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Assessing the Business Proposition
Traditionally, a business value proposition is a statement that a company uses to summarize the reasons why a consumer should buy their product or service.
For your purposes, when doing your due diligence, you are aiming to answer the question “Why is this franchise a good investment?”
The business proposition includes everything from financing the business to operating the franchise. Below is a non-exhaustive list with a number of the questions you need to be asking about a franchise’s business proposition. (Note: Many of these answers can be found in the franchise’s disclosure document or in consultation with the franchisor itself.)
Financing the Franchise
- What is the total cost of establishing the franchise operation?
- What is included in this cost?
- What financing arrangements are available and what are the repayment terms? Will security be required?
- Is there a deposit? If so, will the deposit be forfeited if the venture does not proceed?
- How much working capital is required for the period of time until the business turns a profit?
- What costs will be incurred in addition to the cost of establishing the business (e.g. employee wages)?
- What gross margin can be expected from the business?
- What level of turnover is required to break even on average?
- Is documentation available to confirm these projections?
Franchise Fees
- What is the initial franchise fee?
- What is the royalty fee?
- What are the advertising/marketing fees? How much are they? What do they cover?
- What are the other ongoing fees and how are they assessed?
- Does the franchisor take commission from suppliers of goods or services to the franchisee?
Getting Started
- What is the franchisor's procedure for preparing the franchisee for starting operations?
- How long will it take from signing an agreement to opening the business?
- What will the initial training include and how long will it last? Does the franchisor provide training for the franchisee's staff?
- How much assistance does the franchisor provide in finding the location?
- What kind of grand opening assistance is provided?
From signing an agreement to opening the business
Operating the Franchise
- What will the business's hours be? Will the franchise be required to be open for a minimum number of days and/or hours a week by the franchisor?
- What restrictions will there be on products or services sold by the franchisee?
- Is the franchisee obliged to purchase a minimum amount of goods?
- Are minimum product or service prices dictated by the franchisor?
- How will accounting and record-keeping be managed?
- How often will updates be required? How soon will you have to spend money on replacing equipment or refurbishing the business? How often in the past has the franchisor required the re-equipping or refurbishment of franchise units? How much did it cost?
- Who are the head office team and field support staff? Is it possible to meet them before signing the franchise agreement?
- What other systems are there for franchisees to communicate with the franchisor and each other?