Insider guide to Franchising
Taken from The MumsClub Business Opportunity Guide...
Deciding to become a franchisee is a big decision. Your time, money and family will all be affected by the choice you make so it is important to get it right.
Here, MumsClub, together with some successful franchisees and franchisors, offers tips on what you should consider when choosing a franchise business.
MumsClub Money Matters
Can you afford the initial investment?
It may sound silly, but a franchise opportunity that costs upwards of £20,000 should not be on your shortlist if you have no way of meeting the initial cost, even with any available funding (see below).
It is also important to read the small print to make sure exactly what your initial investment does, and does not cover. If you would be stretched to cover the initial fee, your business may be sunk before you start if you subsequently need to pay out for new equipment, training or advertising.
Is there any financial support available?
It is often the case that the franchisor themselves is unable to offer actual financial support or assistance. However, a good franchisor should offer support with funding proposals and sources of lending. Often, government-backed organisations such as business link (businesslink.gov.uk) can be a great place to start when looking for alternative funding sources to start or support your business.
Sometimes franchisors may offer their own funding, lease back on equipment or even a business contingency plan, which will add value, and attractiveness, to the overall franchise business proposition. Continued on Page 18
Do you have ample funds in place to support the business?
Think Cashflow... Availability of cash is vital to the success of your business and many businesses have failed simply because of a lack of cash to pay its creditors. Realistically, new businesses are unlikely to be in profit until the second year of trading and this needs to be incorporated into business plans and cashflow forecasts.
Make sure that you have additional funds available to provide your business with working capital and try to arrange additional sources of funding, such as overdrafts, just in case your business needs to draw on it in the future.
What are the terms of resale and renewal of the franchise?
Although this is probably not the first thoughts of a potential franchisee, it is something that need considering before signing up.
In some cases a franchise business may not actually be under your full control, for example, the franchisor may retain rights to customers and contracts or may even retain an ongoing interest in your generated revenue or capital appreciation. In such situations, you are suffering the risks of your own business without being able to enjoy all the rewards, which does not make for an attractive proposition. Make sure you understand your franchise agreement completely before signing.
You should also find out what terms the franchisor has for resale. Some franchisors may require a proportion of sale proceeds or place restrictions on potential purchasers.
Equally, if the franchise agreement covers a fixed term, you should discuss renewal of your franchise agreement with the franchisor. It is important to know whether you are permitted to automatically renew the franchise agreement at the end of each term, and how much will it cost you to do so.