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The search is on
Five helpful hints from Andrew Pena to fi nding the perfect franchise
F
RANCHISING PROVIDES a well-trodden path for Step 3 – Understand the numbers
“Franchisors
individuals to set up and grow their own business. Most franchisors will provide projections on the likely returns
will provide
The 2009 Natwest/bfa Franchise Survey recently for the business – these should never be taken at face value.
reported that the industry was now worth some £11.4 Again, you need to dig deeper. You should always question
projections on
billion with the vast majority of franchisees – 90 per cent – the numbers and understand the basis for the projections. the likely returns
reporting their business as profi table. The bfa’s Code of Ethics requires an affi liated franchisor
for the business
Whilst this suggests franchising can provide a sound to show the basis for any projections and to state whether
investment, there is no getting away from the fact that every they are actual performance fi gures or average performance
– these should
business venture has risk and that the job of a potential fi gures. It may well be that the fi gures are based on best never be taken
franchisee is to properly consider and assess that risk. But performing franchisees rather than averages.
at face value.”
what steps can you take to make the right assessment? In some cases, and after proper questioning, you
may fi nd that the numbers bear little resemblance to
Step 1 – Who is the franchisor? reality and have simply been plucked out of the air.
Surprisingly, and in many cases (perhaps well over 80 per Recently, a dispute against a major franchisor revealed
cent), an individual makes a decision to invest without any real that their numbers were ‘theoretical’ and not based on
due diligence into the background of the company into which historical performance.
they are investing. You can only be accurate in your assessment of the likely
On many occasions we see franchisees that have lost returns if you have the information and documentation to
money as a result of entering into contracts with franchisors be accurate on the quality (and basis) for the projections you
that were (a) fi nancially unsound (having consistently made are being provided with.
losses or failed to fi le proper accounts) and (b) dormant or
non-existent companies. Understand who you are dealing Step 4 – Speak to the franchise base
with and carry out a full search on the company you are The bfa’s code of ethics requires an affi liated franchisor to
proposing to do business with. provide full details of all their franchisees (including contact Author’s note
details, terminations and disputes). You should approach as
Step 2 – Understand the business many of these franchisees as possible to get a much more
A franchisor will always have a well-prepared patter on their rounded view of the business and its overall profi tability.
business and the benefi ts of the franchise. It is always best to
prepare fully for that meeting with a list of key questions so Step 5 – Get independent advice
that you can dig beneath the patter. These questions should Before committing, you should speak to a specialist
aim to allow you to fully understand (a) their business and who can provide you with an independent view of
systems, (b) your role as a franchisee, (c) how much time do the business opportunity. Ideally this should be a
you need to commit to the business, (d) the amount of your face-to-face meeting with a seasoned expert where
Andrew Pena
investment (including the working capital requirements), (e) you can talk through the business and projections.
Andrew is the
your likely returns from the business (and the assumptions Often, it is only through the articulation of your analysis
founding partner
and basis for those returns, (f) their current franchise base of the business opportunity that blind spots or errors of
of Cubism Law, a
(including names and contact details) and evidence of their thinking emerge. Surprisingly, very few franchisees take this
specialist franchising
average returns, (g) the percentage of franchisee failures/ fi nal (and probably most important) step. Buying a franchise
law fi rm with offi ces in
terminations (and why they failed and/or were terminated) will always be a step into the unknown.
Chancery Lane, which
and (h) the average duration of each franchise, including start The key is not to get caught up in the emotion of the
operates a unique
date for each of the current franchisees. purchase – ensure you take the step consciously having fully
franchised-based
You should write down all the answers and ask for and accurately investigated, analysed and tested the quality of
business model.
documentation to support what you are being told. the opportunity presented. ■
December/January 2010
www.businessfranchise.com
BF072_Best Practice_Dec/jan09 x.indd 1 18/11/2009 14:56
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