HSBC Franchising

Making the right decision

When you buy a franchise, you're entering into a long-term business relationship. It's vital you take the time to decide if franchising is right for you - as well as to thoroughly check the background and business performance of your prospective franchisor. Above all, don't rush your decision. Be wary of franchisor pressure to sign up - particularly if they imply that if you don't sign now you won't get another opportunity.

A great place to begin your research is by reading our 'Starting a Franchise' guide, which takes you through all the factors you need to consider. Another excellent resource is the British Franchise Association (bfa). Their website clearly lays out the pros and cons of franchising, and can help you examine your strengths and weaknesses to give you confidence in your decision.

The next step is to investigate your potential franchisor to find out if they have the financial resources to support a franchise network. As well as conducting your own research and having the legal agreement vetted by a solicitor, you should spend as much time as you can with the franchisor and ask them questions. Scroll down for a checklist to help you assess a franchise opportunity.

To get a better understanding of the business you're buying in to, we suggest you talk to other franchisees about the challenges they've faced. A good franchisor should be happy to provide you with a list of the names and addresses of all existing franchise owners. See below for ideas of questions you can ask them.

Working out the costs

Naturally, the cost of taking up a franchise varies according to the nature of the business and the size and location of the premises. You could invest as little as £10,000, or as much as £500,000.

In our 'Starting a Franchise' guide, you'll find a list of the set-up fees and costs you'll need to consider. These may include: an initial franchise fee, training fee, advance rent on premises, shop-fitting costs, vehicle lease, initial stock, equipment purchases, working capital and promotional costs.

Once you've ascertained all the start-up costs involved, you'll be able to work out answers to the following key questions:

• What is the total cost of the franchise and what contribution can you make from your own resources? Prepare a full list of your personal expenditure, this will show you how much money you will need to take out of the business in order to live.
• Will you need to borrow and, if so, how much?
• Do you need an overdraft to assist with working capital, or a loan for the purchase of fixed assets - or both?
• What security can you give to back up your borrowing?
• How long do you need to repay the loan? Bear in mind that any loan will need to be repaid by the end of the franchise term.

Borrowing money

Having worked out the start-up costs and how much you need to borrow, it's time to look realistically at the potential profits of the business. Is the level of investment justified and can you recover the money you have put into it? It can help to ask the franchisor the following questions:

• On what basis have the financial forecasts been calculated? Make sure they're based on the performance of the pilot scheme or of existing franchise owners.
• Do the figures allow for drawings, taxation and any depreciation?
• How much is the initial franchise fee and what does it cover? For example, training, market research, sales promotion.
• How much is the monthly management service fee? Are goods supplied to you at cost or is a mark-up charged?
• Is there a minimum fee or sales level? What happens if this is not achieved?

Once you have all this information, you'll be ready to start preparing your business plan to obtain finance from the bank. Your chosen franchisor will often help you with this - and so can we. Our interactive business plan tool can guide you through the process.

How we can help

Our specialist franchising unit has more than 30 years' experience in financing new franchisees. Over that time, we've nurtured strong relationships with franchisors and relevant industry bodies. We're affiliate members of the British Franchise Association and sponsor the annual Franchisee and Franchisor of the Year Awards.

Our central helpdesk team is expert in helping franchisees find the support they need. When you call our team of franchise experts, we'll ask you a few questions to find out about your aims and ambitions. We'll then put you in touch with an HSBC business manager in your local area and continue to work closely with them to make sure they're aware of all the franchising support that's available to you. To see what we can do for your business, give our UK-based franchise team a call today.