So, may be you are thinking about becoming a franchisee but are not too sure what to look for. Is it the right move for you and how can you make sure you choose the right one for you?
There are no shortages of Franchise possibilities out there and as a business model it has many advantages but it also comes with various downsides that should not be ignored.
Recently a client contacted me about a Franchise he was about to buy into in the north of England and wanted my input. He had been searching for the right Franchise to suit his particular plan and budget for about 2 years at this stage and was keen to sign the Franchise agreement and get started. He updated me with all his findings and shared the agreement and projections supplied by the Franchisor. It was a café business with a popular range of cakes as their key product. On the surface it all looked like a credible business with several Franchises already in place. He had met the Master Franchisor and liked them and their outfit. P was smart enough to know he was too close to the deal and just couldn’t find the downside. He had enough savings to meet the reasonable start up costs and fees and the projections the Franchisor had provided seemed reasonable, showing healthy profits within the first year.
We started to examine the details and I could hear the excitement in his voice, describing how he would expand to 3 units within 2 years and how his cafés would be even better and introducing home delivery could boost sales…… So Excited and convinced that he was about to put down a deposit to secure his territory. The idea being that his wife would start the first unit and once there was enough profits generated he would be able to finally leave his job and start the next unit and carry on growing the business.
After our call I set to work and within the hour I found two major flaws in the businesses proposal. My client was tied to buying all his main supplies from the Franchisor and some inaccurate assumptions supporting the projections were alarming enough to raise my suspicions.
You see although the initial Franchising fees and the ongoing percentage of the takings were reasonable, there was a less obvious or the hidden profit on every purchase my client made. This just tipped the balance.
But there was more, the sales figures in the projections were inflated and many costs including rent and rates (substantial fixed costs in this case) were underestimated. The new projections I prepared showed that he would have to achieve sales higher than those achieved by any Franchisee in the last 8 years to make a reasonable profit.
By revising the projections I was able to demonstrate the profit share of the Franchisor at every level of turnover and yes you guessed it, it told a very different story. At almost every sales level, the Franchisor earned more than my client, taking a huge slice of the cake (or profits)! It was hidden away in the cost of sales, inflated turnover and underestimated costs. Suddenly we were looking at a different scenario in which my client was taking all the risk, putting in almost all the work and financing every new unit, yet sharing a substantial part of his profits instead of paying a small royalty fee.
Although at the outset I insisted that my client visited the busiest Franchisees and ask about their experiences, he never found the time or the courage to do so. Don’t get me wrong I don’t judge him as I know this and the numbers fall outside his comfort zone and it’s just easier to ignore. I did enjoy my visit up north however and on a cold sleety day we walked in to the most successful unit and asked to see the owners. He was not available but we hadn’t finished our coffee before he came in and spent over two hours giving us all the insights we needed. Chatting over complimentary coffee and cake he confirmed that the Franchisors were very supportive and the systems and the brand very helpful but lack of profits had forced them to re-mortgage their home to keep the business going. Eight years on they were only just discovering why the business was not making the profits they wanted and deserved. Sadly they had not looked into the proposal too deeply either and felt that they just had to work harder and longer and somehow make it work. In return for his kindness I offered to help him build his profile on the social media where he felt he needed some help.
I also made the point of meeting the Franchisor and pointing out the flaws in their Franchise business proposal and projections and was glad to get their acknowledgement and apology. They promised that they would update the information they supplied to new applicants and there were many in the pipeline.
My client saved himself at least £100,000 and two or more years of his life and he just could not believe that they already had a dozen Franchise units in place. He was disappointed that it hadn’t worked out but grateful he saw the full facts before it was too late. He drove me back to London and we talked more about his way forward. He will be opening his new independent restaurant early in 2013 and he calls often to keep me posted on his progress.
So if you are considering starting a Franchise business make sure you weigh up all the pros and cons. Get an expert to assess the overall proposal; not just a lawyer to check the agreement or an accountant to verify the numbers.
In Summary a Franchise business opportunity can offer the following pros and cons:
- A big name behind you helps in many ways
- Systems than can help you in a new business
- Ongoing help and support
- Easier access to finance
- Help with location and territory
- Benefits of economies of scale, especially in marketing
- Initial fee and ongoing percentage of profits (believe me, this will hurts a year or two down the line!)
- You do things their way not yours, you will have many forms to fill and it may feel like having a boss again
- You are tied to the Franchisor in many ways
- Decisions made by others can affect you
- They go down, you go down
- None of the advantages will help you escape hard work
I do want to point out however, that not all Franchises are set up in the same way and there are many great opportunities out there. Many Franchises can, and have made successful businesses for people just like you, but do your research and I wish you all the best.
To your Success.