Buying a franchise - think before you jump

Buying a franchise is a huge commitment, both financially and in terms of the time involved. Given the extent of this commitment, it is surprising that many people looking to buy a franchise fail to conduct the necessary research and planning beforehand. Careful planning and research can help you to avoid making expensive mistakes arising from business failure, or selecting the wrong franchise for you.

Common reasons for franchisees pulling out of franchise agreements range from the franchise not matching their skill set, a lack of belief in the value of the service/product they are offering, or the franchise not providing the financial returns/training originally conveyed.

Engaging the help of a bfa-affiliated accountant at an early stage will enable them to guide you through the decision making process, which can reduce the risk of business failure. An accountant experienced in the franchise industry will not only provide you with accounting services, but also pro-active business and tax planning advice.

Research the franchisor

You will need to find out what the franchisor's plans are for the business, and assess whether those running the business have the relevant experience to grow the business.

Where you are not being offered an exclusive territory it is important to find out how many more franchisees will be recruited within your area, as competition from other franchisees could affect your business performance.

The process the franchisor applies to vetting potential franchisees is also very important, as a poor vetting process could lead to weak franchisees joining the network. Poor franchisees could undermine the brand, which in turn may affect your business.

It is important to establish how successful existing franchisees have been, how many franchisees have failed, and the reason for failure.

The franchisor's figures will also need to be reviewed to ensure that they are reasonable, and relevant to the territory that you are looking at acquiring. Where you are buying an existing franchise their financial results will need to be assessed to help value the business, so as to ensure that you do not pay over the odds for the business.

Speak to other franchisees

Speaking to other franchisees can unveil any potential issues with the franchise, which may not be communicated by the franchisor. Areas to be addressed include the profitability of the franchise, the length of time it took them to recoup their investment, the quality of the training/operating systems, and support provided by the franchisor.

Raising funds and selecting the right business structure

Critical to getting started is structuring your finance appropriately. Banks will lend up to 70 per cent of the investment, and will require financial forecasts for the first two years of business to support your application. By preparing financial forecasts you can identify short-term borrowing (overdraft) and long-term borrowing requirements.

Besides assisting you with the financial forecast an accountant can advise on the most tax efficient manner for you to raise your share of the investment funds. For example, why cash in an equity ISA generating a tax-free return of 15 per cent, when you can re-mortgage at base rate + 1 per cent, and obtain tax relief on the interest payments?

An accountant can also advise you on the best way to structure your business (sole trader versus limited company) in view of your expected business performance. It is important to remember that there are different rates of tax, loss relief rules applicable to sole traders and limited companies. Careful consideration could reap financial benefits!

Registering for VAT early can also help with the cash flow of the business, as it is inevitable that high amounts of input VAT will be incurred during the initial start-up period.

Signing up

Always ensure that the franchise agreement is reviewed by a bfa-affiliated solicitor, and that you fully understand all the clauses contained in the agreement.

Your accountant should be working closely with your bfa-affiliated solicitor and bank to ensure the acquisition process is as smooth as possible.

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