top of page

Choosing a franchise for a business start up

Updated: May 16, 2023

Franchising has a very high success rate and is an excellent way to get into business.

NatWest Bank conducts an annual survey that reports that over 90% of franchised

businesses are still operating successfully after five years compared to a shockingly low

10% for non-franchised ones. Nevertheless, it is vital to make the right choice because out of

about 900 business format franchises in the UK there are some that it’s best to avoided.

Franchise problems and disputes can be costly, stressful and time consuming so it’s best to

do everything possible to avoid them in the first place. But without an understanding of how

the franchise industry operates where does an aspiring franchisee start? What checks can

be made and what questions should be asked? Who should be consulted and to whom

should the right questions be put? Thankfully, there are several things that can be done at

the start of the process; when deciding which franchise to join.


Some of the checks can be carried out at the initial meeting with the franchisor, simply by

asking the right questions, others are best done by research. The prospective franchisee

should bear in mind that the selection process is a two-way affair and at the first meeting the

franchisor will also be assessing the suitability of the franchisee. For that reason, questions

that could suggest a pre-judged lack of trust should be avoided and the information obtained

instead by research.


Let’s start with an undeniable truth, a successful business must be profitable. Other

objectives such as providing a lifestyle may also be desirable but the number one issue is

without doubt profitability. So how can an aspiring franchisee check how profitable the

franchise is likely to be?


The franchisor should be able to show this with financial projections. If the franchise is in the

early stages of recruiting franchisees the projections will probably be based on the financial

performance of one or more pilot branches. With established franchises they should be

based on the actual results that have been achieved by the existing franchisees. This is

where the oft quoted phrase ‘the devil is in the detail’ becomes relevant. Was the pilot

branch subsidised? Have all the operating costs, including salaries, been deducted?

In established franchises there will almost certainly be a few high-flying franchisees and

some who are under-performing. The prospective franchisee should therefore ask what the

projections are based on. If there have been any failures, have their figures been included?

If any franchisees have joined within the last year have their performance figures been

annualised? If so, were their trading months in a seasonably favourable period? Could any

of these factors distort the projections?


Most financial reporting is on the basis of EBITDA (earnings before interest, tax, depreciation

and amortisation.) However, this method shows the most favourable situation rather than the

actual reality. So, check the small print to see if EBITDA is being used in the projections. If a

loan will be used to fund the business the interest should be considered, as should a sum for

the depreciation of equipment. Will any upgrades of software be needed? Only after all these

costs have been deducted can the true profitability of the franchise be understood. Lastly, it

should be possible to depreciate the initial cost of buying into the franchise over the course

of the initial term.


Directly linked to profitability is the suitability of the proposed franchise territory. Is it capable

of producing the projected profit? Factors affecting this will include the size and

demographics of the population or target market.


Another consideration should be the geographical size of the proposed territory because the

operating costs in a sparsely populated part of the country will be very different in an urban

area. Conversely, travelling times in congested cities can seriously reduce productivity.


Other factors such as regional differences in rent and salaries need to be taken into account.

Another ‘devil in the detail’ is the profit margin that has been used in the projections and it is

important to check that it is likely to continue. Some of the factors involved such as

competitor activity, hikes in VAT, import tariffs and excise duty on fuel will be outside the

control of the franchisor but others are not.


Uniform pricing is a growing tendency for national companies, as many franchises are. For

example, it plays a major role in the marketing strategies of those in the convenience foods

sector. If the franchise under consideration sets the prices, are they suitable for the

proposed territory? A competent franchisor will be able to show that this has been

considered.


Another area where there has been much controversy over the years has been in franchises

where the selling is carried out by the franchisor and the service being provided by the

franchisees. An obvious example of this is the commercial cleaning sector which has seen

many instances of franchisee failures due to under-pricing by the franchisor. This industry is

now under even more pressure due to the parlous state of the retail sector in high streets

and shopping centres. Also, the under-utilisation of offices because of the growing tendency

to work from home.


Franchising in a post-pandemic business landscape will continue to be the safest way to

start a new business but there will be casualties. It is therefore even more important to select

the right sector and within it, the right franchise.

7 views0 comments

Opmerkingen


bottom of page