Assessing the franchisor
A franchisor is an individual, partnership, or corporation who grants an investor (the franchisee), the right to conduct business under their trade name, using their operational methods and organisational systems. The franchisor has developed their own business methods, and aims to expand the business by offering franchisees the right to use these business methods.
The franchisor provides rights and support to the franchisee, by advising, training, and assisting in advertising, marketing, and financing roles. Therefore, it is vital that you as a potential franchisee analyse the franchisor according to the following set of questions, so that you know exactly what and who you are investing in…
The franchisor’s company
- Is the franchisor soundly financed? Ask to see audited financial records for three years.
- Who are the franchisor’s accountants, bankers and lawyers?
- What is the franchisor’s credit rating?
- Is the franchisor a subsidiary of another company and if so whom? Is the parent company soundly financed? Ask to see their accounts as well.
- Does the franchisor have associate companies? If yes, who are they and what is the relationship between them and the franchisor?
- Does either the parent company or any associate operate franchises? If so, would they be in competition with you?
The company’s history and experience
- How long has the franchisor been in this type of business?
- What business experience and qualifications have the franchise’s directors and managers?
- Have they or the company been involved in any litigation or court judgments?
- Have any of the directors or managers ever gone bankrupt?
The franchise system
- Is the franchise operation a success?
- Does the franchisor still run any units him/herself? If so, how many?
- Are they buy-backs or failed franchises or is the franchisor keeping prime site for him/her?
- How many franchise outlets does the franchisor currently have? How many are in your country? What has the trend been in recent years?
Past and future of the franchise system
- When did the franchisor start franchising?
- How long has his/her pilot operation been running?
- Has he/she had any franchise failures or franchisee departures? If so, how many, and why did they fail?
- How many franchise owner-operated outlets does he/she intend having in the future? Where will they be and over what timeframe will they be developed?
- What innovations has the franchisor introduced since starting franchising? What plans does he/she have for the future?
- How particular is the franchisor when selecting his/her franchisees? What selection criteria does he/she use?
- Can you interview some of the existing franchisees?
Too many people rush into franchise agreements without carrying out a thorough investigation into the financial status of the franchisor. Many franchisees trading successfully in their local area find themselves in difficulty if/when the franchisor goes into liquidation. Be wary of franchisors who are not forthcoming with up-to-date financial information.