Ask questions; get answers.
Once you have selected the franchises you’re interested in, meet with your target franchisors and secure a first meeting. Some financial details will be revealed about the offer, and you may be asked to sign a confidentiality agreement.
Regardless of the information the franchisor provides, you must develop your own view of the financial aspects of the business. There is no substitute for a thorough understanding of the establishment costs, revenue potential and operating expenses. Choose an accountant who is experienced in small business and franchising. Discuss how he or she can assist you in reviewing the financial information and advising you on the potential of the business.
Your assessment should be conservative – err on the side of understating revenue and overstating expenses to gain a conservative view of the business. Ask yourself:
- Are my assumptions reasonable?
- Do any other franchises in the network achieve the levels of patronage I think I can achieve?
- Are businesses close by achieving the level of patronage I think I can achieve?
- Do my rental and wages expenses include ancillary costs like rates, utilities, employee benefits, holiday pay and health insurance?
- Is my cost of goods assumption realistic and consistently achieved by other franchisees?
- Are the accounts of the existing operations accurate?
- If it is a mobile or service franchise, are the running costs of a vehicle adequate for the territory?
Present your assumptions and findings to your accountant and ask for his or her candid opinion. This will help to better your understanding of the opportunity, and whether it’s suitable for you.
Talk to Franchisees
There is perhaps no more telling test of a franchise system than to speak with a range of current franchisees. The validation of the franchise system by the current franchisees is a key test of the success of a franchised network. Don’t just limit yourself to those suggested by the franchisor – they will undoubtedly pick the happiest franchisees.
Speak to a range of franchisees and ask them:
- Are they satisfied with their investment and the business?
- Would they recommend this franchise to their friends and family?
- Would they sign up again knowing what they know now?
- What support does the franchisor provide?
- Is the franchisor reasonable?
- Is the franchisor willing to listen?
- What problems are other franchisees experiencing?
- Are the marketing campaigns delivering customers?
Keep Asking Questions
A quality franchisor will be willing to answer all your questions and provide you with enough information on which you can make a fully informed decision. If you feel you’ve asked too many questions but want to ask more – ask anyway. You must be comfortable with every aspect of the business, so ask, ask, ask and keep on asking until you are satisfied.
Only after you have completed all these steps should you contemplate signing a Franchise Agreement. It’s your responsibility to understand the business and make a fully informed decision.