Financial Questions To Ask The Franchisor

Franchise New Zealand:

Buying a franchise involves various different costs: initial and ongoing fees, training fees, stock, shop-fitting or vehicles, and so on. If the franchisor provides a good disclosure document all of these will be documented clearly to avoid any potential confusion or embarrassment at a later stage. However, it is a good idea to ensure you have all the following clearly laid down in writing. Ask the franchisor:

* What are the total costs? Are they paid all in one go, or in stages? What is the timing? What do the costs include? What capital costs will be incurred in addition to this price, and what for? Check details of the franchise fee and other up-front costs such as training, legal and shopfitting or vehicles, then the level of ongoing fees or royalties.

* How much working capital (i.e. cash to run the business, cover wages and other overheads) do I need? Starting a business with insufficient capital can be fatal.

* Do you provide projections for my proposed business? What are these based on? For legal reasons, many franchisors will not produce specific projections but will provide actual figures for existing operations.

* May I see actual accounts which confirm (or otherwise) your projections? How relevant are these to my proposed territory or site? What makes you say that?

* Do these figures take my salary/drawings and depreciation into account?

* Is there any form of work or income guarantee? How long does this apply for? When will it be paid? What are the conditions? Have you ever paid out on this guarantee?

* What assistance do you provide in obtaining finance?

* Have you already made special arrangements with banks? Please outline what these are.

* Do I buy or lease the necessary equipment? What are the options?

* Will I own all the equipment needed to run the business when I have cleared off the borrowing from the finance company?

* How do you, the franchisor, make your money? This may affect the way the franchisor does business and takes care of his franchisees - for example, a franchisor who makes his income from selling franchises is unlikely to be able to offer much in the way of ongoing support. What royalty is charged, and how is it calculated?

* Do I have to buy all or just scheduled items from the franchisor? Are there any other fees? What levels of support or asssistance do I get for the royalty? It is important here to assess value for money, not just percentage figures.

* How open are financial details within the franchise? For example, does the franchisor declare the level of any mark-ups or commissions paid by suppliers? Are the sales figures or financial results of other franchisees shared for purposes of comparison? Sharing information within franchise systems is important because it allows you to benchmark your performance against that of other people using the same system.

* What are the profitability and cash flow projections for my market and others? Look at sales, cost of sales, overheads.