Thinking of buying a franchise. Have a look on the internet http://www.thebfa.org/findingafranchise.asp and selects a shortlist of franchise opportunities.

Buying an existing franchise can be a great way for Tina to fast-track her way to running her own business. However, there are also pitfalls that must be avoided when you buy a franchise. (see below)

There are two routes into franchising.

Either you buy a franchise directly from the franchisor or

You look at an existing franchise for sale.

An existing franchise for sale is often advertised online or sometimes the franchisor might point you in the direction of a franchisee who wants to sell.

If you do decide to buy a franchise, you will be looking at a business that has already been tested out. This can be a good thing as you will know the business has already proven to be a success.

However, it is important to find out why the franchisee wants to sell that particular franchise.

For sale signs are put up for perfectly good reasons such as retirement, personal reasons or a desire to move into a different area of business.

However, some franchisees might want to sell because the business has not been financially viable. You should probably not buy a franchise such as this! Are you certain that you will be able to make the business profitable if they cannot? You need to find out the reasons for the business’ lack of success. If, for instance, it is in a poor location or the market that it is catering for is not large enough, then you should probably not enter into the deal.

Also, you must make sure that you are getting a good value for money. Compare the costs of the franchise to other businesses of a similar nature.

Also, make find out how much an original franchise from the same company would be sold for now.

The devil, as they say, is in the detail and you must make sure that you get all the relevant facts prior to purchase. Or, you will find yourself in the same situation as that franchisee, desperately trying to re-sell that franchise.

Tina’s list of franchise opportunities

http://www.smallbusiness.co.uk/franchise-directory/?gclid=CJWZq4et_JMCFQ8WQgodsn2vzA

http://www.thebfa.org/findingafranchise.asp

FRANCHISE FEES EXPLAINED

The initial cost of a franchise with include the initial fee and, most likely, some kind of continuing fee (also called royalty or service fee). It’s hard to say what else a typical start-up package includes because there is so much variation from franchise to franchise, but the sort of items that could be part of the initial cost include shopfitting, equipment, initial stock and the initial franchise fee.

Initial franchise fee
The initial fee is what you are paying to be given the right to use the brand name within a certain territory and to be trained and provided with advice. The initial cost of a franchise falls within a huge range; it could be less than £10,000, for example, or as much as £5 million, but according to the latest survey by the British Franchise Association, it will typically be around £40,000. Usually, the initial fee is between five and ten per cent of the total investment but can be as much as 40 or 50 per cent.

Service fees
An ongoing service fee, payable weekly or monthly to your franchisor, can also vary quite a lot, from nil up to 20 per cent of sales, but is probably on average around seven or eight per cent. The fact that the service fee is nil does not necessarily mean that all you pay will be the initial start-up cost. Franchisors can also be paid by using mark-ups on products and equipment.

A low service fee is not necessarily an advantage for you. It is crucial that the franchisor retains an ongoing interest in promotion and improvement of the business format, and that will only be achieved by the reliance on some sort of continuing payment from the franchisee.

Franchisors usually prefer to base the service fee on sales rather than profits. This is because monitoring the franchisee’s accounts to ensure that the franchisor is receiving the proper amount can be time-consuming and expensive. If the fee is based on profits rather than sales, this monitoring has to apply to costs as well as sales, doubling the difficulty of the task.

However, a fee based on sales can be disadvantageous to the franchisee. If the costs of the enterprise prove to be higher than forecast, paying the service fee could be an onerous burden for the franchisee.

You should not underestimate the size of the service fee if it is based on sales not profits. If, for example, your costs are 60 per cent of your sales value, a service fee of ten per cent of sales translates into a service fee of a quarter of the profits you make. Work out the figures before you sign.

One point to watch out for is what happens at the end of the original franchise contract if you want to renew. Does the contract allow the franchisor to increase the size of the service fee? Try to negotiate on this, as you do not want a bigger percentage of your hard work to be passed over to the franchiser

A QUICK GUIDE TO FRANCHISE AGREEMENTS AND AVOIDING THE PITFALLS

First of all, you should make sure that you are given a sample agreement by your franchisor to review and it is advisable to ask a specialist franchise solicitor to look at it and report back to you. You can then be sure that you are entering the franchise knowing all the risks and obligations that you will have to fulfil.

Neil Hooton and Shaun Bowden, a partner in Bolton Solicitors list the following items to look out for in the agreement:

Is it comprehensive?

Does the agreement set out everything that you have discussed with your franchisor? Is everything that has been told to you included? It would be wise to avoid leaving anything to chance at the contract agreement stage, as you don’t want any surprises later on. Lastly, is the contract clear on all your obligations and any payments that you will have to make?

Fees

Check the initial fee, then look out for any ongoing fees. Are the ongoing fees fixed or do they vary as a percentage of revenue? This will be important for managing cash flow at a later date, and for forecasting. Are there minimum fees, or performance targets that you will have to achieve? What other costs might you incur?

Supplies

Ask whether you have to buy your supplies from the franchisor or from a named supplier, or if you can choose your own suppliers. If you are bound to a named supplier or your franchisor, will you be given a reduction in price?

Territory

Do you have an exclusive territory? If so, which area does it cover and is it clearly set out, for example by postcode? Is this also the case for any sales that you make? If you don’t have a clearly defined territory, and there are other franchises nearby, it is worth asking how direct competition between the two will be avoided – this is in both your and your franchisor’s interests.

Training and support

What initial training will you receive? Are there obligations on the franchisor for ongoing training and support? What exactly will the training involve? Remember that you may have to plan your time in relation to any training, so it is worth working out a timetable early on.

Term

Ask how long the initial term of the contract is and where this is detailed in the document. Is there a probation period? Once the contract expires, is the agreement renewable and are there costs incurred if you do renew?

Exit

Does the agreement cover your death or your sale of the business? On what grounds can the franchisor terminate the agreement? What does the agreement say about the period after termination or expiry?

However, given that it’s your future livelihood is at stake, we strongly advise you to seek professional advice before signing any agreements.

Visit Bolton Solicitors here

TOP TIPS ON BECOMING A FRANCHISEE

Turning your franchise dreams into business reality is a complex process, so make sure you set off on the right foot by following these ten steps to success:

Be honest with yourself

One of the greatest advantages franchising offers over starting a brand new business alone is that a good franchisor will support you every step of the way. You will also have access to training and will be able to develop your skills. However, from the outset you will need to have the right abilities, personal attributes and a willingness to work hard. Not everyone is cut out to be a franchisee and it’s important to think about your suitability before beginning your search for an appropriate franchise business. Only then can you be sure that taking on a franchise is right for you, and that you take on the right franchise.

Research the market thoroughly

Look at the industry in which the business you are interested in operates. Is the market growing, stable or declining? Will it be subject to fads or seasonality? Is there much competition? Is the product or service price sensitive? Only by answering questions like these will you be able to make decisions on what business is most suitable for you and whether you want to work in that marketplace.

Investigate the franchises available

Once you have found one or two sectors you are interested in, it’s time to find out what franchises are available in those areas. There will probably be several possibilities, so make sure you research them thoroughly. Read all the marketing materials you can, but bear in mind that the franchise company compiles this information so it will be biased in its favour. Start making a list of questions to ask the franchisor as soon as you begin your research.

Ask about the company’s history,

the franchisor’s experience, the support and training you will be given, financial aspects such as fees, forecast revenue and profit, and so on. Franchising is a partnership and it is as much in franchisor’s interests that your have all the facts and an understanding of what’s involved as it is in yours.

Meet other franchisees

It is essential when considering investing in a franchise to meet people who have already done so. Ask your prospective franchisor for a complete list of all the franchisees in the network, not just a select few who have been specifically chosen to talk to you. If the franchisor is unwilling to give you this information then ask why. Depending on how satisfied you are with the answer, consider what this tells you about the company you are considering joining.

Compile a list of questions to ask existing franchisees.

However, be careful not to take everything an existing franchisee tells you as fact. Franchising depends on the relationship between franchisor and franchisee and there can faults on both sides. So use these conversations primarily to gauge what it would be like to be a franchisee for this company and whether you can see yourself as one.

Be realistic about what you can afford

Your investment in a franchise will comprise all or most of the normal costs of setting up a business, such as working capital, equipment, staff recruitment and professional fees. These can vary depending on the type of franchise business – for example, some provide equipment to get you going or premises for an initial period. Starting a franchise will usually include paying an initial fee and some kind of ongoing management fees, both of which should be taken into account when establishing how much you can afford to invest.

Be realistic about your earning needs

You will never be able to calculate in advance exactly how much setting up a new franchise will cost or make you, but you need to make sure the franchise you invest in will be able to provide you with the funds needed for your lifestyle. Be realistic about the profit it is likely to generate and identify what you need to make, at the very least, in order to cover your existing liabilities.

Ensure you can raise the funds

Reputable banks that support the concept of franchising tend to have arrangements with established franchise companies, but you are under no obligation to use the bank your franchisor recommends. Shop around for the best deal, read the small print, and bear in mind you can borrow much of what you need to get started in franchising, sometimes up to 70 per cent of the initial investment.

Seek professional advice

At some point in the process of buying a franchise you will be presented with financial projections and a franchise agreement. By this stage, you should have an in-depth understanding of the nature of your chosen franchise business and probably have a certain degree of trust in your franchisor. It is, however, still advisable to seek impartial advice from an independent franchise adviser before signing on the dotted line. It will be money well spent if it saves you from making expensive mistakes.

Prepare your family and friends

As the time for launching your franchise draws nearer, you will inevitably be caught up in the finer detail of planning your new business. It is easy to forget to involve those people around you who will be directly affected by your new venture; your friends and family. At some point in the early stages of your business you are likely to need either their help or understanding, so it’s a good idea to involve them or at least inform them about what the future holds.

Go for it!

You’ve found the business for you under the umbrella of an experienced and supportive franchisor, with the backing of your friends, family, the bank and help from professional advisers. All that remains is to make it work. If you’ve researched and planned in the manner laid out here and are entering franchising with your eyes open, you’re all set for the best possible start to your future in franchising.