Evaluating a Franchisor

08-December-2013 0:37
in Franchising
by Admin

The world of franchising is enormous.  There is a myriad of business models in almost 100 industries and it can be hard to gauge which franchise is for you.  We have dedicated two articles so far to evaluating a franchise opportunity which covered twenty questions that I believe are essential to properly evaluate any franchise opportunity.  The first ten questions can be found here whilst the second set of questions can be found here.  However, just because a franchise business appears attractive does not necessarily mean that it is a good idea to buy.  There is another important factor to consider that is in some respects unique to franchise businesses and that does not usually apply to small businesses that you are starting from scratch.  By buying a franchise, you are effectively entering into a partnership with the franchisor.  

The franchisor-franchisee relationship is central to the success of any franchise business.  The reason franchising attracts so many people is the belief that they will benefit from joining a business system that has proven itself in the marketplace.  At the same time, franchisees sometimes wish they had more control over their individual franchises.  The relationship has been likened many times to a marital partnership.  Franchise agreements can last 5-10 years or more, so, without doubt, this is the closest thing there is to a marriage in the business world and making sure that you have picked the right partner is just as important as the merits of the franchise opportunity itself.  

The final part in this three-part series of articles, therefore, is a guide that will help with an evaluation of the franchisor themselves.  Like the previous two articles on evaluating the franchise opportunity, we will present ten questions that you will need to answer before you can get a full sense of exactly who it is that you are partnering with.

1. What is the franchisor's financial standing and business reputation?

The franchisor's financial standing is sometimes difficult to assess, but a good way to make an assessment is through credit references and company financial statements.  There are many places online where these can be checked either for free or for a small fee.  If you struggle reading and understanding financial statements, get your accountant or franchise advisor to look at it with you and to explain why the financial statements of the franchisor are strong or weak.  Unless the franchisor is in a strong position financially, partnering with this particular organisation is going to be risky.  Franchisees usually have very little protection in the event of the franchisor ceasing to trade, entering administration or going into liquidation and in these circumstances you will find yourself in a strange kind of limbo where the fate of your business is being decided by the administrators or liquidators of the franchisor despite your having operated successfully.  You will want to make sure that you understand the consequences of the insolvency of the franchisor before you sign the franchise agreement.  

It is also important to get a handle on the reputation of the franchisor in the trade.  There are usually trade forums online where the business will have been mentioned.  Speaking to competitor organisations to get an idea of how they perceive the franchisor will also be useful.  To have the (usually begrudging) respect of the rest of the industry is definitely a sign of the strength of this opportunity.     

2. What is the relationship of the franchisor with existing and ex-franchisees?

The franchisor should be able to provide on request contact details not only of existing franchisees within the network but also former franchisees.  Is there a high turnover rate?  Does the franchisor require confidentiality agreements of its current and/or former franchisees which would prevent you from getting relevant information as you conduct your pre-purchase due diligence?  I would not purchase a franchise with which I could not make personal contact with at least two existing and ex franchisees and discuss all aspects of their experience as frankly and honestly as possible.  The ideal scenario is that you would be able to visit and shadow an existing franchisee or two before committing to the franchise to experience for yourself exactly what a franchise owner actually does.  I would also be sure to find out from former franchisee's why they eventually left the franchise system.    

3. Does the franchisor derive profit principally from franchise sales or from recurrent franchise revenue?

I am always skeptical of any franchisor that does not derive significantly more income from ongoing franchise revenue than from the initial franchise fee.  This may well be because they operate a "burn and churn" strategy in which they get through as many franchise owners as possible to keep up initial franchise sales revenue.  A truly successful franchise partnership is more likely when the long term financial interests of the franchisor and the franchisee are aligned.  Indeed, one of the things that I would always check for is just to check that the franchisor's ongoing fee income is enough to support the services that they say they will provide to their franchisees.  If it doesn't look like it could, be frank with the franchisor about your concerns and be sure to speak to other franchise owners specifically on the adequacy of the support from the franchisor.

4. Does the franchisor comply with the British Franchising Association Code of Ethics?

A question that you want to ask of any franchise organisation would be "are you a member of the BFA"? and, if so, "are you a listed, associate or full member"?.  This should give you some idea of the standing of the organisation.  The British Franchising Association (BFA) has also published a code of ethics which aims to inform franchisees of existing best practice in terms of how franchisors should conduct themselves.  It reflects current best practice, not just here in the UK but also across Europe and the rest of the world.  Please familiarise yourself with the contents of the BFA code of ethics and use it as a guide against which you can benchmark your experience of each franchisor.  

5. Has the franchisor met all compliance and registration laws?

There may well be a number of different licenses and/or permits that are necessary for you to operate your franchise business in the franchise territory that interests you.  Ensure that the franchisor is going to take care of those things for you or, if not, at least understand that you will have to take care of these issues yourself so that you are operating the business legally.  Also, please understand before you sign on the dotted line what systems the franchisor will use to measure and manage "brand compliance" across their network of franchisees.    

6. Is the success of the business being franchised based upon the charisma or skills of the owner?

Marketing, operations and sales techniques should be based upon repeatable systems instead of relying on the personal skills or charisma of the owner.  One of the greatest attractions of operating a franchise is the idea of being in business for yourself but not by yourself.  Good franchise opportunities come with excellent support services in place and detailed operations manuals that cover every crucial aspect of the business.  If these things are not in place, the success or failure of the business will be entirely down to you as the franchisee, in which case there may be little value being delivered to you as the franchisee from this franchise purchase. 

7. How do the records of the directors of the franchisor company compare with others in the industry?

It is important to assess the strength and reputation of the management team when assessing the strength of a business.  How long have they conducted business in this industry and how long have they sold franchises?  What have they been involved with previously?  The track record of the management team will give you a real insight into whether or not this is the right franchise for you.  Franchise sales teams can do a great job of convincing you that you are partnering with the best possible people in the industry, but this is often not the case.  

8. Is the person acting for the franchisor authorised to provide you with information relating to the franchise?

It is important not to accept as fact anything other than what is put in writing by a member of the organisation with the authority to do so.  Whilst you would normally have some degree of legal redress if you were a victim of misrepresentation, legal action against a franchisor is not conducive to a happy, ongoing partnership.  Better to make sure you have your facts straight upfront.

9. What kinds of meetings and events will the franchisor be initiating and organising?

Does the franchisor hold regular training meetings to keep franchisees up to date with innovation and developments within the company and industry or events in which franchisees can share knowledge at a local, regional and national level.  This is an important part of the whole working for myself but not by myself motive for buying a franchise, so make sure that you know what exactly you are getting in this regard. 

10. How are the upfront franchise fees and ongoing franchise fees used by the franchisor?

This is a perfectly reasonable question before you enter into a franchise agreement to ask of the franchisor.  Ultimately, you want to find an organisation that asks for enough money to do exactly what it says it will do for you as a franchisee, but without ripping you off and making you pay twice the going rate for services which could be easily and more cheaply obtained another way.

So that's it.  We've given you a total of thirty questions to help you evaluate both the franchise opportunity that interests you and the franchisor with whom you will partner to take your franchise business forward.  This is by no means definitive and there may be numerous other questions that you will want to ask in order to perform sufficient due diligence.  Take your time and take the best professional advice that you can afford to take.  A franchise agreement is not something to enter into lightly, so please use your head as well as your heart in guiding you in your decision.  Feel free to contact us here at Continuous Business Planning for our independent review of both the franchise opportunity you are interested in and the franchisor organisation.  Once you have done your due diligence, don't be afraid to pull the trigger on an opportunity and commit yourself to it.  We are not suggesting that paralysis by analysis is a desirable state, but we firmly believe that anyone considering a franchise opportunity needs to reflect hard enough on what they are about to do to be confident that they are making the best possible decision.  Good luck with your search for the perfect franchise opportunity for you.