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In this article John Pratt explains what you need to know before entering into a franchise agreement. ('What Franchise' Magazine (Volule 5, Issue 2))
WHAT DO YOU NEED TO KNOW BEFORE ENTERING INTO A FRANCHISE AGREEMENT?
Franchising is a very successful way of assisting would-be entrepreneurs to enter into business. The chances of failure are substantially reduced but, of course, that is no comfort to those franchisees who do fail either because they don’t have the necessary skills or because the particular franchise they have taken is not all that it should be.
A franchise is not simply a business idea, but it is a business method that the franchisor has proven actually works. The only way that the franchisor can prove that his franchise works is by having a successful pilot franchise operation if the franchisor is at an early stage of its business development, or a significant number of successful franchisees if the franchise has been launched, so the first step that you must take is to ask a new franchisor for full details of its pilot operation – ideally at least two pilots should have been operated for at least twelve months - and, if it is a well established franchisor you must obtain a list of all franchisees (not simply those that the franchisor wants you to talk to!) so that you can contact all of them to ensure that the financial information that the franchisor has provided to you is based on actual performance of franchisees and not simply on what the franchisor believes is technically possible if you are a “super star” franchisee.
In terms of financial information most franchisors assist franchisees in preparing their business plan but in providing information concerning turnover, profit margins and profitability as well as start up costs, franchisors usually seek to protect themselves by making disclaimers and statements along the lines of “these figures are not guaranteed”. This puts you on notice that just because the franchisor has provided you with figures, they are not necessarily easily achievable or indeed that you will achieve them in practice. One important way of protecting yourself is to ask the franchisor to confirm in writing that the figures that the franchisor has provided to you on which you have prepared your business plan are based on the performance of franchisees and if they are not based on average performance, what are they based on? Franchisors must be prepared to tell you how they have produced these figures and must be prepared to stand by whatever basis they disclose to you as being the basis on which the figures were calculated.
You can also tell a great deal about a franchisor from how the franchisor deals with your application for a franchise. If there is any hint of hard sell, then walk away. Hard sell can take various forms such as “someone else is interested in your territory so you had better sign the franchise agreement quickly”, “you need to put a deposit down now”, “if you sign the agreement now that will reserve your territory, but don’t worry we won’t enforce the terms of the franchise agreement”. All of these have been used by less than scrupulous franchisors in the past. Further, you should assess the quality of the materials that the franchisor provides to you and the efficiency with which they deal with your application. Finally, if you sense that, as the saying goes, “they would take you on as a franchisee just because you have a pulse and a cheque book”, do not become involved. You have to have the sense that the franchisor is extremely fussy about the people it takes on as a franchisee. The higher the quality of the franchise network, the more likely it is that the franchisor is going to have a successful franchise business developing franchisees and their business activities rather than “fire fighting” and dealing with problems with franchisees.
Finally, you need to talk to third parties who are involved in franchising to see what they have to say about the franchisor. Often bankers and solicitors are aware of those franchisors who have a good track record and those who have a bad one, although you have to be able to read between the lines because generally they will take a cautious view about expressing a strong negative opinion about a franchisor! Membership of the British Franchise Association is, of course, another third party indicator which is positive especially if membership is at the full member level or associate level.
Just as important as assessing the franchisor and his franchise is the need to assess your own skills and what it is that you are looking for from a franchise. It is surprising the number of individuals who take a franchise on the basis that it is similar to having a job – it isn’t! When you are employed you can have a 9-5 lifestyle, take time off work if you are under par and take lengthy holidays but when you are running your own business as a franchisee, this is unlikely to be possible. However good a franchise system may be, the success of your franchise business will be linked much more to what you put into your individual franchise business than what the franchisor provides. A brilliant franchisor will not make you successful if you don’t have the skills or commitment. So what skills are required? Well whatever anyone says, it is almost inconceivable that any franchise business will not involve some selling – that is not to say that you will necessarily be required to cold call (although in many franchises that is precisely what franchisees have to do) but having strong inter personal skills, being able to get on with people and generally not being afraid to promote your services or products, is essential. Of course, some franchises, such as McDonald’s or Burger King are principally about managing an efficient outlet rather than attracting new customers because the brand does that for them, but in almost all other franchises the brand is an advantage in the marketing process rather than a reason for not undertaking any marketing.
In terms of commitment, talk to the other franchisees in the network to see what they have done in order to make their franchise successful. If in the first few years of your franchise working twelve hours a day, seven days a week, with no holiday is not for you then don’t take on a franchise. If you are not motivated by success then franchising is unlikely to be right for you – you really have to have a burning desire to create a successful business whether that burning desire relates to financial success or pride in what you have created or being recognised as the best franchisee in the system!
Franchising has two essential elements. The first is a system that works and the second is a franchisee that is prepared to get the best out of the system. If one of these two elements is not present then you will not have a successful franchise. This means that you have to look very carefully at both yourself and the franchisor. Never skimp on your analysis before you commit. Taking a franchise is simply too important a decision to get it wrong. Be tough with yourself. Don’t kid yourself that you will single handedly be more successful than other franchisees. You should treat everything that you are told by the franchisor with caution and don’t accept what you are told without testing it. The great majority of franchisors are truthful and good business people but they are out to sell franchises because without the constant flow of new franchisees, their business would not succeed. They also know that they are competing against other franchisors so it is in their interests to make their franchise appear as attractive as they possibly can. In other words there is always some pressure to paint a rosier picture than the situation actually deserves. If you are aware of this, do your checks and be absolutely honest as to your likely commitment and skills you will be a successful franchisee. If you don’t, you won’t.