Top 5 Questions SMEs Should Ask Before Entering a Franchise Agreement

At Berrill Kiernan Associates we believe that buying into a franchise can provide an SME with a recognised brand, an established business model and access to valuable support. However, a franchise is not a guaranteed route to success. It involves financial commitments, contractual obligations and restrictions that can significantly affect how the business operates. Before signing an agreement, prospective franchisees should ask five important questions to establish whether the opportunity is commercially sound and suitable for their circumstances.

1. What Will the Franchise Really Cost?

The initial franchise fee is only one part of the total investment. SMEs should calculate the complete cost of entering and operating the franchise before making any commitment.

Potential costs may include:

• Initial franchise fee

• Premises and fit-out costs

• Equipment and technology

• Stock and opening inventory

• Training and recruitment

• Marketing contributions

• Ongoing royalties

• Software and support charges

• Insurance

• Legal and professional fees

• Working capital

• Loan interest and finance repayments

Some franchise agreements charge a fixed monthly fee, while others take a percentage of turnover. There may also be mandatory purchases from approved suppliers, minimum marketing expenditure or additional charges for training and systems.

It is essential to prepare a detailed financial forecast that covers the first two or three years. The forecast should include realistic sales assumptions, all operating costs and the amount of working capital required before the business reaches a stable level of profitability.

A franchise may look affordable based on the entry fee but become much more expensive once the ongoing commitments are included.

2. Is the Business Model Proven and Suitable for Your Market?

A recognised brand does not automatically mean that every franchise location will be profitable. The success of one franchise outlet may not be replicated in another area due to differences in demographics, competition, customer demand, rent levels and local spending patterns.

Before entering the agreement, investigate whether the business model has been successful in locations similar to the one being considered. Ask the franchisor for evidence supporting its financial projections and understand the assumptions behind any suggested turnover or profit figures.

You should consider:

• Who is the target customer?

• Is there sufficient local demand?

• What competitors operate nearby?

• Is the territory protected?

• How much marketing is required locally?

• Are sales seasonal?

• What are the expected gross profit margins?

• How long do comparable outlets take to become profitable?

It is also worthwhile speaking to existing franchisees, ideally in locations with similar market conditions. Ask them about their actual experience, costs, support levels, staffing challenges and whether the financial returns match the expectations provided at the outset.

3. What Are the Contractual Obligations and Restrictions?

A franchise agreement is a legally binding contract and may impose significant restrictions on how you operate the business. It is important to understand these obligations fully before signing.

The agreement may specify:

• Approved suppliers

• Required equipment and systems

• Operating procedures

• Branding and marketing rules

• Opening hours

• Staff training requirements

• Minimum performance standards

• Reporting obligations

• Renewal terms

• Transfer or sale restrictions

• Termination conditions

• Non-compete provisions

These requirements may be reasonable as part of maintaining a consistent brand, but they can also limit your flexibility and increase operating costs.

Pay particular attention to the length of the agreement and what happens when it expires. Understand whether renewal is automatic, whether further fees apply and whether the franchisor can refuse renewal.

You should also establish what happens if the business underperforms or you need to exit early. Some agreements may include substantial termination costs or require the franchisor’s approval before the business can be sold.

Independent legal advice is strongly recommended before committing to any franchise agreement.

4. What Support Will You Actually Receive?

One of the main attractions of franchising is the support provided by the franchisor. However, the level and quality of support can vary considerably between franchise systems.

Do not rely solely on verbal promises. Establish exactly what is included in the agreement and what may incur additional charges.

Support may cover:

• Initial training

• Ongoing operational guidance

• Marketing campaigns

• Website and digital support

• Recruitment assistance

• Supplier negotiations

• Technology systems

• Business performance reviews

• New product development

• Local marketing advice

You should also ask how quickly support is provided when problems arise. If the business experiences staffing difficulties, falling sales or operational issues, will you have access to someone who can help?

It is important to understand whether the franchisor is focused on supporting franchisees over the long term or primarily on selling new franchises. The financial health and reputation of the franchisor should also be considered, as your business may be heavily dependent on its continued strength.

5. Can You Afford the Risk if Things Do Not Go to Plan?

Every business investment carries risk, and a franchise is no exception. Before proceeding, consider whether you could manage financially if sales are lower than expected or the business takes longer to become profitable.

Prepare downside scenarios based on:

• Lower customer numbers

• Higher staffing costs

• Rising rent or utilities

• Delayed opening

• Unexpected equipment repairs

• Lower-than-expected margins

• Additional borrowing requirements

• A prolonged period before break-even

You should also assess your personal financial exposure. Will you need to provide a personal guarantee for business borrowing? Are you investing personal savings that you cannot afford to lose? Would the business still be manageable if you were unable to draw a salary for a period?

A realistic business plan should show how much cash is required to survive a difficult trading period. It should not be based solely on the franchisor’s most optimistic projections.

Make an Informed Decision

A franchise can offer a useful structure for SMEs entering a new industry or expanding into a recognised brand. However, the opportunity must be assessed carefully. The strength of the brand, the total cost, the contractual restrictions, the support provided and the potential downside all need to be understood before signing.

The most successful franchise decisions are based on independent research, realistic financial forecasts and a clear understanding of the obligations involved. Taking time to investigate the opportunity now can help prevent expensive problems later.

If you would like to discuss your business, contact us on or email Paul@bkg.ie or visit bkg.ie.

Disclaimer: This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.