How to choose a Franchise Opportunity – Part 2
Joel Caws - Technical Director, Select Your Franchise
After part 1, you should have a shortlist of franchise options that:
- are businesses that you think you might enjoy running
- are available in the location you desire
- are in a price range you can afford
At this stage you will want to narrow down the choice further and hopefully end up with just one option that will become your new franchise business. So with that in mind we have a few tips that can help get you closer to this point:-
Research each franchise opportunity online
The Internet has made information more accessible than it ever was in the past. With a little help from websites like the Companies House website you can do a little research on who’s behind the company and what other commercial ventures they might be involved in.
Probably the biggest help though, is to search for the brand and see what third parties are saying about them. What do their customers think of their services? And what do their franchisees think about them? With social websites like Twitter and Facebook becoming a popular place for people to freely voice their opinions, it can be a valuable place to research the brand and find out what people really think.
Arrange to meet each franchisor
Taking an opportunity to go and meet the franchisor is an important step. By visiting their head offices, it will give you a feel for the people you could be working with and help you to decide if you might enjoy running your own business under the umbrella of this franchisor. Take time to find out all you can about the history of the franchise, how long it has been running, its track record and look to confirm the findings from your research you have already done online. Raise any points of concern you have.
Talk to the franchisees
Whilst at the franchisors offices, its a good idea to get a list of some franchisee references. Chatting to some of their franchisees will give you a feel for how the franchisee operates on the ground. The franchisees are, after all, the business owners who understand the day to day operation of practically running the franchise business.
Get professional advice
You will likely come across legal contracts, agreements and financial considerations during your research process. Consulting the appropriate professionals is essential to ensure you don’t sign something you don’t fully understand. There are franchise specialist lawyers who can assist with the legal side whilst most of the high street banks have dedicated franchise sections that can help with financing and advice on funding your franchise business. You might also decide to use the services of a franchise consultant who, through their extensive knowledge of the franchise industry, can help you to manage the whole process of starting up a new franchise business.
Understanding Balance Sheets and Profit and Loss Accounts Part 2
This second article follows on directly from the first article (which should be read first) and starts by showing how the more easier to understand ‘side by side’ (Assets on one side and liabilities on the other) style of balance sheet has over time been replaced by the now commonly used ‘vertical’ style, so as to make the document more useful and highlight certain useful things (see later).
Therefore the old style balance sheet shown below…
has now been replaced by this…
Please note, in the first instance, that all the same category headings and related blocks of figures are used. The next thing to note is that it can still be described as a ‘Balance Sheet’. It’s just that by changing the layout and ‘doing sums within sums’, we are looking at two different balancing figures. In fact the figures immediately tell us, at first glance what the business is worth, on paper, on the balance sheet date: i.e. in this case £12,500.
Chris Roberts - Director, Franchise Finance Ltd
This is because the difference between the Total of the Assets less the total of the Current and Long Term Liabilities is what is left as the owners share. Put another way, if all the assets were sold at their book value and all the liabilities were paid (£56,000-£43,500,000) the amount left, or ‘paper value’ of the business, is £12,500. This is sometimes referred to as the ‘Surplus Resources’ of the business.
The next most useful thing to consider is the amount of ‘Working Capital’. This is the difference between the Current Assets and the Current Liabilities i.e. in the short term, is it likely that the business will have enough cash or be able to generate enough cash (by collecting in debtors or selling more stock) in order to pay its short term liabilities. Normally, the bigger the amount of working capital the safer the business is. However if the make-up is a small amount of cash, old or doubtful debtors and say outdated or slow moving stock, then obviously this won’t help much!
Something else that is of interest to lenders, investors and other trading companies who are checking your franchise business out (this may be suppliers or existing or potential customers) is the Gearing Ratio shown by your balance sheet. This is the relationship between the ‘Surplus Resources’ mentioned above and any borrowed money (e.g. bank loans, overdrafts, leasing, HP, factoring etc.).
Gearing is normally expressed as a percentage e.g. where the surplus resources are £50,000 and the borrowing is £50,000 i.e. a ratio of 1:1 this is 100%. This means that the lenders do not have more than you invested in the business and is a good bench mark because most lenders start to become concerned when the ratio starts to get much bigger than this, particularly if they do not have any security.
Balance Sheet Summary
Now you understand what a balance sheet is and are beginning to see what it tells you about your franchise business, you can see it is a very useful document. It becomes even more useful when you look at trends over say three consecutive balance sheets (and this aspect will be referred to further in a separate forthcoming Article next month). Also, you can use your increasing knowledge to investigate the financial strength of your customers, potential customers or even your suppliers to help you make safer decisions on who you should be doing business with.
However, the third and final Article in this series will cover the Profit and Loss Account which is the second and equally important part of a set of accounts. This will be published next week.
The author, Chris Roberts, runs a series of one to one and group courses and Franchise Finance also prepare full business plans and financial projections for their clients.
How to win a Franchise Dispute
Fiona Boswell - Senior Associate Solicitor, Freeth Cartwright LLP
A recent case undertaken by our team has highlighted the steps that a franchisor should take to win a liquidated damages claim.
A liquidated damages claim is one where the contract sets out in black and white the exact amount that the guilty party has to pay the innocent party if the contract is broken in specific ways.
Liquidated damages claims can be a bit of a minefield, since the Court will throw out the claim if it thinks that the liquidated damages are a penalty instead of being a genuine estimate of what damages the Court would award in the circumstances.
To ensure that the liquidated damages provisions in your franchise contracts are effective make sure you take the following steps.
- Keep your franchise contract under review, and liquidated damages provisions up to date.
- When your franchisees say they are leaving the franchise network, explain that the franchisee isn’t allowed just to walk away like that. Point out that you, the franchisor will incur loss from that behaviour, and would expect to be compensated for it.
- Try to work with the franchisee in putting the relationship onto an even keel - offer training and support.
- If that doesn’t work, and it is clear that the franchisee is not going to co-operate, terminate the franchise contract.
In this case the franchisor even offered to compromise on the amount of compensation that it was due. The franchisee was having none of it, and forced the matter all the way through to the court. Not only did the franchisee have to pay the liquidated damages, it also had to reimburse the franchisors legal costs on the higher, so-called “indemnity basis” because the franchisor had offered to settle the dispute early.
So, what lessons can be learned from this for franchisors:
- Keep your standard franchise contract, including the calculation of any liquidated damages provisions, under review
- Attempt to keep the relationship on track even if a franchisee becomes difficult
- Try your best to settle the dispute without troubling the Courts
Fiona will be speaking at the National Franchise Exhibition at Birmingham NEC on Friday 30 September Theatre 3 @ 4pm – Top Tips for Growing Your Business by Franchising.
Fiona Boswell is a Senior Associate Solicitor at Freeth Cartwright LLP and Head of FC Franchise Build, Manage, Grow, Exit ™ Unit. You can contact Fiona on 0845 070 3812 or e-mail fiona.boswell@freethcartwright.co.uk
Whilst every effort has been made to ensure the accuracy of this article, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.