Franchising is a much more common business model than many people realise, encompassing a surprising number of the most recognisable high-street brands. The benefits of opting for a franchising format may seem clear-cut, but taking a step back to assess the pros and cons before making your mind up is a must …
What is franchising?
According to the British Franchise Association (bfa), franchising (or business format franchising, to be precise) is the ‘granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis’.
To put all that more simply, some companies choose to grow not by developing in the conventional way but by granting a licence to others to sell their product or service. So one person copies another’s proven business model and receives support in exchange for an upfront payment (the franchise fee) and ongoing fees (a percentage of turnover or mark-up on supplies). Each business outlet is owned and operated by the franchisee, while the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business
Why follow the franchising route
It continues to perform well as a sector, with a significant increase in the estimated overall number of people working in franchising. More than two-thirds of franchised units that have been running for five years or more report being either ‘quite or highly profitable’. Says bfa CEO Pip Wilkins: ‘Thanks to franchising, more people are starting their own business and more jobs are being created. The figures show that whatever your background, with the right attitude and ambition you can thrive.’
Franchising can provide the perfect path for those who are keen to set up their own business, who have some money to invest, and who want the independence of self-employment coupled with the support of the franchisor. Choosing a reputable franchise will enable budding entrepreneurs to follow a tried-and-tested formula with the backing and support of a well-established brand, which can, potentially, lead to dramatically higher levels of success. Statistics have shown that a franchise is more likely to succeed than other types of business start-up. However, no business can offer a guarantee, so if you are thinking of investing in a franchise, you should take professional, legal and financial advice before parting with any money. It may also be a good idea to work for a franchise first, to gain some experience of what is involved.
THE LANGUAGE OF FRANCHISING
- Franchise/franchising – method of business in which the owner of a business system (the franchisor) grants an individual or group of individuals (franchisees) the right or licence to market a company’s goods or services
- Franchisor – the business that owns the brand and business system
- Franchisee – person or group investing in a franchise
- Franchise agreement – contract that details the legal relationship of obligations between franchisor and franchisee
- Franchise fee – the initial investment figure needed to become a franchisee (different franchisors include different things within this, so always check what is included)
- Tried and tested market
- Established trade name
- Access to an experienced network
- Allocated trade area
- Market intelligence from the franchisor
- Marketing activities undertaken by the franchisor
- Bulk buying powers of the franchisor
- Finance may be more readily available
- Lead time to success may be shorter
THE CRUCIAL QUESTIONS
It is critical to answer some questions absolutely honestly in order to make the right choice about whether or not to take on a franchise …
- Do you want to be self-employed?
- Do you want to invest your own money?
- What proportion of your assets would you be willing to risk in a franchise? (Calculate the value of your assets, including savings, car, etc.)
- Will your family/partner be supportive?
- Is your physical health good (e.g. have you had any problem that would prevent you obtaining a life assurance policy)?
About the business
- What sort of business do you want?
- Do you want to get involved in something new?
- Do you want to use your skills and experience?
- Do you want a business to share with someone in your family?
- Do you want a premises-based business or one you run from home?
- Do you want to manage other people or be ‘hands on’?
- How much do you want to spend?
- How much time can you give to the business?
TYPICAL START-UP FEE MAKE-UP
The start-up fee is likely to include the following (depending on the business):
- franchise fee (e.g. the fee to use the brand and system)
- any equipment needed (e.g. stationery, machinery, office equipment)
- any initial stock required
- initial training
- initial marketing or sales launch
- any necessary property costs, including fittings
- any vehicles needed (it should be specified whether this is the total cost of the vehicle or the first repayment if on finance)
- any subscriptions/memberships/licences, etc.
- any staffing costs
- any other element necessary for the initial launch of the business.
It does not include:
- working capital.
More about the bfa
The British Franchise Association (bfa) is concerned with developing and controlling good and ethical franchising among its member franchisors. It describes its role as to help ‘potential franchisees recognise the good, the bad, and the ugly for what they are’ and those ‘businesses involved in franchising to secure their own position among the “good” operators’.
Its Qualified Franchise Professional (QFP) qualification is designed to provide formal recognition of an individual’s professional knowledge and experience in franchising, and offers a range of membership grades, full details of which can be found on the bfa website.
It also offers free online training with its Prospect Franchisee and Prospect Franchisor Certificates. Click here to read all about them.
Many of the personal qualities required to make a franchise work are also highly prized in the Armed Forces. Self-discipline, self-motivation, initiative, willingness to work and the ability to get on with others are key to the success of any franchise business, as is that little spark of entrepreneurship.
There are a number of technical franchises available, involving areas like cars, IT and workshop tools, and Service training and experience can often be relevant in such areas. However, ex-Forces people also run successful franchises in areas such as upholstery cleaning, sign-making, legal services and estate agency, so keep an open mind until you’ve checked out all the options.
There are, however, some common key skills. Competence in ICT, accounting, law in the retail sector, financial awareness and the ability to drive would all be extremely useful. It’s also likely that, as a potential franchisee, you’ll need to take out a bank loan to fund the purchase. While most franchisors will help with the necessary business plan and any other paperwork, it is essential that you, as the individual taking out the loan, fully understand every detail of these documents.
Decided on a franchise? What next?
Research the opportunities and make a shortlist of franchisors. Meet them and ask to talk to some of their franchisees (preferably other Service leavers). Reputable franchisors will help because they will want their franchisees to be sure they are getting into the right business. In some cases, ask if the franchisors run their own outlet – if it is a profitable business and they don’t, ask them why not.
Do not sign up for anything until you are ready. However, franchisors are in business and want to sell to people who are ready to invest within a few weeks – commercial concerns don’t operate according to the Service posting timescale of six months or so; they are looking for early commitment from the right people, who will find any necessary financial backing fairly easy to obtain.
What you should look for
As a prospective franchisee, you should seek information on the following:
- initial training (e.g. technical, admin, sales and marketing)
- help with initial funding
- ongoing training
- the product or service (e.g. availability, sales record in other franchises or businesses)
- plans for new products/services
- franchise territory (e.g. size)
- marketing support.
How much does it cost to open a franchise?
Costs vary depending on the sector. Start-up costs are usually covered by the franchisee’s initial investment and a loan, often from a high-street bank, which will generally advance money to fund franchisees of an established, ethical business. Under normal conditions, banks will often lend 70% of the start-up costs, as opposed to 50% for an independent operation.
However, although risks will be lower than for other kinds of business – they may even be less than in a lot of employment options – they still exist. Franchising is not for those who are not realistic about what they can afford or how hard they will work. However, people from all walks of life become franchisees for a wide variety of reasons – including the many people looking for a fresh start after a lifetime’s career in the Armed Services.
Still not sure?
Franchising deserves serious consideration if you are thinking about starting your own business. Franchises exist in a huge range of business sectors – there is probably a franchise to suit everyone, no matter what their interests, previous experience, lifestyle or budget.
Following the pandemic-related disruption of recent years, the bfa is now getting back to running its full programme of events, seminars and training courses. Keep an eye on this page for updates and full details of upcoming events. Also making their long-awaited return this year are major national and international franchise exhibitions – click here for full details and to stay up to date.
Exhibitions and events aren’t the only sources of advice of course; alternatives include banks, solicitors, franchise consultants and, most importantly, anyone you know who is already operating a franchise.
A final few words of caution …
- offers that sound too good to be true
- a large fee upfront but low royalties
- franchisors that will not let you meet other franchisees
- low-quality training, marketing material or business plans
- pressure to sign anything before you are ready.