What to Do When Thinking About Buying A Franchise?
I said that I would add some further guidance on buying a franchise so here are my tips to ensure you research adequately. Failure to do so could put you in a tricky situation. In addition to the 50 questions to ask a franchisor as detailed in this link from the British Franchise Association
50 questions to ask a franchisor - Bfa here are some more detailed approaches for getting the information you need:
1. Check out their website. Obvious one but you need to do some specifics.
a. Go to their contacts page or locations page to find out the contact details for franchisees and to see how many are in operation.
b. In my experience if they have a 0800 number for a franchisee it often means they are not operating. Why would a local business not want to answer the call themselves instead of diverting to a call centre and why would they not want to show a local telephone number, which we all want to call within our mobile minutes.
2. Go to review sites like Yelp, Yell, google places, trust pilot and so on to find out what customers say about the franchise.
a. Look at the reviews carefully, both positive and negative. It’s fairly easy to find fake reviews. In fact, having just done a search on Trust Pilot the franchisee (Jeff Longley) mentioned in this thread put a review on trust pilot himself (very foolish but there you go).
b. Obviously check the details, do they over charge, are their franchises competent? Can you glean information from these posts that is associated with how they may have been trained by the franchisor.
c. Don’t just look at the ratings score, assess the reviews from a credibility point of view because many could be fake.
3. Assess the liquidity and over financial viability of the franchisor. This can be done by assessing websites like duedil, endole and of course companies house. Pay attention to the following:
a. The category of company. Limited or otherwise may affect their credibility and capability to invest. If they are owned by capital partners or a banking organisation, everything maybe too much about the bottom line and not about introducing new initiatives to the benefit of your business.
b. Incorporation Date. How long have they been trading for and from this you can understand how successful they are. If they only have 7 franchises in 3 years like Mr Electric, are they really successful? A point you can raise in face to face meetings with the franchisor.
c. Registered Address. In this example the registered office is a law firm in London. Why? Surely they would transfer the registered office to an appropriate office location where the business operates from? I would question the long term approach of the business in this example.
d. Latest Activity. Look for areas of concern and in this example there have been numerous Director changes. Some have resigned and been reinstated but if there are numerous changes, why is that? It would be fair to assume a degree of instability!
e. Directors. Assess these people in detail and obviously this means checking out their Linked In Page.
i. What experience do these people have and what is their background? One director of Dwyer UK Franchising is involved with Venture Capital & Private Equity. If a venture capitalist is pulling the purse strings, they may have some very specific implications.
ii. What Nationality are they? Not being xenophobic but what will different nationalities bring to the decision making table? I have already said that those from the states do not understand the UK but this company has an all-America board.
f. Financial Figures. Obviously a critical checking point for any franchisor and here are some areas to check:
i. Cash In Bank.
ii. Current Liabilities. A minus figure for Dwyer UK Franchising Currently.
iii. Employees. This shows unreported for Dwyer UK, but why? Would this suggest that there are very few in the UK and many of the support staff are in the USA. Is this a good thing?
iv. Total Assets.
v. Turnover. This shows unreported for Dwyer UK, but why? An obvious indicator that it is not a high number, you would be happy to promote this figure if it was good.
vi. Net worth. In this example the figure is £-583,677, which does look negative but may indicate a period of investment so you need to ask questions about exactly what they are investing in?
4. Ownership. See who owns the company, it may not be the directors as is the case with Dwyer UK. In this example Dwyer UK Franchising is owned by Dwyer Franchising Llc. So what do you do from here:
a. Do a search for Dwyer Franchising Llc on endole, duedil and companies house. In this example nothing will come up as it’s a US company, so you need to look on websites in America for more.
b. Armed with the ownership information, do a search on Google for Dwyer Franchising Llc and obviously link through to various results including new stories, company information websites and more.
c. In this example you will find that the company was sold again in August 2014. Sounds positive when reading the article but what does this mean for UK franchises, will they directly benefit from this?
d. Keep searching and you will start to find court cases associated with the owner. In this example I found a court case regarding Glass Doctor another franchise brand in the Dwyer Group Umbrella. Here is yet another example of the total mess you can find yourself in as a franchisee
http://www.gpo.gov/fdsys/pkg/USCOURTS-caed-1_09-cv-01634/pdf/USCOURTS-caed-1_09-cv-01634-1.pdf
5. Franchisor Employee Feedback. There are numerous ways you can find out what people think of the franchisor to dig deeper. Remember they will really have some insight into the credibility of the company but of course be on the lookout for those who are clearly trying to bad mouth a company. Here are some ideas:
a. Contact the franchisor about becoming a franchisee, get some names including the person selling you the franchise and check them out on LinkedIn. How long have they worked there and what reviews have they got on LinkedIn.
b. Any other contacts you can get from the franchisor, check them out.
c. Go to glassdoor.co.uk and type in the company name. This maybe Mr Electric, Dwyer Group or Dwyer UK. Try all 3 and see what people say about working for these organisations. If the responses are negative on the whole, why would you want to buy a franchise with an organisation that treats its employees badly.
d. Search through LinkedIn and try to find people who were or are associated with the company and send them an invite to connect. Also, send them a message about your intention to buy a franchise and see what they say. Try to do this with 5 people to get a decent perspective.
6. Communications with current franchisees. This is of use and you will get some good information on the franchise but be aware it is in their interests to say the franchise is good. They want the brand to nationwide so it looks good for them and they maybe incentivised to say the right thing to you. Try the following:
a. Call them at first to get an initial idea of the franchise, perhaps after your first call with the franchise sales team. Do not tell the franchise sales people you are calling franchises or they will coach the franchise on what to say in more detail beforehand.
b. Do not just call one or two but many of them so you get a varied response but remember they have an interest in saying good things.
c. Email them a bunch of questions associated with what you have been told by franchise sales to check it adds up. Log these emails and use this information to question the franchise sales team when you visit them.
d. Make sure you have questions prepared. So how much do you earn from national accounts, where does your work come from, what type of marketing works, what’s training like and so on.
7. Visit current franchisees. This is very important, you need to see what your business could look like. Do the following:
a. See how the operation works, is it fluid, well organised and do they seem busy?
b. Checkout their accounts systems, crm and other computer software in use.
c. Use of branding, does it look like a franchise or just another small business?
d. What are their employees like, up to scratch or not happy in their job. All indicators of a successful business.
8. The accounts of current franchisees. Obviously a very important area to check but how?
a. You are welcome to ask the franchisor for an example franchise accounts but how accurate this will be is up for debate.
b. You could ask the franchisee for this when you visit them but once more the figure could be inaccurate.
c. The best approach is to do some online searches for each franchisee. Many of these franchises will be limited companies but won’t be a random company name trading as Mr Electric. To find out the company name associated with each franchisee search for the following:
i. Go to the contact page of the franchise or locations page to find all current franchisees.
ii. Choose one and search for a particular franchise on Google. For example Mr Electric Beds or Mr Electric Leicester.
iii. You will be presented with a few search results associated with the franchise. It may take a few clicks or you may find the company name associated with the franchise straight away.
iv. In the case of the “Mr Electric Beds” search you will find out the ltd company name immediately, Jels Electrical Ltd T/As Mr Electric Beds, Bucks, Northants.
v. If you can’t find out the limited franchise company yourself I would go as far as to demand it from the franchisor, this information is absolutely critical to your decision. Don’t just get one company name get at least 5 for better proof.
d. In other examples you could simply go to LinkedIn and the information is there in the title of the directors LinkedIn profile. For example do a search for Mr Electric on LinkedIn and you will start to see owners of franchises.
e. Armed with your company names do exactly the same kind of search that you would have done for the franchisor company. Go to duedil, endole and of course companies house to assess each franchisees company. Check turnover, liabilities, net worth and so on as normal.
f. Go a stage further here as it is your business and livelihood on the line. As such get some full reporting on the franchisee’s companies including a credit check. Why, well because it will indicate how well they are doing obviously but how quickly they are paid and whether the business can be trusted.
9. Previous franchisees. You may think this is hard to find out but not in the internet world! Here are a few ideas:
a. LinkedIn is a great place to start. Obviously do a search for Mr Electric and this will bring up many people who are or have been associated with the franchise. This is very similar to the process of finding employees who used to work for the franchisor.
b. You may not see exact names of people but you will see Mr Electric franchise names. For example Mr Electric Leicester, Mr. Electric Thames Valley etc. Keep going through the pages on LinkedIn to find more, jot down the names of the previous franchisees, perhaps 10 or so.
c. Go to the contact or locations page of the franchise website and try to find these franchises. If they are not listed or they have an 0800 number listed, it means they are not operational and no longer a franchisee.
d. For the franchises that you believe to be no longer operational, go to google and search for those franchise names. Let’s take Mr. Electric Thames Valley, do a search for that business and you will find lots of information not just on the ltd company associated with that franchise but also telephone numbers to call that may be still in operation. Its more than likely that a phone number will be in operation as most of these previous franchises will be electricians continuing their trade away from Mr Electric.
e. Obviously your questioning of these previous franchises should be pragmatic and you should have a list of questions ready.
f. Another approach for finding information from previous franchisees is to go straight to google and search for Mr Electric in your town or city name. For example, a search for Mr Electric London brings up the franchise Mr. Electric London North and West, a franchise not listed on the Mr Electric website. Click through and you have a phone number, which will more than likely get you through to the previous franchisee.
g. Remember that with all of the above you have the internet at your disposal and a plethora of old directory listings to help you get in touch with previous franchisees. No one ever removes these listings, so keep clicking through the Google pages and you just might find invaluable information.
10. Current marketing by the franchisor. This is critical, is the franchisor spending any of those fees you are paying them on marketing the brand? Follow these tips:
a. Request the current marketing spend figure per annum for the benefit of every franchisee. In other words, the fund which all franchisees pay into so money can be spent on marketing to support every franchise.
b. Ask the franchisor to furnish information on all current marketing activities including the website, seo, ppc, pr, events, exhibitions and more. If they fail to provide any information or it is very thin on the ground, you should be careful. A failure to spend money on marketing the brand is indicative of many things including a lack of income from franchisees to pay for it. So, if franchisees are not paying their fees or very little, no marketing is centrally completed, thus the brand does not grow and the legitimacy of the franchise must be bought into question.
c. They must also prove success with their marketing and evidence that it works. So if they have spent money, they need to prove the relevance of this activity towards building your potential franchise.
11. Local Marketing For Your Franchise. This is also very critical and if this does not work or is inaccurate or out of date your business will not work, full stop. The franchisor must provide information on what is in a typical marketing plan for a start-up franchise, the total spend required and the likely results. You should also talk to other franchisees about the level of support in this area. Some franchisors can be very lackadaisical with this part of the business and choose to offer guidance and wishy washy advice instead of specific, itemised solutions. As far as I am concerned this should be a menu of activities to build the business so make sure you pretty much demand it.
12. The Package. You need to know exactly what is included in the package. Here are some items to consider:
a. What software is available to be used and what are the costs. For example crm, accounts, mobile job deployment etc?
b. Support with accounting.
c. Support with marketing.
d. What’s involved with training?
e. How much do you have to spend over and above the franchise fee to get the business operational?
f. How much do you have to spend to grow it to £500K turnover?
g. Bank loans and do they have any favourable relationships with banks for business setup and rates etc.
h. What technical training is available?
i. When do you start paying fees and how do the percentages vary?
13. What’s the failure or closure rate, how many franchises are closing down. You can get an idea about this by speaking to previous franchises and also the number of franchises on the contact or locations page.
14. Wat about Churn. In other words how many are leaving the franchise versus signing up. If they have lots of franchise sales this may indicate they are losing a lot also. So if they say they are bringing on lots of new franchises this maybe because they have lost many not because the network I growing.
15. Mystery shopper. By golly this is useful and you should do it for every franchisee. Once you have a grasp of the franchise and how it should work, its sales approach and processes etc call them posing as a customer to check how they operate, how they deal with calls, different types of business, both domestic and commercial to test the operations. If the franchises are not operating as the franchisor tells them how they should what does that say about the strength of the franchisor. What does it also say about the supposed superior business systems if the franchisee does not do it. So if the franchisee does not do it, why are they franchising instead of running their own business?
16. Owned Units. Some franchises have owned units run by the franchisor and this is entirely sensible so they know their business and can make better improvements with time. Find out the ratio of owned unites to franchised. With Mr Electric all are franchised.
17. When, how and where do you get support after initial training. Telephone, email and inline is good but you need to ensure this support is structured and relevant to your needs. Focus on what you need and make sure they deliver on that training.
18. Break Even. How long will it take? Make sure you get accurate financial projections for the franchise and get this tested and checked by other people in the industry and independent accountants so you know it is viable. Franchises are renowned for flowering up these figures to increase the chances of a franchise sale.
19. Get the franchise agreement/contract in your first meeting so you can assess what you are getting into. Failure to understand this document will cause you challenges and problems you may not have foresaw without assessing it. If you know someone legally qualified or good at spotting dodgy clauses, get them to read it.
20. Use Email. Get as much clarification in writing from the franchise specialist during the sales process. Without fail, you must ensure that everything you communicate with them is in writing. Never accept a clarification verbally in a meeting or on the phone. Ask that they confirm your questions by email and build up a log of written communications by email. Whatever you do save these emails and if after signing the contract you are not happy with proceedings you may just have some evidence in writing to get out of the contract if you need to. Always be prepared for a court case in franchising, you never know what may happen!
21. Employee Training. Does the franchisor offer training for your employees or do you have to pay for all their training?
