Things To Consider When Buying A Franchise

Deciding to take on a franchise is a big commitment with a number of keys factors to consider. So what should a new franchisee be looking for? My first point would be to look for franchises that are part of the British Franchise Association (bfa). To become a member, a franchisor has to go through an accreditation process – so you can be reassured that you are dealing with a reputable business. You can check membership on the bfa website.

Make sure you shop around and don’t just speak to just one franchisor – no matter how much you like the business. Compare them to other, similar franchises or those with a similar cost set-up to make sure you’re making the right selection for you.

Take advice from family members. Will they support you as the business starts, takes off and through any challenging times that might arise? Also, make sure you consult other professionals, such as a lawyer to check the agreement and an accountant to check the numbers.

It is also good to ask the franchisor for a full list of their franchisees and speak to those that have recently started up (speaking to other franchisees in your area could lead to joint marketing opportunities) as well as franchisees who have operated for a while. A tip here would be to ensure you have a list of all franchisees so you can have a truly representative picture.

Another vital aspect to consider is the financing. How are you going to fund your franchise? If considering bank funding, banks – including NatWest – lend up to 70 per cent for an established franchise and probably nearer to 50 per cent for a new concept or one perhaps with less of a track record. By way of example: if you have £20,000 of your own funds to invest, the bank could allow you to borrow around £40,000 for an established franchise or £20,000 for a new one. You should always keep some funds for emergencies (such as a flood, illness) that could stop the business from operating normally. So even if you have the full amount to buy the business you may want to borrow some in order to retain a surplus. I would suggest around 10 per cent of your investment.

Just as important, though, will be the ability to service the finance you obtain. A bank will carefully assess what funds you need to live off personally, in addition to making payments on any finance you take out to set up the franchise. So ask yourself: does the business generate sufficient profit to repay the finance, cover your personal drawings and provide a surplus? If the answer is positive that’s a good start.

So how do you know what finance levels you require? The starting point is clearly the franchisor, as they will have the experience of other established franchisees. They will normally provide a template business plan and set-up costs, though of course each franchisees requirement can differ in terms of personal drawings if nothing else. Some franchisors use a third party to assist franchisees with completing their plan, such as Franchise Finance, a bfa-affiliated member. These organisations will have a good understanding of the franchise from previous plans they may have helped franchisees with and compliment that by providing an independent view of your proposal.

As the business develops in the first months and year, make sure you monitor progress, which should be daily at the outset and moving to weekly or monthly as the business settles. Having said that, it is never too frequent to keep an eye on the financials. If things are not going as planned do not bury your head in the sand but speak to the franchisor, other franchisees, the bank and other professional advisors to see how you can collectively get things back on track.

If you are thinking about taking on a franchise, don’t just walk in to a branch to discuss the finance the bank can provide but contact our dedicated franchise team who can deliver industry-specific support and put you in touch with a local specialist.

I will finish with one final thought: running any business, even a franchise, will be hard work, so getting the finances right is extremely important, as running out of money will lead to failure.

Mark Scott is director of franchise development and a regular speaker at various seminars for prospective franchisees and franchisors, including the British Franchise Association.