copies of its latest audited accounts and, ideally (although mostly franchisors would refuse to provide this) their latest management accounts. If a franchisor does not want to provide latest audited accounts – which would be surprising – you can obtain these accounts from Companies House. You can establish a great deal from how a franchisor responds to your enquiry about its financial position! Having said all of this the difficulty here is that very often franchisors who have an established business set up a new company to undertake franchising activities and certainly in the early days that new franchisor company will have few assets and no trading record, so the accounts may not tell you very much. If that is the situation then you should ask for the accounts of the existing business.
- At least as important as the franchisor’s accounts are the details of the financial performance of other franchisees. Prospective franchisees should obtain as much information as they possibly can about existing franchisees’ financial performance. Franchisors will have this information because the great majority of franchisees are required to provide copies of their accounts, VAT returns and assessments to the franchisor so the franchisor should be in a position to provide pretty accurate franchisee financial information. You would want to know average start up costs, turnover and profit in the first three years. You should insist that that information relates to all franchisees and not simply the top performing franchisees.
Written by: John Pratt
Partner, Hamilton Pratt