Tell-tale signs that a franchise isnít worth your effort

23/05/2018 19:00 | Start a business

How to tell if a franchise is worth the effort or not

A franchise business opportunity can be an attractive way for budding entrepreneurs to become business owners. And itís easy to understand the appeal. A franchise company has a proven business model which can save you time, energy and money compared to starting your own business from scratch.

Although the good franchises outweigh the bad, you should still be cautious when you're assessing the best one for you. It's essential that you perform thorough due diligence before you sign a franchise agreement. A franchise contract is a legally binding document, and so you should only invest in a franchise business opportunity if youíve done your homework and youíre happy that youíll receive all the training and support you need.

If youíre considering becoming a franchisee, then here are some tell-tale signs that the franchise may not be all it claims to be.

No track record

A well-established franchise has been tried and tested, both by the franchisor and other franchisees. The franchise model will have been developed and improved by the franchisor, so you don't have to make the same mistakes that they did to become a success.

There are many ways that you can check the track record of a franchise that you're interested in.

  • If the franchisor is a company registered at Companies House, you should be able to view the latest accounts online. But if the franchisor is not a registered company, or hasnít filed any accounts yet, you should ask them to provide you with financial information. After all, if the franchisor wants you to invest, they should have no issues with sharing details about the franchise financials with you.
     
  • If the franchise is relatively new, they may not have a detailed financial history to share with you. If this is the case, then ask the franchisor for the results from the franchise pilot. Most franchisors will have run a pilot lasting between one and two years to prove the franchise concept. The data from the pilot should give you the information you need to make an informed decision.
     
  • Good franchises have satisfied franchisees. The best way to understand if the projected earnings being claimed by the franchisor are realistic is to ask existing franchisees. They can tell you how profitable the franchise is and how well the franchisor supports its franchisees. If the franchisor has nothing to hide, then they should be happy to give you a list of franchisees to contact. If they refuse or attempt to cherry pick the franchisees you speak to, they may have something to hide.
     
  • The British Franchise Association (bfa) is responsible for setting and maintaining standards for the franchise industry. If a franchisor is a member of the bfa, this indicates that theyíve had to meet strict criteria including having a proven franchise concept and a successful trading history.

Inadequate territory size

Just as a business on a high street full of other shops selling the same product would struggle to make a profit, the same is true for a franchise. There are typically two types of franchise territory that will be detailed in your franchise contract.

The first type is known as an exclusive territory. This means that the franchisor is obliged not to open another franchise within your area. Exclusivity means that you wonít end up in competition with the same brand, but youíll still need to differentiate your franchise from other similar businesses in the area.

The second type of territory is non-exclusive. Similar to an exclusive territory, the franchise contract will state the area that youíre permitted to sell your products and services within, but there is one fundamental difference. The franchisor has the right to open additional units owned by other franchisees within your territory.

Although this doesnít seem fair, the principle behind non-exclusive territories is that the franchisor is within their rights to increase the number of franchises in your area if they feel that more than one profitable business can be sustained. In a franchise business opportunity based on a non-exclusive territory, you have to trust the franchisor implicitly. You need to have faith in them not to overcrowd your territory to the point where youíre unable to generate an adequate return.

Again, this highlights the need for thorough research to be carried out before you sign the franchise agreement. You must fully understand exactly your obligations and restrictions when it comes to your territory. The good news is that most franchisors are honest and reputable and focused on making a profit through royalty payments rather than by selling new franchises and risking cannibalising existing sales.

Lack of training and support

A comprehensive training programme is one of the most beneficial elements of the franchise model for many franchisees who are inexperienced as business owners. Itís the responsibility of the franchisor to provide you with sufficient training to enable you to run your business successfully.

The types of training and support a franchisor provides varies from one franchise to another depending on the industry and franchise system in place. Although the level of support you receive from a franchisor is no guarantee of success, it does provide a robust foundation for you to succeed. Good franchises generally include the following in their training package:

  • Extensive initial training
  • Classroom-based training combined with on-the-job learning
  • Business-related training including marketing, sales, recruitment and management
  • Detailed operations manuals
  • Ongoing training tailored to your needs
  • Regular franchisee events so that you can meet and share ideas, stories and problems with your peers.

If you're concerned that the training and support that is being offered lacks in quantity or quality, then you should think twice about signing the franchise contract. Speak to existing franchisees to find out more about what the initial training was like and whether they believe that the ongoing support is adequate.

Youíre entitled to get the advice and guidance you need throughout your franchise journey and donít be scared to ask for it. After all, thatís why youíre paying a royalty fee and what probably made you choose to invest in a franchise in the first place.

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