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HSBC Franchising

Buying a franchise

Deciding to buy a franchise may be one of the most important financial decisions you'll ever make. The good news is, you're not on your own. We're here to guide you through all the factors you need to consider and show you how we can help.

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.

Checklist to help you assess a franchise opportunity

To help you decide if the franchise you're considering is a good business venture, make sure you can answer the following questions:

  • How long has the franchisor been franchising?
  • What is the background of the directors?
  • How much expertise/experience do the directors have in the business they are franchising?
  • Is this business financially sound? Ask for three years' audited accounts, and current management accounts if possible and ask your accountant to review them.
  • Is the franchisor a member of the British Franchise Association? If not, why not?
  • How many franchise owners have failed? What went wrong?
  • If the franchise is new to the market, what pilot scheme did the franchisor operate? Remember that when buying a new franchise you should get a proven business format and as much information as possible on the pilot operations.
  • What initial and ongoing training is offered? How much support is given in choosing and fitting out premises?
  • Is there a market for the franchise's goods or services? Has there been any market research carried out?
  • How much does the franchise cost and what does the price include? How does this compare with other franchise models?
  • How much will you have to pay on an ongoing basis? (This is normally a percentage of turnover or a mark-up on goods supplied).
  • Have you been given any financial projections for your business? Have you seen any actual trading figures from existing franchise owners that show whether these projections are realistic?
  • Who are the main competitors and how do they compare in terms of price, quality, delivery and service?
  • Is there a long term market for your goods or services, or is the franchise operating in a market subject to changes in fashion? Is the business seasonal?
  • What sales area is being offered? Is it postcode based or geographically based? Is there a set territory?
  • How long is the term of the legal agreement - can you renew it?
  • Do you have to achieve minimum levels of turnover, or buy minimum amounts of stock? What will happen if you don't achieve this?
  • Can you sell the business in due course? What restrictions are there on sale?
  • How many existing franchise owners are there?

Questions to ask existing franchisees

We recommend you contact several franchise owners and try to spend time with each of them Here's a checklist of questions you can ask existing franchisees:

  • Did the opening of your business go according to plan, or were there unexpected problems? If so, how did the franchisor help you to solve them?
  • How effective and useful was your initial training? Were there any hidden or unexpected costs?
  • How much support does the franchisor give you on a day-to-day basis? Has the franchisor been helpful and supported you through any difficulties?
  • Does the franchisor visit you regularly?
  • Were the operations and training manuals well written and useful?
  • If products are supplied by the franchisor, is delivery prompt and quality consistent?
  • How long did it take to break even, and was that longer or shorter than expected?
  • Has turnover and profitability been in line with initial projections?
  • Does the franchisor arrange meetings and conferences for the franchise owners? Is there a regular newsletter, or other form of communication within the network?

Our top 5 tips for getting bank finance for your franchise

1. Do your research

Find out whether your chosen franchisor has a successful core business with a support network and strong finances in place to support you. Think about the sort of business you want to run and what you will be doing on a day-to-day basis.

Our guide to 'Starting a Franchise' is a great place to start as it has a list of questions to ask a franchisor, as well as questions to ask their franchisees. Asking those who have already bought into this franchise is usually the best way to get an accurate picture of your potential franchisor.

2. Plan ahead

You'll need to present a business plan to the bank to back up your request for finance and this needs to present your case in a compelling way. It isn't just about the figures - although they are important, see 3 below - the plan should also contain details about you, your background and experienceand how you are funding your stake in the franchise.

Think about your area/territory - will you be based at home or from premises? How much competition is there, what do you know about them and how can you stand out if it is a crowded market? Your franchisor should help you with many of these aspects, but you will need to understand and `own' your business plan.

3. Focus on the figures

If you are projecting turnover of say £100,000 in year 1, how will you get there? Will there be a few months of little or no sales/income as you build your business? How will you fund your personal expenses until the business is strong enough to allow you to pay yourself a wage?

Prepare a full list of your personal expenditure: mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business in order to live.

What if the business is slow to build, how could you overcome that? What if sales come in much faster than anticipated, would you have enough working capital to cope? Again, a good franchisor will help you through many of these issues but as a franchisee and business owner, you need to fully understand the cash flow of the business.

4. Practice your pitch

Luckily, talking to a bank manager is nothing like being in the Dragon's Den. They certainly won't tear shreds off you but they will be looking to have confidence in you as a business owner. If you don't understand the figures, they won't be as confident in lending to you.

Think about the possible questions they may ask, learn the key metrics of your business and come up with some contingency plans so you can be prepared if you are asked difficult questions about how your business will operate.

5. Be confident

Once you're happy you have properly researched the franchise and have completed a comprehensive business plan, you should be in a good position to obtain finance. In broad terms, franchising is a safer option than going into business on your own. As a franchisee, you should have a tried and tested format to follow, receive training and support from your franchisor, and have access to a network of fellow franchisees for guidance. So although you'll own and operate your own business, you won't be doing it alone. All this support means that a bank is going to be happier to lending to start-up franchisees than other types of start-ups.

Find out more

Contact our franchise experts

Call us on

0800 234 6224

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From overseas

+44 1226 260 878

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