The FDS Franchise Buyer's Checklist

Using over 25 years of experience in the franchise industry FDS has written the definitive checklist for prospective franchisees seeking to fully research franchise opportunities.

Receiving the Franchise Prospectus

Among the first set of materials you will receive from a franchisor you have expressed an interest in will be the Franchise Prospectus. This is a sales brochure which will highlight the benefits and strengths of the franchise opportunity, and should ideally provide you with enough information to be able to judge whether you wish to take your information further.

The Franchise Prospectus should contain:

• Directors' and key executives' business experience

• Company's track record

• Description of the franchise

• Initial investment required

• Other payments due to the franchisor

• Data on help in raising finance

• Restrictions on franchisees' personal participation

• Termination/renewal of agreement terms

• Number of existing franchisees and their success rates

• Franchisor's rights to select/approve sites

• Training and support guaranteed to the franchisee

• Financial information about pilot operation

• Financial data on the franchisor

• List of franchisor's banker and other professional advisers

Talking to the franchisor

Treat your meetings with the franchisor like you would treat a date with a potential life partner - you don't want to make a bad impression but equally you don't want to end up tied to a badly structured or downright dishonest franchise. Write down a list of what you need to ask before you arrive.

What to find out from the franchisor:

• The company's financial health and history

• How long it has been franchising

• Details of pilot operation results

• Current number of franchisees

• Permission to talk to random franchisees

• Main source of company earnings

• Value and appeal of product or service

• Long-term viability of product/service

• Type and level of head office support

• Full details of the training provided

• Whether training is an extra cost

• Total cost of taking up the franchise

• Realistic working capital needed

• Permission for bank references and other referees

• Territorial practices and exclusivity terms

• Types and amounts of advertising

• Any need to buy products from the franchisor

• Target obligations

• Realistic profit and loss figures

• Management service fees or royalty payments

• Operating restrictions

• Launch assistance

• Sample contract

The Franchise Agreement

There are a number of specialist franchise solicitors operating in the UK, and many are affiliated to the British Franchise Association. Because they are familiar with the nature of the franchising relationship, these practices will be able to judge a franchise contract that not only protects your business, but also keeps in mind commercial considerations.

The Franchise Agreement must cover...

• Your rights to sell/transfer ownership of franchise

• Obligations to the franchisor, e.g. buying supplies/services

• Rights to renew or extend contract beyond original term

• Terms and conditions for terminating contract

• Description of exact training and support offered

• Precise price, commissions, rental fees involved

• Precise boundaries of the territory awarded to you

• Description of your heir's rights in the event of your death

Warning signs

When investigating a franchise opportunity, ensure these points do not conceal problems.

Be wary if the franchisor:

• Promises huge profits with thin investments

• Says 'act now to get in on the ground floor'

• Fails to give statistics on sales and profits

• Promises 'easy sales'

• Fails to identify directors or principals

• Tries to 'trade you up' to a higher fee

• Says 'act now, it will cost more later'

• Promises profits by sub-franchising

• Has a name similar to a well-known business

• Promises large income from 'work from home'

• Demands large 'front end' licence fee

• Has a very short-term contract

• Provides no data on track record or financial strength

• Cannot give plans for future development

• Has vague territories

• Is ignorant of competition

• Has incomprehensible contract

• Is vague about support and training

• Has weak advertising

• Is vague about your financial obligations

• Has poor head office premises

• Tries to meet only in a hotel

• Is evasive about access to existing franchisees

Talking to established franchisees

Armed with your shortlist of franchise opportunities, it's time to get stuck into the serious research. Waste no time in getting the opinions of the people that count - the franchisees. After all, they're the people at the sharp end of the business, actually experiencing the pressures, pitfalls, pleasures and profitability of the franchise concept. They'll be able to provide real stories and real figures, rather than talking in terms of expectations.

What to ask franchisees:

• How long are you going to have to operate without a living income while the business finds its feet?

• How many hours are you going to have to put in to build a customer base?

• How accurate have the franchisor's profit & loss forecasts proven?

• How useful is the training?

• What is the franchisor like to deal with?

Beware: If the franchisor will not turn over a complete list of franchisees to contact, take this as a serious blow to the credibility of your research into the viability of the franchise opportunity. The franchisor may argue that it needs to protect its concepts and networks against business espionage or poaching, or that its franchisees are too busy to spend time responding to every query they receive from potential franchisees, however this may also indicate that the franchisor lacks confidence in how it is perceived by its franchisees.