The Importance Of Looking At The Financial History Of A New Franchise Opportunity

Working out the validity of a franchise is a major part of your selection process when choosing one for yourself. A good way of looking at the sustainability of an opportunity is to look at the financial history of the company.

Looking over the disclosure document that a company has to provide, by law, is a good starting point when looking to buy it. In this disclosure document it ought to outline the financial history of the company including its financial status and audited statements from previous tax years.

It is fairly obvious that investing into a business that is financially unstable is a massive risk as the company may go out of business or go into bankruptcy after you have invested your money.

The new opportunity may be exactly what you are looking for in terms of location, industry and market but it needs to be managed correctly and be financially stable in order for you to make a return on your investment.

To make sure you have the all the information about the new franchise you must hire a solicitor to go over the fundamentals that are included in the disclosure document. The solicitor will go over the financial statements that should be included in the document and will give you an accurate reading if you should buy a franchise from this company.

If you cannot afford a solicitor and have experience in business then you may only need to look over the statements yourself to get an accurate reading of the companies position. Getting good solicitor advice is highly recommended though as much of working in the disclosure document may be worded to benefit the brand owner and from a biased point of view.

A good solicitor will be able to clarify if it has a steady growth over the past few years of trading. If the growth has stagnated therefore the opportunities are becoming less and the possibilities for your new venture will also be less.

The boss of the brand should have a business plan for growth of their business, this will be established by the disclosure but it can often be misleading so check the growth against the actual statements from previous years to establish the truth about the options to buy a franchise.

The solicitor or yourself should be able to establish if it is making most of its income from the sale of new locations or the ongoing royalties generated by them. The financial statements will have evidence of this.

If it is solely relying on the sale of new franchise opportunities then the longevity of the company will be short, as the amount of them sold cannot continue year on year. There should be an equal balance between royalties received each month and the generation of opportunities.

If the statements state that the company is putting back into the company then this will be a good sign that they are helping the new branches. This will include initial training, sales and marketing, business support and product advice. A good owner will always be available to support the franchisees with their knowledge and experience as well as financial help.

When you decide to buy into one, make sure you have looked into the financial history of the company before you invest. A good franchise will be transparent about their earnings and potential over the forthcoming years. Hire a solicitor if you do not have the experience and they will be your safety net if the company turns out to be too much of a risk.