Buying a franchise

What's the difference between Google buying YouTube for $1.65 billion and you buying a franchise?Nothing, says Graham Monk

OK, there's the small difference of Google spending a trifling $1,649,970,000 more than you (assuming that you are about to commit around £20,000 to your purchase), but look behind the scale of the purchase and the fact that these are just ordinary, everyday mega brands and you will be surprised at the parallels.

Firstly, you are both investing in something with the intention (over time) of getting a return on your capital.

Secondly, there's the capital used for the purchase. It's being funded either by savings, a loan or a combination of the two. In Google's case it was, understandably, a bit more complicated but the way that it funded the purchase wasn't too far removed from what you might be doing.

Thirdly, underpinning the need to get a return on your investment is the additional ‘benefit' associated with the purchase. In Google's case, it had been criticised by analysts for being overly reliant on generating revenue from keyword searches. Irrespective of the profits that the business returns, it is vulnerable (or at least its share price) to these opinions. One way of addressing this is to reduce the reliance on searches and buy a complementary business. YouTube gives Google the ability to tap into the booming and potentially lucrative online video and social networking markets, as well as a new income stream. Similarly, potential franchisees have identified the ‘benefit' of owning a franchise. I hear lots of reasons, for example, ‘I want to be my own boss...' and ‘I want control of my destiny.'
Fourthly, you are both buying something with a long-term view. Yes, it's important that you get some return on the investment in a fairly short period but you are, or should be, both looking at a five year window of opportunity.

Fifthly, you are buying a ‘turnkey solution'. In the same way that Google has bought the complete and entire YouTube infrastructure - from servers through to the site itself, from marketing through to processes and procedures - that is what you want when you buy a franchise. To purchase a tried, tested and profitable operation that, with the right training and assistance, you can open in your territory and replicate the success of the franchisor.

There were a number of people who questioned Google's purchase. Had they paid too much for a business that didn't make much money? What about the issue of site members uploading and showing copyrighted material, and therefore making Google liable for time-consuming and expensive law suits? Probably the question that vexed most was whether Google will ever be able to realise the real value of YouTube and its investment by moving it from the computer in the study to TV in the living room, thereby extending its penetration to the much more valuable family market? These are all the questions that Google asked itself, because, before it signed on the dotted line it knew exactly what it was letting itself in for: Google was able to make an informed, rational and objective decision based on facts.

How? It carried out extensive due diligence. This is a process undertaken by potential investors (individuals or institutions) to analyse and assess the desirability, value, and potential of an investment opportunity. It's not a ‘set process' applied to every business and market as everyone will need a different approach and metrics. But there are some fundamentals.

So, what might it consist of? The obvious starting place is the financials. You should be given detailed financial projections for the franchise and that's your starting point.

These are projections against what you might earn so it's important that you have as much faith in them as the people that put them together. No one is saying that there is anything untoward about them, but you need to be satisfied that they make sense.

All too often I see spreadsheets, which include staff costs, but on investigation these are net of national insurance so the figures are out by at least 10 per cent at the start. Or there is no allowance for professional services like an accountant. Professional indemnity insurance is a must and is often overlooked. These are all costs, which if they aren't highlighted will have a devastating impact on your bottom line.

On the flipside wouldn't it be a good idea to get a feel for the stability and profitability of the franchisor's business? Do you want to buy a franchise from an unstable and unprofitable franchisor? Ask to see some accounts for the franchisor and speak to their accountant.

One of the most important elements of the franchise package is going to be your territory. How has it been defined? Not geographically, but in terms of the number of customers required to fulfill the projections? It's easy to state that there are ‘X' thousand potential customers in the territory, but what proof is there that this is the case. What independent third party proof of this is there? How many of these potential customers would you need to engage with to hit the figures and how does that equate as a market share? Whatever the figure is you need to ask yourself whether this is realistic given the number of competitors.

Which brings us to the market sector that you are just about to enter. What do you know about it? Is it new, old, growing, stagnant, in recession? The internet is the biggest business reference book the world has ever known and you can discover all you need to know just by inputting a few key words. Moreover, how does the product or service that you are thinking of buying compare with the competition? One of the easiest ways of getting a feel for this point is to mystery shop the franchisor and the key competition. How do they compare on price and service? Would you have bought from the franchise that you are thinking of investing in, or from one of the competition?

It goes without saying that the franchise agreement is critically important to your purchase. Ensure you speak to an expert in this matter. I recommend you go to one of the firms listed on the British Franchise Association's website.

If there is one last thing that I would advise, it's talk to current franchisees. In an ideal world you should visit them and speak face to face to get a better feel for them and their business. Do this as the last piece of the process and you will have enough information gathered to ask some searching and pertinent questions.

Whether you are Google and invest $1.65 billion or a more modest £20,000 it's important that you make the right investment. The drivers are the same - to get a return, to enhance your current situation and to do so with long-term intentions. So, why wouldn't you spend the time, like Google did, making sure that you know everything about the business that you are buying before you sign on the bottom line? There is a lot at stake and money is just one part of it.

Graham Monk

Graham is a partner at SmartGrowth where he helps to bring businesses to the franchise market, consults on recruitment and marketing for franchisors and runs a bespoke service helping potential franchisees choose the franchise best suited to them. Contact Graham on graham@smartgrowth.co.uk