Pitfalls to avoid when buying a franchise

Cathryn Hayes, HSBC’s head of franchising, explains the common financial pitfalls faced by franchisees

Running your own business may be your long-term goal, but it can be a frightening step to take and involve many financial pitfalls. Franchising gives you the chance to own and run a successful business under an established brand with a proven format, market and business system.

However, the biggest pitfall of all is to buy the wrong franchise, so research and planning before you commit yourself is vital. There is a lot of work to do before you will be ready to part with any money - you will need to research your chosen franchise carefully, making sure it is the right one for you.

Skills
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Owning your own business requires special skills and the right person to be in charge. It needs discipline, commitment, drive, hard work, long hours and decision making ability. Can you commit fully to make the business work? Is help and support in certain key areas available? What existing commitments do you have personally that will affect your thoughts and plans?

It is extremely important that you check the background and business performance of your prospective franchisor - don’t be rushed or pressured into signing the franchise agreement. Satisfy yourself by asking the right questions and finding the right franchise for you.

You will also need to know you can afford to purchase the franchise you are interested in. What can you invest, have you got savings or can your family help? Can you afford to repay any loans should the business not perform as expected and do you have enough contingency funds to cover any difficult trading periods?

When you have found your chosen franchise, the next step is to prepare a business plan, including cash flow forecasts - vital documents for obtaining finance. Remember to include your CV and a personal survival budget (a list of your outgoings vs income).

Commitment
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It is important to consider the financial implications carefully before buying a franchise. You are entering into a long-term commitment and need to get the finance right at the outset. A business plan will clarify the main business idea of your chosen franchise and define your long-term objectives. It provides a blueprint for running the business and a series of benchmarks to check your progress against.

It is also vital for convincing your bank - and possibly key customers and suppliers - to support you. The plan should address any risks facing the business and what action needs to be taken to either prevent them or minimise their impact. Practise your presentation before meeting with the bank to help deliver a professional pitch.

A good business plan will contain the following:

* Summary business description - details of the franchise being purchased and its financial needs.

* Market analysis and product/ service - research and identify local competition and assess what the likely demand of the product/service will be in the specific territory.

* Market strategy - outline intentions for marketing the product/service and how the sales figures shown in the projections will be generated.

* Management plan - include details of the type of business (eg, sole trader, limited company) and CVs of key personnel. Set out the structure and key skills of the management team and staff.

* Operations - analyse the capacity and efficiency of the current operations and any planned improvements. What premises does the business have? What production facilities are there and how is production organised? What is the capacity of the current facilities compared with existing and forecast demand? What management information systems are in place?

* Financial data - at least two years’ projected figures are required, including a balance sheet, cash flow, and profit and loss statement Ensure that projections correspond with the information outlined above and they’re realistic. If it is a resale franchise, include details of the existing business being sold. Has the business been growing? Is it profitable?

A copy of previous years’ accounts should also be included. Be confident about your figures and memorise any vital facts about the business.

* SWOT analysis - a one-page analysis of strengths, weaknesses, opportunities and threats. Strengths might include brand name, quality of product or management. Weaknesses could be lack of finance or dependency on a few customers. Opportunities might be increasing demand or a competitor going bankrupt, while threats might be a downturn in the economy or a new competitor.

Rules
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To summarise, here are our fundamental rules for writing a plan:

* Clarify the purpose of your plan before you write it.

* Focus on the key information the reader will want.

* Highlight future plans as well as describing the current situation.

* Be realistic.

Don’t:
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* Waffle or include unnecessary detail.

* Base your plan on overoptimistic assumptions.

* Ignore competitive threats and weaknesses.

At the outset it is a good idea to establish and maintain good financial housekeeping habits. Ensure you have the right structure in place for recording documentation in order to balance your books and file accurate financial statements each month to make sure your business runs smoothly. Use a bookkeeping method that you are comfortable with, either electronic or manual.

By keeping regular, accurate records you will be in a good position to review your business and profits and understand how much income you can draw from the business. It is important to know how the business is performing and that, when your first year-end arrives, you will have all the relevant documentation for your accountant prepared.

Your franchisor should be there to guide and help you through the crucial initial trading period and you should also get support from other franchisees in your network.

TOP TIPS
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* Do your research - make sure you are buying the right franchise.

* Ensure you have sufficient liquid cash to inject into the business as your stake and know the minimum funds you require to cover your personal living expenses.

* Understand your financials - breakeven figures are key and keeping a close eye on cash flow is very important. Profitable businesses can fail due to lack of cash.

* Manage your debtors carefully and chase immediately they become due - be organised and focus on knowing how your business is operating.

* If you need help, ask for it-most franchisors will keep in close contact in the early days. Other more experienced franchisees may also be a good source of help.