So you’ve selected a franchise business and are at the due diligence stage. Here are 6 questions you should ask the franchisor.
1. What is your compliance policy?
The franchisor is a key partner when you buy a franchise, so ensure you ask them about their compliance policy. The franchisor should be able to explain the consequences of failing to comply so there are no uncertainties about what will happen if there is non-compliance.
It’s also a good idea to ask those on the ground; i.e. other franchisees, about the franchisor’s compliance policy.
2. What kind of financial information do I need to share with you?
Franchisors may have a centralised accounting system, which gives them control over and access to data so it can be audited at any time. So sharing your financial information with the franchisor is not as uncommon as you may think.
Ask your franchisor about what information you will be expected to provide, in what format, and how benchmarking works across the network.
Franchisees have an obligation to keep correct books of accounts. Other important financial information include: tax related information, employee details, and GST figures. Franchisees can be audited by the Australian Tax Office or Fair Work Australia.
Ask the franchisor for guidance on what constitutes proper books of accounts and courses franchisees may be required to undertake.
3. How important is working capital?
It is common for buyers to overlook the need for cash to sustain a business, especially at the start.
Good franchisors will remind franchisees every six months or so about the need for enough working capital. This should be incorporated into the normal communications between the head office and the franchisees.
Most franchisors will also want to see a business plan and proof that franchisees can run the business and support growth without suffering a cashflow crisis.
4. Do I need to construct an annual business plan?
All good businesses have a business plan which is updated annually, and franchises are no different. A business plan helps you make clear business decisions and work towards increasing profitability, and it can be the basis of regular discussions with your business development or area manager.
Before you buy a franchise you should expect to construct a business plan and your franchisor should ask you to keep this updated.
5. What are the parameters of my territory?
If the franchise system is territory-based, ask your franchisor to provide clarity about what can and cannot be done within the territory – this should be explained in the franchise agreement.
The franchisor’ policies and procedures should also clearly cover instances when the franchisor or another franchisee can operate in your territory. You should ask the franchisor if there are any instances where a franchisee’s territory can become non-exclusive or taken away from you.
6. How important is the franchisor/franchisee relationship?
Open and honest communication is very important to maintaining strong relationships, and franchising is no different. It is a business relationship between the franchisor and franchisee.
Communication is dependent on both parties so it’s vital that you keep your franchisor in the loop about significant issues that could have an impact on how you run your business.
Ask the franchisor if they would expect you to turn to them first if any issues occur in your business or even in your personal life which could affect the business.
What you want in a franchisor is someone who is aware of any problems within the system and is able to solve them. And franchisee profitability directly affects the prosperity of franchisors, so it’s in their best interests to ensure a smooth running operation and a happy network.