A Small Business Guide to Franchising
From negotiating the sale to the pros and cons of owning a franchise, we look at what to consider before becoming a franchisee…
If you’ve caught the entrepreneurial bug but you are less enthused by the considerable risk and uncertainty that comes with starting a business, a franchise may be for you. Buying a franchise allows you to set up your own business, but with the backing of a proven business model behind you and support, training and assistance from an established franchisor.
However, franchises are not risk-free. Just as with any business, failing to do your homework could see your whole venture tank, however bullet-proof the model seems. This article will give you an introduction to franchising from the perspective of a novice, giving you the basic knowledge needed to start looking for a franchise that suits you.
We cover the advantages and drawbacks of buying a franchise, then move on to how to select and evaluate particular franchises, and how to negotiate the sale of a franchise.
What are the advantages and disadvantages of franchises?
There are a number of different advantages of owning a franchise, many which are focused around the fact that a franchise often means less risk. With a franchise you get a proven business model and often a well-known brand name – especially with larger franchises, you will have the image of a large, well-known brand, eliminating the risky process of trying to make a name for yourself. The franchisor will often undertake sales and marketing activities themselves.
Also franchisees often have easier to finance as banks are much more likely to lend to franchisees with a proven business model as opposed to backing risky start-ups. And a good franchisor will provide you with a range of support, including initial training, help with finding premises, and support and advice going forward, often an exclusive market as most franchises will give you exclusive rights to a particular territory or number of customers.
Everything has two sides however and buying – and running – a franchise has disadvantages. For instance, running one often entails higher cost. As well as the general start-up costs of premises, equipment and so on, you will pay a franchise fee in order to take on the brand name initially (typically this is up to £20,000, although it can be much more) in addition to royalties or yearly management fees.
Also there is often less flexibility. You will only be allowed to deal with the franchise in a way that suits the needs of the franchisor. Rebranding or moving elsewhere is typically completely out of the question, and you will need the franchisor’s approval to sell the business.
And finally the franchisor may fail – however well-run your own franchise is, there is nothing you can do if your franchisor goes under.
How do I evaluate a franchise?
Most franchises will provide potential franchisees with a written prospectus, either in print form or online, which will give basic details about the business. Some information you should establish:
Details of the franchisor: this will include when the business was established initially, when the franchise model was launched, details of the founders and other key people, whether the franchise is a member of the British Franchise Association, the state of the franchisor’s finances (you should insist on a bank reference), how many franchisees have failed, how many franchisees the franchisor currently has, both in the UK and abroad and where the franchise is headquartered and whether the UK branch is a subsidiary.
Details of the franchise: including which territories or client bases are up for grabs, including details of specific catchment areas and an assessment of the potential competition.
The support you will receive: If not included, make sure to ask for the following: what initial training you will receive, what kind of ongoing support will be provided, whether a starter kit with the materials you need is offered, whether it is included in the price, whether you will benefit from sales and marketing activities and how long it will take for the franchisor to help you with something.
Details of the franchise agreement: this includes how long it will run and whether there is an option to renew, how large your catchment area is and whether you have exclusive rights to customers within it, how much flexibility you have in your approach to the business and how easy it is to sell up.
Details of costs: This will give you details on the franchise fee – be wary of high up-front fees, as it indicates a franchisor who is less confident you will generate ongoing royalties, start-up costs such as initial equipment and premises, and whether the franchisees will sell this to you, how royalties and ongoing fees will be charged and whether rates are contingent on turnover, whether you will pay separately for training and support and if the business sells a product, the cost of stock and whether you are tied into buying stock from the franchisor.
Returns: You need to establish how much money you can expect to make from the business. so if not given, make sure to as how much existing franchisees are making – focus on the most recent first, as this will give a clearer indication as to how much you can earn – and the projections of financial returns for new franchisees and how these measure up to actual performance.
How do I check whether a franchise is right for me?
After you have evaluated your potential franchises, you need to carry out some final checks before committing. This stage relates more to getting a feel for the business, meeting the people within it, and establishing whether it is the right franchise for you.
In particular, you should make sure to visit the franchisor themselves. Try and get a feel for how the operation is run from the top. If they seem overly keen to sell a franchise to you, or are suspiciously enthusiastic about figures and potential, investigate why. Also visit some existing franchisees – at least two franchisees – take a look around and ask them how their business is performing currently. How does the reality match up to the claims made in the prospectus?
Also ask how many franchisees have failed. Alarm bells should ring if the franchisor will not provide this information.
Make sure to hire a lawyer to examine the franchise contract. Get the franchisor to give you a sample contract – again, if they won’t provide this, you should be very suspicious – and hire a solicitor to look over the terms and conditions. And do your homework. Carry out your own market research into the territory you propose to take over. Look at demographics, competing businesses, and how the area feels generally. Just because a franchise has worked elsewhere does not guarantee that it will work in your area.
Finally draw up a business plan. Just because you are buying a franchise doesn’t mean you can get away with not preparing a business plan. Project your own likely figures based on your market research.
Where can I find further information on starting a franchise?
The British Franchise Association (bfa)
This is the UK accreditation body for franchisors. The certification process for full bfa membership is notoriously stringent, so you can rest assured that every business on their franchise index has committed to a set of high standards.
The trade press
Many publications focus on the ins and outs of starting a franchise. A good place to start is Startups.co.uk – the site’s introduction to franchising covers all aspects of starting a franchise, including news and information on some of the UK’s most promising franchises.