Assess a franchise opportunity
To assess if a franchise represents a sound business Opportunity, you'll need to consider:

What the business is and how it operates

The location of the franchise

The success of the franchise concept - the number of franchises in the UK, the length of time in business and how financially successful they are

The amount and strength of competition from other businesses in the same market sector

Any market research that has analysed the public perception of the franchisor's (the business offering the franchise) brand

Levels of initial and ongoing costs

How much training and support you'll get in setting up and running the business

Conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew

The franchisor will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims.

Visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones.

Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers such as Business Link, your solicitor or your accountant. Find a solicitor on the Law Society website - Opens in a new window, and find an accountant at the Association of Chartered Certified Accountants (ACCA) website - Opens in a new window.

How a business plan can help
Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance. For more information, see our guide on how to prepare a business plan.

The costs of a franchise
When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.

Initial costs
The franchisor - the business that sells you the franchise - usually charges an up-front fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.

Your largest initial costs are usually your investment in:

premises
equipment
initial stock
You will need to establish a business entity. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business, and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader - each of which will involve different costs - or your franchisor might have specific requirements. See our guide on legal structures: the basics.

Continuing costs
You usually pay a percentage of the sales revenue to the franchisor. Alternatively you may pay a management fee of some kind.

Under the terms of the franchise agreement, you may have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.

You also have to pay the usual business costs - for example, rent for premises, utilities or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.

Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.

How to purchase a franchise
There are a number of key things you need to consider when planning to purchase a franchise. It is worth thinking about the following:

Assess yourself to see what kind of franchise, if any, will suit you.
Find out what franchises are available and draw up a shortlist.
Assess franchise opportunities carefully, ask questions and talk to other franchisees.
When you find a business, investigate its financial prospects. Base this on thorough research of performance figures. Include an analysis of three years' accounts - if they have been trading for that period - and management figures.
If you'll need to raise finance, ask your bank if it will consider a loan for the type of franchise you're considering.
Do your own market research into the business and the competitors in your area.
Draw up a business plan.
Check the franchise agreement and get professional advice.

However, it is advisable to make sure you don't:

take up the first opportunity before investigating alternatives
allow yourself to be hurried into making a decision
pay any non-refundable deposit
commit yourself before you're completely satisfied
assume a business will work in your area just because it works elsewhere
rely on the forecasts provided by the business selling you the franchise
sign any agreement without legal advice

Tips on franchise agreements
The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. Get a specimen contract for them to review.

Areas covered by a typical agreement
Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
Fees - what initial fee will you pay? What percentage of sales revenue will you pay? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
Support - how much help will you get starting the business? What continuing support will you get?
Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
Exit - what happens if you can't continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?

Back to About Buying a Franchise.