Does this sound familiar?

“I am going to start my own business, be my own boss, not get caught in corporate politics, reap the benefits of my hard work, work my own hours and have an overseas holiday every year….”.

This is all absolutely possible and definitely some of the wonderful aspects of franchising.

However, there are a number of well-worn paths and tips that after establishing Ella Bache’s franchise system and 10 years as CEO running Ella Bache, that I would like to share with any budding and even existing franchisees

Success in the Corporate World or a background in Finance does not guarantee success:

  • Great franchise businesses are about franchisors developing a robust and proven system and franchisees paying a franchise fee to follow that system.If you like to break rules and hate following systems, franchising may not be for you
  • All high performing franchisees have great accountants behind them managing the books and preparing the necessary financial statements but the financial focus within the four walls of the operating business needs to be nimble, flexible and focused on both lead and lag indicators.Lead indicators are predicative indicators of future performance, whilst lag indicators are actual historical performance.  Choosing the right mix of these numbers and monitoring them regularly is critical for decision making…..A practical and commercial approach to the numbers is key to success and not always in the wheelhouse of a traditional accountant.

It is a marathon, not a sprint:

  • One great month is not a sign to buy a new car, book a trip and invest in those Louboutin shoes or Gucci suit you have been dreaming of.Measured, planned success over time is what you can expect if you do your homework before signing on the bottom line.
  • As a rule of thumb, you need to enough working capital (spare cash) to not only fund the business over a period of time but also ensure there are funds available should things not go to plan.

A love of the industry is not enough – Question, question, question:

  • Many people become interested in a particular franchise opportunity because they have loved it as a customer or maybe their parents ran a successful business.
  • You absolutely need to have a passion for the business you are considering but there is so much more….
    • How long has the franchise been operating?
    • How much information is openly disclosed?
    • Are all the franchise fees, what they are for and the services you will receive, clearly articulated?
    • What proven success models (real numbers) can the prospective franchisor show you?
    • Is the franchisor happy to share a variety of existing business performance – established, new, large, small, country, metro….?
    • Exactly what weekly/monthly support will you get from the franchisor?
    • What feedback mechanisms are in place within the franchise system?
    • Has there been a history of disputes?
    • Interview other franchisees – established and new
    • Interview members of the business’s franchise council
    • What financials will you be asked for? Tip – if it just the standard P&L, Balance sheet and cashflow information, this may be a sign that commercial, modelling and decision-making numbers and ratios are not a priority.I believe this is cause to ask more questions!

Financial Diligence is critical:

  • Before you decide to move forward with your investment, you need to delve deeply into the operating financials
  • As mentioned above, you want to see some real P&L’s of businesses within the system.What you are looking for and the questions you should be asking are things like…..
    • What is the bottom-line profit percentage to sales?
    • How long on average has it taken a business to breakeven?Does this vary by location/size of business?
    • What percentage is wages/salaries to sales?
    • What percentage is the expense line to sales?
    • What percentage is rent to sales?
  • You need to also understand some lead indicator financials ie factors that can predict or indicate positive or negative performance in the future….
    • What is the average spend per customer/client?Has this increased or decreased?
    • How many new customers/clients has the business attracted?Is this up or down on the previous period?
    • If you are considering a retail business, what is the return per square metre of the business and again, is this number improving?
    • Another question for retail franchises – what is the productivity per hour for staff and has this improved over time?
  • This list of questions needs to be designed specifically for the business in question and does not have to be a long one but the insights you will gain from the right operational decision-making questions are invaluable.
  • The obvious question is of course, what is the ideal rent/sales ratio, salary/sales or total expenses/sales?This varies greatly by industry and by product category – there are no magic ratios that guarantee success.  The best approach is to ask your potential franchisor to provide some actual performance data for businesses similar to the one you are considering.  Review the key ratios for that business and use these as your benchmark.  It is also important to review these businesses at various points in time…look at a start-up as well as an established business – these benchmark ratio’s will change over time.
  • The last step of the questioning process is to now understand what the franchisor has in place to support their franchisees in –
    • Tracking these indicators
    • Ongoing regular benchmark reporting across the system.Franchisees can track themselves against other similar businesses within the network and as a group support each other to grow.  Such reports should be readily available and ideally part of the reporting system that the franchisor has in place
    • Support/training/development – weekly, monthly, quarterly, to improve these numbers within individual franchisee businesses.

In summary, there is a broad process here with lots of questions and diligence required at each stage…

  1. Love the industry you are considering – you are going to be engulfed in it, so you need to love it
  2. Look for clear, confident disclosure from potential franchisors – fluffy, vague language is something to be concerned about
  3. Ask for real proof of concept and performance from others in the system.Benchmark your business against similar, high performing businesses already in the system.
  4. Speak to other business owners already established
  5. Ask the potential franchisor how they will set you up for success and importantly the commercial operating reports you will have and the regular support they will provide you and your team
  6. If in doubt or feeling overwhelmed, reach out for help
  7. Be patient – bank your short-term wins, don’t spend them (that time will come)

“Deciding to invest in a franchise is a fantastic opportunity but extreme diligence and insight is critical to ensure you set yourself up for long term success and those years of overseas holidays you have dreamt of”