Before signing a franchise agreement it is essential that you thoroughly research the business and franchisor. Use this checklist as a guide to the minimum you should find out before becoming a franchise owner.
Make sure the franchise owner prospectus contains:
Make sure the franchise owner prospectus contains:
- Business background of directors and key executives
- Track record of the company
- Description of the franchise
- Breakdown of the initial investment required
- Details of other payments due to the franchisor
- Guidance on raising finance
- Requirements for franchise owner's participation
- Terms for termination/renewal of agreement
- Number and success rates of existing franchise owners
- Franchisor's site selection/approval rights
- Overview of guaranteed training and support
- Report on the performance of the pilot operation
- Financial statement from the franchisor
- Details of franchisor's professional advisers
- Financial health and track record of the company
- The company's franchising history
- Results of the pilot operation
- Current number of franchise owners
- Permission to talk to existing franchise owners
- Company's main source of earnings
- Value, appeal and long-term viability of product/service
- Head office commitment to support
- Full details of the initial training programme
- Additional training costs to the franchise owner
- Total size of the franchise investment requirement
- Realistic estimate of working capital needed
- Bank and other references
- Territorial practices and exclusivity terms
- National and regional advertising practices
- Exclusivity of product supply contracts
- Franchisor's margins on product supply
- Target obligations
- Realistic franchise owner profit and loss figures
- Management service fees or royalty payments
- Restrictions on franchise owner's operations
- Franchisor's launch assistance programme
- A sample of the franchise agreement
- Tries to get you to sign a deposit agreement to reserve a territory
- Does not offer an automatic right to renew your agreement
- Has a very short-term contract
- Pressures you to 'act now' before the cost goes up
- Tries to trade you up to a higher fee
- Demands large front end licence fee
- Promises huge profits with thin investments
- Promises 'easy sales'
- Promises profits by sub-franchising
- Promises large income working from home
- Fails to give statistics on sales and profits
- Evades identifying directors or principals
- Has no data on financial track record
- Cannot give plans for future development
- Has incomprehensible contract or vague territories
- Is vague about support and training
- Has a name similar to a well known business
- Is ignorant of competition
- Has weak advertising
- Avoids detailing your financial obligations
- Tries to meet only in a hotel or has poor head office premises
- Is evasive about access to existing franchise owners
- Description of exact training and support offered
- Precise price, commissions and rental fees involved
- Precise boundaries of the franchise territory
- Obligations to the franchisor
- Rights to renew or extend beyond original term
- Your rights to sell/transfer ownership of franchise
- Terms and conditions for terminating contract
- Heir's rights in the event of your death
Article published on: 21st Sep 2010
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