Q: Should I be wary of a discounted franchise?

Andrew Pena
Founding partner, Cubism Law
A: It is sensible to be properly informed before investing in any franchise opportunity. Clearly, if an opportunity is being discounted you need to fully understand why it is being discounted. Does the explanation make sense? It may well be that an opportunity has been discounted for good reasons, eg, current franchisee performance figures warrant a reduced fee structure or it may be that the banking crisis means that it is no longer possible for prospective franchisees to obtain the same level of funding.

However, a good explanation is only the starting point. You still need to be satisfied that the franchise – even at a discounted rate – offers a good potential return on investment. You should analyse the history of the business and the historical performance of its franchise base. You should also look at how that historical performance has been affected in the current climate. As part of this process, you should analyse the financial data of current franchisees and also ask for a full list of all current and ex franchisees. If you are satisfied that the financials make sense in the current climate, the next step would be to speak to a number of current and ex franchisees to get their perspective on the investment.   

If, after assessing all these factors, you’re still convinced, make sure you get some expert advice to confirm your viewpoint.

Clive Sawyer
Managing Director, Business Options
A: There are often some very good reasons why a franchisor offers a discount on their initial upfront franchise fee, such as they are new and the risk is higher for the franchisee and therefore they are acknowledging this in the upfront price, or for strategic reasons they want to recruit larger than average numbers of franchisees and they are prepared to reduce/waive their profit margin in the initial franchise fee to help them achieve this. Franchisors are not expected to make large profits from the initial franchise fee and so if a discount is offered you need to be sure that what you get for your money has not been compromised, eg, a reduced marketing launch campaign or less onsite training.

Discounting prices does not necessarily mean there is a problem. In business, many companies offer discounts on their products or services and therefore selling at a discount in itself is not necessary a thing to be concerned about. The overriding message is that if a franchisor is offering a discount make sure you are clear about the reasons behind the discount. Don’t be afraid to ask the franchisor how they can offer a discount without compromising what the franchisee gets. If the reason given does not stack up be wary – if it does then you may be getting a very good deal!

Andrew Pena
Founding partner, Cubism Law
A: It is sensible to be properly informed before investing in any franchise opportunity. Clearly, if an opportunity is being discounted you need to fully understand why it is being discounted. Does the explanation make sense? It may well be that an opportunity has been discounted for good reasons, eg, current franchisee performance figures warrant a reduced fee structure or it may be that the banking crisis means that it is no longer possible for prospective franchisees to obtain the same level of funding.

However, a good explanation is only the starting point. You still need to be satisfied that the franchise – even at a discounted rate – offers a good potential return on investment. You should analyse the history of the business and the historical performance of its franchise base. You should also look at how that historical performance has been affected in the current climate. As part of this process, you should analyse the financial data of current franchisees and also ask for a full list of all current and ex franchisees. If you are satisfied that the financials make sense in the current climate, the next step would be to speak to a number of current and ex franchisees to get their perspective on the investment.   

If, after assessing all these factors, you’re still convinced, make sure you get some expert advice to confirm your viewpoint.

 

Clive Sawyer
Managing Director, Business Options
A: There are often some very good reasons why a franchisor offers a discount on their initial upfront franchise fee, such as they are new and the risk is higher for the franchisee and therefore they are acknowledging this in the upfront price, or for strategic reasons they want to recruit larger than average numbers of franchisees and they are prepared to reduce/waive their profit margin in the initial franchise fee to help them achieve this. Franchisors are not expected to make large profits from the initial franchise fee and so if a discount is offered you need to be sure that what you get for your money has not been compromised, eg, a reduced marketing launch campaign or less onsite training.

Discounting prices does not necessarily mean there is a problem. In business, many companies offer discounts on their products or services and therefore selling at a discount in itself is not necessary a thing to be concerned about. The overriding message is that if a franchisor is offering a discount make sure you are clear about the reasons behind the discount. Don’t be afraid to ask the franchisor how they can offer a discount without compromising what the franchisee gets. If the reason given does not stack up be wary – if it does then you may be getting a very good deal!