Ten questions to ask before investing in a franchise

Franchise businesses are increasingly becoming a popular alternative to the nine-to-five grind of working under contract for someone else. Franchising provides the opportunity to head up your own company. You could make a hobby your work and turn your skills into a profitable venture.

There are over 39,000 franchise units operating in the UK, according to the British Franchise Association (bfa), which between them employ 561,000 people. In twenty years, annual turnover within this sector has grown by £8.4 billion, thus it contributes significantly to the UK economy. These are impressive facts and on that basis, it’s little wonder so many people want to get involved.

Here are ten questions to ask before investing in a franchise:

1) How much money will a franchise cost?

Costs vary depending on the type of business purchased. Some franchises might require an investment into equipment or products, while others will not, therefore it’s impossible to give even a rough average of the costs involved.

Franchisees will need to pay fees over the course of their lease. These might include a one-off payment to open a store and an annual management service fee, payable to the franchisor. However, the costs will be fully explained to the franchisee upon enquiry and well in advance of signing any agreement.

2) What sort of return can I expect?

Again, this is an extremely difficult question to answer given the different business types in operation. Industry research calculates that the total annual mean turnover was £356,000 in 2012; an amount that had increased by four per cent over the previous year.

Upon application, the franchisor should present you with financial information which indicates the franchise’s earning potential, providing the business model is followed.

3) What support or training will I receive from the franchisor?

Training and support can vary quite considerably between the different franchisors. There is a strong commitment to training within franchising, according to the UK Franchise Directory. The reason for this is that the promise of training opens the field up to far more potential franchisees, giving the franchisor a bigger and better pool of candidates to choose from.

The service management fee or on-going franchise fee pays for the franchisor’s continued support; helping franchisees launch their new business, providing assistance with regard to arranging finance, marketing, locating premises and devising the initial business plan. The franchisor will always be at the end of the telephone line; essentially, franchisees need never feel like they’re on their own.

4) Can two or more people buy a franchise?

Yes, numerous successful franchises are run in partnership, where each party has made an investment. This can be an ideal situation perhaps where one person has business experience and the other has skills which suit the actual franchise. It also provides an instant, local support network.

5) Can I run a franchise on a part-time basis?

The advantage of franchising is that you can choose a business that allows you to work as many hours as suits your lifestyle. Not all businesses are conducive to part-time working, so if you only want to commit 20 hours per week to your new business, look specifically for a part-time franchise opportunity – they do exist and don’t all run nine-to-five.

Hence becoming a franchisee can be a great option for someone looking to return to the workplace while maintaining caring responsibilities or for those wishing to reduce their workload. Naturally, the turnover and returns for a part-time franchise does tend to be lower than that of a full-time franchise, so you need to decide what your earning expectations are.

6) Do I need relevant experience?

Experience of running a business is, of course, desirable but not strictly necessary. As mentioned above, the franchisor will offer guidance regardless of whether or not you’ve run a business previously.

With regard to a particular sector, ‘drive and enthusiasm’ are deemed far more important qualities than experience, so says the UK Franchise Directory. Again, full training will be provided and you may already possess relevant transferable skills.

7) Which industries can I choose from?

With a large number of business types available to choose from, you should have little difficulty finding one which suits your experience or passion. Among the 930 franchise brands in operation, you will find many retail, animal care, legal services, recruitment, finance and healthcare sectors represented. That’s just the proverbial tip of the iceberg.

For inspiration, it’s useful to visit a franchise exhibition to see what opportunities are on offer and to chat to existing franchisors/ees.

8) How secure is the investment?

The latest NatWest bfa Franchise Survey found that 92 per cent of franchise units are profitable. Many are trading on an established and trusted brand name, offering a service or product that has already been proven as valuable and successful. As such, many banks are prepared to lend greater amounts for business start-ups that are part of a franchise network, which is an indication of their confidence in this type of investment.

Before going ahead, it is important to consult a specialist financial advisor, ideally from one of the bfa’s accredited banks.

9) How long is a franchise agreement?

The majority of agreements stipulate a fixed term, with the intention of developing a long-term and profitable business. The average agreement lasts five years, according to Business Franchise Magazine. Naturally this varies, with some agreements for 10 years while other, bigger franchises may be leased for a minimum of 25 years.

10) Is it possible to terminate a franchise agreement?

The franchise agreement should detail terms under which either the franchisor or franchisee can terminate the agreement. This generally states that the franchisee, when they want to move on, can understandably only sell the lease onto someone that has been approved by the franchisor. We have written a great article on franchise exit strategies that you should read prior to starting a franchise.