Lies, damned lies

Elizabeth slipped silently through the barbican gate. Above her loomed the dark stone towers of Tokaj Castle. Forbidden by her husband Count Gordowski to help the local village, whose inhabitants faced starvation as a result of his crippling taxes, she was risking death to carry a basket she had filled with bread and meat stolen from the castle kitchen.

Descending down the narrow path, her way was suddenly blocked by the massive figure of her armour-clad husband. 'My dear wife, you left so quietly. Do tell me where you are heading, and what is in your basket.'

'I am going to the village to visit a sick friend,' she whispered. 'So your basket does not contain any food for the villagers?' 'No, definitely not, it's just a small bunch of roses my lord,' she murmured. 'Then you could have no objection if I look inside?' 'If you insist my lord, please go ahead.'

With the point of his dagger he lifted the cloth cover and reached inside with his gauntleted hand. 'Ahahh... what have we here?' His hand emerged and brandished aloft - a magnificent bouquet of fifty red roses.

Elizabeth is still revered as the patron saint of liars and sales representatives.

As a Knight Commander of the Hungarian Order of St Elizabeth the Liar, I have the ability to spot a 'porky' at four hundred paces. I am an advocate of the small print, a master of the technicality and the wizard of the get-out clause.

Much to my regret there are those who richly deserve higher awards than me. Buying and selling in the United Kingdom has become an obstacle course in truth avoidance. The art of fabrication, double standards and pretence has overtaken honesty, sincerity and candour.

The fear felt when you invest in a franchise is caused by the former, and conquered by the latter. So how exactly should you check the actual performance and business credibility of a potential franchise?

Begin with a careful study of the franchise brochure. Does it operate from a normal 'business' address, or is it a private house hidden behind a box number? Locating the postcode in your SatNav gives a good indication of the immediate surroundings. Does the photograph of its premises offer sufficient detail to enable you to identify their extent? Is the franchise contained within a single office, with a single computer, and operated through a single van?

We can all accept that a large business was once a small business, but a franchised operation is based on the premise of offering you the opportunity to become part of a network of multiple operations. By all means consider joining a developing franchise, but wonder if your investment is being utilised as an experiment. Having a 'good idea' for a franchise is not a sufficient reason to begin. The risk is highest if a franchise has operated for less than five years.

Check on the key executives of the franchise. Many will have been with national or international operators and broke away to begin their own franchise. The real question is whether they dived overboard as the franchise sank, or left after a successful voyage. Experts can still be inept.

Ask if the franchise has any past or pending courtroom dispute with their franchisees. Expect that one per cent of the franchisees will have their bum in the hand at any one time. More than that is a sign that all is not well. Spend time discovering what the dispute is about and use your judgement to see if the matter is one with which you would have sympathy. The fact that a franchisor may have proven victorious is of little consequence. The franchise agreement is written with that objective in mind.

Check on the financial records and stability of the franchisor, and then delve back 10 years into the personal financial background of the owners/shareholders. Were they associated with any bankruptcies, receiverships, administration or arrangement with their creditors? Have they used those techniques to avoid moral responsibility for the collapse of the network? Economic pressures and competition are insufficient reasons for bankruptcy, as most are aware of problems at least three years before.

Request or obtain (usually through a major metropolitan reference library) copies of the last three years' annual accounts as filed at Companies House.

Check what fixed assets are within the business. Leasing allows you to use the Rolls Royce, rather than own it. The franchisor should have at least the same amount of investment at stake as you are providing.

A lack of cash or free capital in the franchisor accounts is a sure sign that it is your investment that is badly needed to shore up the operation.

Check the directors' loan accounts, then move on to compare the increase/decrease in costs and turnover year on year. Remember to factor in the rates of inflation. A sales increase of three to four per cent represents a decrease over an average year given current inflation forecasts.

Examine any figures related to the long-term debt around the franchisor. A large amount of debt has to be serviced and draws both capital and interest out of the network. How much is really left to develop the franchise system?

Check that the franchisor cash flow is positive. A successful franchise has to continually fund expansion and development. If the flow is negative ensure that the time scale for turnaround is clearly stated.

Ask about any patents, processes, copyrights and proprietary systems the franchise owns. Are they sufficiently protected to avoid a rival stealing the process?

While it is nice to have the 'seven secret herbs and spices', some franchises will continue to rely on the perfect combination of speed, service and top-quality management to retain and develop customers. I have a well-founded fear that one day I will open my copy of the 'Daily Bugle' to discover a person bearing a similar name is responsible for some heinous crime, misdemeanour or unhealthy peccadillo.

The same concerns will once have flickered across the countenance of dear Col. Saunders, if not my old friend Ronald McDonald. Attaching yourself to an ascending star is fine while all going well, but faded stars develop into black holes. It's fine to bask in the reflected glory of a celebrity, but think carefully if the franchise has only a well-known name.

Request a full list of all franchisees and choose one to visit that has been operating for some time, to ensure that any problems have had an opportunity to arise. Pack your deerstalker, pipe, violin and magnifying glass and head off to investigate. Forget the 'is it a nice franchise?' questions, and concentrate instead on the hard-nosed financial results of your becoming a franchisee.

Asking a franchisee 'how much do you make?' is a St Elizabeth question, as most will display a marked reluctance to answer fully. In any event the question is pointless, as how they choose to operate will have a dramatic effect on results.

Try to ask what the total package represents as a 'take home' amount. The question of how they make the calculation is irrelevant. A Mercedes Benz represents a benefit in kind of £12k, whereas the use of the company push bike will be zero. Operating the franchise as a sole trader will produce greater profitability than a franchise employing a manager.

Good franchisees will be well aware of the expected benefit from each type of franchise and will be able to provide information about their region and the current performance data.

• What would your average franchisee expect to make?
• How much less would below average achieve?
• How much more would above average achieve?
• Who should I ask for advice?
• What is the secret of success in this franchise?
• Where should I expect to be at the end of the first three years?
• When did you make your biggest mistake?
• What could be done differently?
• Which common mistake would I make?
• How would you advise me to proceed?
• What support are you having from the franchisor?
• How often do you make contact with head office?
• Which one thing would have improved your franchise/launch/training/turnover?
• What is missing from the franchise?

Now try to investigate what the potential costs are likely to be. Do not bother with actual amounts that relate only to that franchise area, but request percentages.

• What percentage of my turnover would be spent on labour?
• What percentage of my turnover would be spent on my premises?
• What percentage of my turnover would be on producing sales?

Take the results and use them to calculate your required turnover. As an example let us suppose that the percentage spent on premises is three per cent. The premises you have in mind will cost you £8,000 gross a year, resulting in a required turnover of £267,000. Can you achieve that amount of business, or should you seek a less costly location? Repeat the process for each percentage.

Ask check questions to ensure you have fully understood the answer given by the franchisee. 'If you are not making a profit this year, do I understand your business is failing?' 'No, I am repaying initial costs. Next year I should achieve nineteen per cent gross profit on my sales.'

'Tell me Elizabeth - is that basket full of roses?' 'No, it's my lunch.'