Working out the validity of a franchise is a major part of your selection process when choosing a new franchise. A good way of looking at the sustainability of a franchise opportunity is to look at the financial history of the franchise company. Looking over the disclosure document that a franchise company has to provide, by law, is a good starting point when looking to buy a franchise. In this disclosure document it ought to outline the financial history of the company including its financial status and audited statements from previous tax years.
It is fairly obvious that investing into a new franchise that is financially unstable is a massive risk as the franchise company may go out of business or go into bankruptcy after you have invested your money. The new franchise may be exactly what you are looking for in terms of location, industry and market but the franchise opportunity needs to be managed correctly and be financially stable in order for you to make a return on your investment.
To make sure you have the all the information about the new franchise you must hire a solicitor to go over the fundamentals that are included in the franchise disclosure document. The solicitor will go over the financial statements that should be included in the document and will give you an accurate reading if you should buy a franchise from this company. If you cannot afford a solicitor and have experience in business then you may only need to look over the statements yourself to get an accurate reading of the franchise companies position. Getting good solicitor advice is highly recommended though as much of working in the disclosure document may be worded to benefit the franchisor and from a biased point of view.
A good solicitor will be able to clarify if the franchise opportunity has a steady growth over the past few years of trading. If the growth has stagnated therefore the opportunities are becoming less and the possibilities for your new franchise will also be less. The franchisor should have a business plan for growth of their franchises, this will be established by the franchise disclosure but it can often be misleading so check the growth against the actual statements from previous years to establish the truth about the options to buy a franchise.
The solicitor or yourself should be able to establish if the franchise is making most of its income from the sale of new franchise opportunities or the ongoing royalties generated by the franchises. The financial statements will have evidence of this. If a franchise is solely relying on the sale of new franchise opportunities then the longevity of the franchise company will be short, as the amount of franchises sold cannot continue year on year. There should be an equal balance between franchise royalties received each month and the generation of new franchise opportunities.
If the franchise statements state that the franchise company is putting back into the new franchise options then this will be a good sign that the franchise is helping the new franchises. This will include initial training, sales and marketing, business support and product advice. A good franchisor will always be available to support the franchisees with their knowledge and experience as well as financial help.
When you decide to buy a franchise make sure you have looked into the financial history of the company before you invest. A good franchise will be transparent about their earnings and potential over the forthcoming years. Hire a solicitor if you do not have the experience and they will be your safety net if the franchise company turns out to be too much of a risk.
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