The biggest pitfall is to choose the wrong franchise – research and planning before you commit yourself is vital. There is a lot of work to do before you will be ready to part with any money, you will need to research your chosen franchise carefully, making sure that it is the right one for you.

It is extremely important that you check the background and business performance of your prospective franchisor, don’t be rushed or pressured into signing the franchise agreement. Satisfy yourself by asking the right questions and receiving the right answers.

20 questions to ask your potential franchisor before you buy:

1. How long has the franchisor been in franchising?
2. What is the background of the directors?
3. How much expertise/experience do the directors have in the business they are franchising?
4. Is this business financially sound? Ask for three years’ audited accounts and current management accounts if possible. Ask your accountant to look at them.
5. Is the franchisor a member of the British Franchise Association? If not, why not?
6. Have any franchisees failed?
7. If the franchise is new to the market, what pilot scheme did the franchisor operate? Remember that when buying a new franchise you should get a proven business format and as much information as possible on the pilot operations.
8. What initial and ongoing training is offered?
9. How much support is given in choosing and fitting out premises?
10. Is there a market for the franchise’s goods or services? Has there been any market research?
11. How much does the franchise cost and what does the price include? How does this compare with other franchises?
12. How much will you have to pay on an ongoing basis? (This is normally a percentage of turnover, or a mark-up on goods supplied).
13. Have you been given any financial projections for your business? Have you seen any actual trading figures from existing franchise owners that show whether these projections are realistic?
14. Who are the main competitors and how do they compare in terms of price, quality, delivery and service?
15. Is there a long term market for your goods or services, or is the franchise operating in a market subject to changes in fashion? Is the business seasonal?
16. What sales area is being offered? Is it postcode based or geographically based? Is there a set territory?
17. How long is the term of the legal contract – can you renew it?
18. Do you have to achieve minimum levels of turnover, or buy minimum amounts of stock?
19. What will happen if you don’t achieve this?
20. Can you sell the business in due course? What restrictions are there on sale?

This is not an exhaustive list, there will be other questions to ask, but it should give you an idea of the type of research you will need to carry out to ensure that you make the right decision.

You will need to know you can afford to purchase the franchise you are interested in, what can you invest, have you got savings, can your family help? Can you afford to repay the loan, should the business not perform as expected, do you have enough contingency funds to cover any difficult trading periods – don’t overstretch yourself?

When you have found your chosen franchise, the next step is to prepare a business plan, including cash flow forecasts – vital documents for obtaining finance.  Remember to include your C.V. and a personal survival budget (a list of your outgoings v income).

The business plan will clarify the main business idea of your chosen franchise and define your long-term objectives. It provides a blueprint for running the business and a series of benchmarks to check your progress against. It is also vital for convincing your bank – and possibly key customers and suppliers – to support you. The plan should address any risks facing the business and what action needs to be taken to either prevent them or minimise their impact (contingency).  Practice your presentation before meeting with the bank to help deliver a professional “pitch”.

Here are our fundamental rules for writing a plan:

Do:

• clarify the purpose of your plan before you write it
• focus on the key information the reader will want
• highlight future plans as well as describing the current situation
• be realistic

Don’t:

• waffle or include unnecessary detail
• base your plan on over-optimistic assumptions
• ignore competitive threats and weaknesses

In summary – to ensure that you avoid the pitfalls:

• Do your research – make sure you are buying the right franchise for you
• Ensure you have sufficient liquid cash to inject into the business as your stake and know the minimum funds you require to cover your personal living expenses
• Understand your financials – breakeven figures are key, and keeping a close eye on cash-flow is very important.  Profitable businesses can fail due to lack of cash!
• Manage your debtors carefully and chase immediately they become due – be organised and focus on knowing how your business is operating.
• If you need help, ask for it – most franchisors will keep in close contact. Other, more experienced franchisees may also be a good source of help.

For more information, download HSBC’s free ‘Starting a Franchise guide at www.hsbc.co.uk/franchise or email franchiseunit@hsbc.com for a copy.

Author

Cathryn Hayes

HSBC Bank plcDISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic.