Buying a Franchise

Posted: Thursday July 11 2019

By: Needle Partners

Buying a franchise can be a great way to start a business without having to come up with an idea or brand from scratch. An established franchise network will allow you to piggy-back onto somebody else’s concept and business structure and benefit from their experience. If you are considering buying into an existing franchise system it is useful to understand exactly how franchising works.

By Sharon Needle – Needle Partners

Franchising is setting up a business under a licence from a franchisor (who can be a person or company but is typically a company) so that you carry out a business based on a model and concept that the franchisor has already established.

In practical terms it means that your business operates under the franchisor’s organisational umbrella for a fixed number of years and uses its branding, business model, knowledge, expertise and ideas in exchange for monetary consideration in the form of an initial franchise fee and ongoing fee(s) which are typically based on a percentage of your business turnover. The person (an individual or company) that takes on the licence to do this is known as a franchisee.

Depending on the type of franchise business (and franchising business opportunities exist across an extremely wide range of business activities from coffee shops, fast food businesses, cosmetic companies to cleaning services) the franchisor will provide intial training and ongoing support to the franchisee. What that looks like will depend on the type and size of the franchise – some larger franchisors will organise national or even international conferences (Vegas anyone? ) while smaller franchisors may offer monthly catch up meetings and or calls.

The commercial arrangement between the franchisor and franchisee is primarily set out in a franchise agreement – the legal contract that is entered into between the franchisor and franchisee.


Buying a Franchise – All Franchises Are Not The Same

Not all franchises are the same so if you are interested in starting a business by buying into an existing franchise arrangement you should initially look at the information pack that franchisor’s will send to prospective franchisees. You may want to look at a number of these in the type of business you are interested in.

The initial information you will want to consider when buying includes:

1. How long the franchise has been established for and the number of other franchisees that operate under the franchise umbrella.

2. The business concept offered and the support that will be given.

3. The expected financial projections for the franchise (and you will want to see existing figures from franchisee’s in similar areas to the one that you want to operate in (called “territory” in franchise speak). In new franchise’s you may only have the franchisor’s own area to compare with or what may be referred to as a “pilot” franchise.

4. What the cost will be to you and whether or not the franchisor has put in place financing arrangements with banks that you/other prospective franchisees can access.

5. The level of assistance and training (both initial and ongoing) the franchisor will provide the franchisee and its employees.

6. Do you need business premises to operate from.

In addition it is useful to have access to existing franchisees to ask questions as to how they have found the support from the franchisor. Most importantly to look at a business that interests you. If you hate sewing or coffee a franchise that does alterations or a coffee franchise may not be you.

While it is great to be inspired by long established franchises a new franchise should not necessarily be rejected due to its newness. There are some great ideas around that are newly franchised and sometimes signing up to one of these as one of the first franchisee’s gives you a great financial opportunity as the franchisor may have an introductory fee and rates to help it establish the business. If a new franchise appeals to you we would advise that you see if an established franchise consultant is advising them. Franchise consultants work to launch lots of new franchises and good ones only tend to take on ideas that they feel are workable.

Before providing you with the initial information pack the franchisor may want you to sign a confidentiality agreement (sometimes called an “NDA” – short for non-disclosure agreement). Don’t take this personally, this is to ensure that any information provided to you while you investigate the franchise is kept confidential and not disclosed to other party(s). Do remember though that this document is legally enforceable if you breach it.

Once you have identified the franchise that you would like to buy into you may want to consider making a business plan- something that a lender may require. The franchisor may assist with this as part of its onboarding process otherwise a chat with a friendly accountant may help you with this. You will also need to decide if you are buying the franchise as a company or partnership or in your individuals name- this is something that you may wish to discuss with you solicitor and accountant.

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