Of the roughly 1,000 business format franchises in the UK, many are excellent opportunities for building your own business. Unfortunately, some should be avoided at all costs.
The best franchises are managed by professionals who carefully screen franchisee candidates. They ensure that new franchisees are adequately funded and meet strict criteria. In contrast, bad franchises are often run by individuals who will accept anyone who can pay the initial fee, regardless of their suitability. This short-term profit motive frequently leads to disputes and franchisee dissatisfaction. It can cause the loss of the franchisee’s investment and even greater financial liabilities.
So, how can you avoid falling victim to a bad franchise?
1. Check Out the Franchisor Limited Company
This information is freely available at Companies House. Your check should include what other businesses the directors are involved with. We have seen many cases where bold claims about the soundness of the business model were not reflected in the annual accounts.
2. Is the Franchisor a Member of the British Franchise Association (BFA)
The BFA requires members to go through an accreditation process, but it could be more effective by adopting a tougher, streetwise approach. We know of one franchisor that remains a member while having a balance sheet that is negative by over £1m. Membership therefore doesn’t guarantee quality.
3. Review the Operations Manual
Before signing a franchise agreement, ask to see a copy of the operations manual. This document outlines the day-to-day procedures and is a crucial element of any franchise. If a franchisor is unwilling to share this, it’s a red flag. If the manual isn’t a complete blueprint for running the business, it’s a red flag. If it appears to be out of date or has never been updated, it’s a red flag.
4. Investigate Financial Projections
Ask how the financial projections were calculated. Understanding the basis for these figures will help you assess their reliability and avoid disappointment later.
5. Safeguard Against Misleading Projections
Franchise agreements almost always include an ‘Entire Agreement’ clause, stating that the franchisee has not relied on any financial projections or promises made during discussions. To protect yourself, list the key points and financial projections you are relying on and ask for them to be annexed to the agreement. Both parties should initial this annex.
6. Assert Yourself Before Signing
Remember, until the franchise agreement is signed, you are on equal footing with the franchisor. Once the agreement is signed and the franchise fee is paid, the franchisor will hold most of the power in the relationship. During your research, be confident enough to ask tough questions. Take detailed notes and make sure the franchisor sees you doing so.
7. Request a List of Recent Franchisees
Ask to see a complete list of all franchisees who have joined in the last three years, not just the current ones. If the franchisor cites data protection as a reason not to comply, suggest redacting personal details. A genuine franchisor will accommodate this request. A refusal is a warning sign.
8. Speak to a Range of Franchisees
Ask to speak with a mix of franchisees: long-established ones who have re-signed, recent joiners, and those in areas similar to where you plan to operate. Insist on making the selection yourself rather than allowing the franchisor to control the process.
9. Will There be Sufficient Sales?
Many franchisee failures are caused by insufficient sales. Be cautious if most of the selling and promotion is done by the franchisees, especially by networking and social media.
10. Evaluate the Potential of the Proposed Territory
This includes the location and the social demographics. A huge rural area may have the same sized population as an urban one, but it may be more difficult to operate. Affluent areas offer a different potential to those less affluent. That works both ways. Be very cautious about franchises that are ‘virtual’ and don’t provide an exclusive territory.
Finally, make sure that you physically meet the franchisor and their team at the company head office. Buying a franchise is a large investment and a long-term commitment, don’t rush into it on a conference call.
By taking these steps, you can reduce the risk of being ripped off by a bad franchise and increase your chances of finding one that offers genuine value and support.
Comments