Entering into a franchise is, or should be, an extremely exciting process. You may well have been an employee for many years and now this is the opportunity you have dreamt about of owning your own business with the reassurance of an experienced franchisor. You must not, however, let the excitement take over and you need to treat your proposed venture with great care and caution. All franchisors are going to claim that their franchise is wonderful, they have a great deal of experience, their franchisees are successful and that you are going to make a great deal of money, but you need to make sure that what they tell you is true. Very few franchisors tell deliberate untruths but, of course, they paint a rosy picture of their franchise.
Bear in mind that franchise agreements will invariably contain a clause that protects franchisors if they have provided you with incorrect information in order to encourage you to enter into their franchise agreement. There are limits to the enforceability of these clauses but the last thing you would want to do is to be involved in costly litigation against the franchisor – much better to enter into an agreement with a really good franchisor who does, indeed, have a large number of highly profitable franchisees.
Lawyers call the process of finding out about a proposed business venture “due diligence”. What this means is that you have to check and verify everything you are told – you do not simply assume that it is true! Below is a summary of the very basic information that you need to obtain from a franchisor:-
- Are they members of the BFA – if not what is their reason?
- Obtain a full list of all of their franchisees and talk to as many of them as possible. If the franchisor only provides you with a small number of franchisees that probably means the franchisor only wants you to speak to those franchisees who will say nice things.
- How long has the franchisor been franchising – usually the longer the better!
- What do the franchise units of the banks think of the franchisor?
- Ask the franchise lawyer who you appoint whether he has heard anything good or bad about this particular franchisor.
- Obtain from Companies House a copy of the franchisor’s latest accounts and if the franchising operation is undertaken through a separate subsidiary also obtain the parent company’s details.
- Ask your franchise lawyer to report on the agreement to let you know whether the agreement has been well prepared or whether it contains inaccuracies or odd provisions – it is very unusual for a franchisor to have a poor agreement and a good franchise?
- Who are the consultants who advised the franchisor – this is particularly important if it is a new franchisor. Be concerned if the franchisor has tried to cut corners by using internet consultants who claim that they can prepare the full franchise package for a few hundred pounds!
- When figures are made available to you in order for you to prepare a business plan or cash flow forecast or to make a presentation to your bank, ask the franchisor on what basis the figures have been prepared. Are they based on the average performance of all of their franchisees or on some other basis?
Armed with the information set out above, you are substantially increasing the likelihood that you will have a successful franchise business. The great majority of franchises are successful but that is no comfort to you if you have not carried out the basic checks and have made a terrible mistake.