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How to Assess a Franchise Proposition

by Cliodhna ButlerAugust 8, 2014

Assessing a Franchise Proposition

So, you've researched your options, chosen the franchise business for you, been in touch with the franchisor and now you've been given a franchise business proposition. What next?

Now is the time for a good, careful review, allowing you to evaluate the business proposition and judge whether or not this franchise will help you meet your future goals.

It is advisable to engage a lawyer and an accountant who will be able to help you review the legal and financial aspects of the franchisor’s offering. You should also talk to other franchisees about their experience running the business and with the franchisor.

The below list represents the key areas which you must look into when deciding if the franchise business proposition is the best match for you. We recommend you add your own questions to this list and use it as a final checklist before you sign the franchise agreement.

1. Financials

  • Are any financing arrangements available from the franchisor?
  • Is there a deposit required by the franchisor?
  • Is the deposit refundable if the venture does not go forward?
  • What is the total cost of establishing the franchise operation?
  • What is included in the cost of establishing the operation?
  • Besides these costs, what additional costs might be incurred?
  • How much working capital do you need to start out?
  • What are the expenses associated with the business?
  • How often will the franchisee have to replace equipment?
  • What gross margin is expected from the business?
  • What is the projection for when you will break even?
  • Are there accounts you can review to confirm these projections?

2. Franchise Fees

  • What is the initial franchise fee?
  • Is there a franchise renewal fee and how often is it charged?
  • Are there ongoing fees and how are they calculated?
  • What protections are in place against unfair fee increases?
  • Does the franchisor mark-up products sold to franchisees?
  • What protections are in place against unfair price increases?
  • Does the franchisor take commission from goods sold to you?
  • Is there a minimum ongoing purchase of goods required?
  • Do you have to pay for advertising, and if so, how much?

3. Getting Started

  • How long from signing the agreement to business start-up?
  • Who is responsible for finding the franchise location?
  • What is the procedure for preparing to start operations?
  • What initial services does the franchisor provide?
  • What launch support does the franchisor provide?
  • What launch promotions will the franchisor provide?
  • What costs are associated with the launch?
  • What initial and ongoing training is provided to the franchisor?
  • Will the franchisor provide any training for your staff?
  • Are there any costs associated with the training?

4. Operating the Business

  • Is there an operations manual, and how often is it updated?
  • What hours and days of the week will the business operate?
  • Will the business operate on public, national or religious holidays?
  • What systems are in place to communicate with the franchisor?
  • Who are the head office team and field support staff?
  • How will accounting and record keeping be managed?
  • Are there any restrictions on the products sold by the franchisee?
  • What advertisements and promotions does the franchisor provide?
  • Will the franchisee receive any help with local advertising?
  • Is point-of-sale and promotional literature provided?

If you know the answers to these questions then, with the help of your legal and financial advisors, you should be ready to make an informed decision about signing the franchise agreement.

You should have a good understanding of how much you are actually investing, an accurate estimate of the business running costs, and knowledge of the revenue the business should produce. When added up, this is the franchise business proposition, giving you a clear picture of when and how much you can expect to profit.

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