Franchise Advice
take up a franchise you are entering into a long-term business relationship and it is very important that you spend some time looking into the background and performance of your prospective partner.
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Information Your enquiries should be backed up by financial information about the franchisor, including the audited accounts – your accountant will look and comment on the accounts for you. A bank reference on the franchisor,
obtained by your bank, might also be helpful. Information on the performance of the existing franchisees should be forthcoming and the franchisor should be willing to let you have a full list of franchisees to whom you can talk to or visit. In the case of a new franchise you should look carefully at the
here are a number of points that should be considered when assessing a franchise. The first step is to assess the franchisor and its business. When you
performance of the pilot operation. Then there is the nature of the franchise
business itself – you should ascertain whether or nor there is a market for the products or services in your chosen area and what the future demand is likely to be.
Support So, having established the soundness of the franchisor and the business you should then look at the strengths and weaknesses of the franchise operation. Critical to your likely success or failure is the level of support and training available from the franchisor, both at start up and subsequently. There should be a comprehensive
operations manual, which gives you guidance on all aspects of running the franchise operation. Another important aspect to consider is: What help – if any – does the franchisor give in respect of any staff recruitment and training you may have to undertake?
Legal contract The next step is to consider the legal implications of the franchise contract. As this document will be legally binding once you have signed it, you should receive a copy well in advance. I strongly recommend that you obtain independent legal advice on
the contract from a solicitor well versed in franchise agreements, preferably a British Franchise Association (bfa) affiliate.
Financing Having got this far, and assuming you still wish to proceed; the next step is to examine the financial aspects of the franchise. Broadly speaking, these fall into two
categories – the start-up costs and the hoped for income/profits. Looking at the start-up costs first, it is important that you identify the total amount of money required to get the business started, including any
“You must be prepared to take a realistic view of what might be a practical possibility in borrowing terms”
‘working capital’ needed. You will then have to consider what assets, if any, you or the business might have available as security for the required loan. You must be prepared to take a realistic view of what might be a practical possibility in borrowing terms – whilst unsecured borrowing might be possible in some circumstances for a good franchise it is, for example, unlikely you can borrow £90,000 towards a franchise costing £100,000, especially if you have no security. Having established the start-up costs and borrowing requirements, you will then have to look at the potential earning power of the business on a realistic basis. Does it justify the level of investment and can you recover your investment?
Projections Having satisfied yourself on these points you will have to get down to the detail, ensuring that any profit predictions and cashflow forecasts prepared by the franchisor for your franchise are sensible. This is also a good opportunity to look closely at matters, such as how the franchisor takes its income and what other fees may be payable. The last hurdle then remaining is to take the projections and your business plan to your bank and to convince them to lend you the money! n
Cathryn Hayes
Cathryn Hayes is head of franchising at HSBC Bank. For more information or for a copy of a franchise guide go to www/
hsbc.co.uk/franchising, call 0121 455 3438 or email
franchiseunit@hsbc.com.
July/August 2012 |
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