If you are buying into a franchised system, it will
be important to ensure two things:
1. that the Franchisor is performing well
2 that the Franchisee’s existing business (if
any) is performing well, within the franchise system.
Franchisor Performance
These investigations are part of your due diligence.
There is more to due diligence than having your lawyer check the
contracts and your accountant check the figures. Obviously these
things need to be done and it would be foolish to consider a purchase
without these checks however, you, also have a role to pay.
Every Franchisor is obliged to keep a current
disclosure document. That disclosure document is a very useful source
of information for you. It should, if properly written tell you
if the Franchisor has been terminating franchises and if
franchises have been failing or disputes have been brewing. It
will tell you the experience level of the Franchisor and much
more. If you do not understand the disclosure document then you
should get assistance. If the disclosure document is not well
written this should be a warning to you.
The disclosure document should also provide you with
contact details for past and present franchisees. The purpose of this
is to allow you the opportunity to make contact with franchisees so
that you can make enquiries in relation to how well the system works
and what the Franchisor and its representatives are like. Try to
read between the lines. Franchisees do not like to openly criticize
the Franchisor as they sometimes fear that this may impact on their
business.
You should consider the age of the franchise system,
the age of the underlying business and the number of Franchisees
within the system and their history. A young franchise
system may have additional risk as it will not have a track
record and the experience of the Franchisor will then be of
particular importance.This experience should be tested rather than
accepted on face value. A new franchise system may be more
flexible with the arrangements that they are prepared to offer, so
perhaps you can twist an arm, to get an advantage but, beware of
a Franchisor who is too flexible and is prepared to make a lot of
changes. This may be a sign of inexperience at best and at
worst, is desperation to make a sale.
Take note of the recruitment process and how
professionally it functions. A Franchisor who is prepared
to take on anyone who is prepared to hand over some cash may be
putting the whole system at risk and your business along with
it.
Get details in relation to how the training process
will work. The training process will be used by the Franchisor to
assess you.
Do not underestimate the importance of
personalities. You will have to work with the franchisee and its
representatives. Find out who will be your direct contact within the
franchise system. A franchisee who likes the Franchisor and
their representatives is far more likely to succeed. So it is
important to make sure that you believe that you can relate to both
individuals and the culture in the Franchisor organization.
Actively ask yourself “what is the
Franchisor promising to do for me”. The
Franchisors obligations should go beyond renting a name. In a
well run system the benefits of the system to the franchisee should
be obvious – the list is not exhaustive but may include:
group advertising and websites, referral of work, a respected brand,
training, buying power, centralized phone number and a manual
that sets out a unique systems that gives the brand its
character.
In a well run system there should be annual events
and opportunities for Franchisees to meet with the Franchisor and
other Franchisees.
Franchisee Business Performance
Your accountant will obviously deal with issues
related to business performance.
You should however also consider some additional
matters. Where does the performance of the franchised
business sit within the system. In any existing business the
Franchisor should be able to provide this information. Does the
business perform better or worse than the average franchise
within the system? What can be done to improve performance? What
risks are there to the continuing performance of the business? You
might also ask your accountant to let you know what the benchmarks
are within the industry as a whole. Does a franchisee with an average
performance within the system outperform the industry average?
Ask these questions of your Franchisor and you
will get a feeling for how well the Franchisor knows the industry and
how well they understand their own franchise system.
Riba Business Lawyers work in the areas of Franchising, Leasing, Business purchases, Business sales, and franchising lawyer.
Joseph Riba has worked for more than a decade in the franchising
industry. Joe was admitted as a lawyer in Queensland Australia in 1993
and commenced J J Riba and Company franchising solicitor in 1998.
Article Source: http://www.compensationsecrets.co.uk/