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10 steps to assessing a franchise system

Franchise System Checklist

Making and taking the decision to acquire a franchise system may be one of the most important decisions of your life, certainly your business life. It is important to do your homework and research the system or systems that you are considering. We recommend that you consider no more than three systems and prepare a checklist to compare each one of them against the other. If you have already decided on one system or are set on the industry or sector it is worthwhile to compare other systems in the same sector to be sure that the system you are choosing is the right one for you.

Before you create the shortlist and start evaluating them you need to be clear that you have sufficient capital or access to capital to fund your new business. In addition to start-up capital for the business you also need to ensure that you have sufficient working capital for the business and your personal life. The major banks are very positive towards franchise systems and will fund up to 70% of some franchise systems based on the quality of your business plan and strength of the franchise system so the challenge of raising capital may not be as daunting as it could be.
So prepare your checklist and ensure that you ask each franchisor the questions you need answers to so that you make the right decision.

1. Identify which franchise systems you are interested in

Choose an industry that appeals to you – the decision you are contemplating is going to cover the next 10+ years of your life potentially so make sure it meets your requirements – be that industry sector and/or financial return.

Once you acknowledge that setting up a franchise can give you many advantages over starting a business from scratch it now comes down to choosing the right system. Trading under the brand of another business as a franchisee is proven to have a much lower failure rate it does not guarantee success and you still must work very hard.

You will benefit from the help and support of a proven franchise system and they will give you access to all of their resources as franchising is symbiotic – you both need each other to succeed.

  • Who are the shareholders or owners of the franchise?
  • When was the company founded?
  • When did the company launch the franchise system
  • What is the company name of the franchisor (if different to the brand name).
  • Is there market intelligence available, eg industry reports.
  • Check the current accounts of the franchisor at https://beta.companieshouse.gov.uk/

2. Is the Franchisor a member of trade organisations

The franchise industry is self-governing in the UK and there is no regulation. Of course franchise systems that trade in industries must comply with regulations relevant to their sector. In the UK the British Franchise Association (bfa) is the self-regulating trade body for the industry representing the needs of franchisors and franchisees. They are a great source of information and regularly conduct research aimed at promoting franchising generally.

Not every franchisor is a member of the bfa – there are 990 systems in the UK and about a third are members. Franchisors that may not be part of the bfa may be part of other franchise associations from around the world – particularly if the system was established overseas. A system that is not part of the bfa does not make it a bad system so do not use this as your only criteria. Do your research and by all means ask a system that is not part of the bfa why they are not – there are often very good reasons that make sense.

When you research a franchisor identify if the system has won awards or commendations in their market sector. This shows brand strength and commitment to public recognition which is always positive.

  • Is the franchisor a full or associate member of the British Franchise Association?
  • Is the franchisor a member of an international franchise association, eg the International Franchise Association or the European Franchise Federation?
  • Has the franchisor won any awards?

3. Ask the franchisor questions about sales trends and their locations

Franchisors will have traded successfully for a period of time to evaluate their concept – this is often called the pilot site or concept site. Ask about this initial operation even if it was some years ago. The franchisor may operate multiple owned operations and this is normally a positive as it shows belief in the system. A franchisor that never traded their own system is highly unusual and normally one to be very wary of. The franchisor will disclose to you how the pilot operation performed and you should expect to see steady growth. The franchisor will explain the challenges they faced and how these were overcome – this is important as it shows you how they have developed the system for the benefit of the franchisees that they have since recruited. The franchisor will also share with you their franchisee growth rate in terms of absolute numbers of operations as well as the financial performance of franchisees. Do not be surprised if there have been failures in the system, this is not unusual as unfortunately owning a franchise is not a guarantee for success.

  • Is there a successful pilot operation? If so, is this run by a franchisee or franchisor?
  • Request to see the financial performance and commercial considerations of the pilot operation.
  • When did the first franchise location open?
  • What are the sales trend over the last 5 years?
  • How has the franchise system grown in the past 5 years? (detailed list of locations per year)
  • Is the franchise system also active in other countries?

4. Questioning the business model

The business model of the company’s franchise is critical for future success. If you believe in the current business model, you should also question the plans for the future and how the system intends to evolve with market conditions. Good franchise systems continue to evolve systematically and many franchisors encourage franchisees opportunities to get involved. Involvement may be as part of a project team where you have a specific set of skills that could contribute or through participation as part of a Franchisee Advisory Council that many franchisors encourage.

  • What are the critical success factors that make the system unique?
  • Can these factors be copied?
  • What improvements has the business model implemented in recent years?
  • Is there an innovation management process to develop the system?
  • What specific ways are franchisees involved in working with the franchisor to improve the system?

5. Undertake a competitive analysis of the system

Of course, you should also keep an eye on the competition whether they are franchised or not. This is used primarily as a reference to reassure you that the system you are considering is competitive and has some unique selling points (USPs).

If after completing your evaluation you discover that the competition is stronger or better placed and this concerns you we would recommend that you do not continue with the system.

  • Direct Competition: What services are offered by other companies and where are they located?
  • Indirect competition: Which companies solve the customer’s problem in a different way?
  • What are the strengths of the system compared to the competition?
  • How can the system hold the unique selling point permanently?
  • Where do you see the drawbacks of the system compared to the competition?

6. Check the services offered and the fees charged by the franchise system

A franchisor has invested significantly in terms of time and money in getting their system ready and “franchisable”. Possibly years of know-how and experience have gotten them to this point and if the system can prove that through following their processes you can build a sustainable business they have earned the right to charge franchise fees.

Fees are normally broken down into non-recurring fees such as the Franchise Fee and recurring fees – such as the Royalty or Management Service Fee (MSF).
Recurring and non-recurring fees are contractual so be sure to know what they are.

You will be advised during the recruitment process of the scale of fees but always clarify which fees recur and which do not.

With the recurring fees some franchise systems ‘reward’ high performing franchisees with reduced fees upon reaching targets, this is worth asking the question as it shows you are focused and also motivated to become a high-performing franchisee.

Do not be swayed at this early stage by a system that charges low MSF or even high MSF – you must evaluate the system to determine which system can deliver the right level of income for you after the fees have been deducted. On the face of it a system charging just 5% may seem attractive whereas a system charging 25% may seem unattractive. However, if the system charging 5% can only generate £50k of turnover compared to a system generating £200k of turnover for the same effort then perhaps the system charging higher fees may be the better investment for you.

  • What services are included in the fee that are applicable to you as a franchisee, eg Marketing, Training, Support etc.
  • Has the franchisor protected their trademark to prevent other brands using their name to attract customers?
  • What recurring and non-recurring fees are charged?

7. Validate the system

Of course you will develop a business plan for the business but you must also consider your personal situation. Does the business need to generate a personal income for you? If so how much and by when? These are important factors that you must take into consideration when validating the financial performance of the system.
The franchisor will offer some non-binding financial projections and it is important that you assess these to ensure that they are realistic and achievable. Franchisors will normally encourage you to speak with existing franchisees – this is your chance to ask questions of someone who has taken the decision that you are considering taking yourself. If your sales budget varies from the real figures achieved by people currently running the business you are about to invest in then re-run your business plan with the realistic numbers – it’s a fine balance between being over-optimistic and so pessimistic that you do not take a decision.

  • What are your living expenses?
  • How realistic is your sales forecast compared to existing franchisees?
  • Which costs are fixed and which are variable costs?
  • When will you reach the breakeven point?
  • What are the average sales achieved by the existing franchisees?

8. Speak with existing franchisees of the system

Discussions with the existing franchisees are one of the most invaluable aspects of evaluating a franchise system. It is not unusual nor surprising for you to have ‘mystery shopped’ existing franchisees of the system that you are evaluating – it shows the franchisor that you are thorough. It is in these moments you can get a real flavour for the type of business that you are considering. Ask yourself the question “Can I see myself doing this in 5 years time?” The answer must be yes of course! When meeting franchisees with an introduction from the franchisor create a checklist of questions that you want answers to and compare them with other franchisees that you meet – asking consistent questions facilitates easier evaluation. The questions you should ask may include:

  • Knowing what they know now would they make the same decision again?
  • What qualities should a successful partner of this system have?
  • What is the normal working day like for you?
  • What are their main tasks?
  • Did they achieve their sales and profit goals?
  • When did they reach the breakeven point?
  • What should I pay special attention to?
  • What would you do differently today?

9. Check the Franchise Agreement

If this is your first experience of a franchise contract you should be made aware of some key points.

  • A franchise contract is notoriously one sided in favour of the franchisor. This is not bad news but reflects the needs of the franchisor managing many relationships evenly. This is a benefit to you as it offers protection to you should any other franchisee of the system breach the system.
  • A franchise contract is not a negotiation. Of course you need to clarify certain points but this is not a negotiation of every single point within the contract.
  • Get the contract reviewed by an experienced franchise lawyer, preferably one affiliated to the bfa as they will be very familiar with what is fair and reasonable and what is not. Never use a general lawyer even if this “saves you money”
    because they are a ‘family friend’ – it may cost you in the long run.

The franchise agreement is a very important legal document and you must be aware of your rights and obligations as well as your responsibilities. It is rare for a franchisor to manage its franchisees by its franchise agreement. Management is normally by the operations manual as that identifies how the business is run but even so you should understand what you are signing up to as one day you may need to revert to it in case of dispute and ignorance of what you sign is not a legal defence. That being said do not get too hung up about the agreement – so long as your experienced franchise lawyer has explained it to you carefully.

Franchise agreements well drafted by experienced franchise lawyers do not themselves guarantee success but show how well run the business might be. As noted in the previous section your discussions with existing franchisees will often give you a true insight into the business. Ask them whether they refer to the agreement and/or their experience of it.

Some questions to ask:

  • How long is the initial term and is there an automatic right to renew the franchise agreement?
  • Is there a cost to a renewal of the agreement?
  • How many franchisees renew their agreement?
  • What are the key obligations of the agreement?
  • On what grounds would the franchisor issue a notice of contract breach?
  • What services are included in the monthly fee?
  • Under what conditions can additional locations be opened?
  • For what reasons can an extraordinary termination of the contract take place?
  • If there are turnover rents as part of the contract under what conditions can the rent be adjusted unilaterally by the franchisor?

10. Other Important Issues

  • How many partners have left the system in the last 2 years?
  • On what grounds did they leave the system?
  • Is there or was there any legal dispute with franchisees?
  • If so, which party was legally correct?
  • Is there a franchise advisory board and if so, what is there mandate?
  • Do franchisees have to use and purchase specific products or services from the franchisor or their nominated suppliers?
Free Checklist

Franchise Checklist – Request your personal PDF copy by email.

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