Franchising is a much more common business model than many people realise, with a surprising number of the most recognisable high-street brands run as franchises. When it comes to launching a business career, it’s clear to see why many people are drawn to the idea of franchising, but it’s definitely worth stepping back to assess the pros and cons of this operating model before making the leap …
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.
THE SECTOR AT A GLANCE
total contribution of franchising to the UK economy
franchised units in the UK
people employed in franchising in the UK
of franchising units reporting profitability
Six in ten franchised units turn over more than
Source: NatWest/bfa Franchise Survey 2018
Why choose franchising?
According to the latest annual NatWest/bfa Franchise Survey, published in 2018, franchising continues to perform well as a sector, with turnover up 14% to £17.2 billion, and a significant increase in the estimated overall number of people working in franchising: more than 700,000 people are employed in the sector, with a little over half of them in full-time employment. More than two-thirds of franchised units that have been running for five years or more report being either ‘quite or highly profitable’.
The biggest growth areas for franchising remain personal services and hotel and catering, although store retailing also shows some growth, despite a challenging environment for retail in general. Failure rates for franchises remain very low, with fewer than 1% per year closing due to commercial failure.
Says Pip Wilkins, chief executive of the bfa: ‘Thanks to franchising, more people are starting their own business and more jobs are being created. These figures show that whatever your background, with the right attitude and ambition you can thrive.’
Is it for you?
Franchising can provide the perfect route 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. A franchise is more likely to succeed than other business start-ups, with the latest edition of the annual NatWest/bfa Franchise Survey revealing that 93% of franchises reported high profitability. However, no business can offer a guarantee, and 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.
Thinking of running your own business?
Read all about the different self-employment options here.
THE BENEFITS OF FRANCHISING
- 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
This is likely to include the following (as applicable to the business):
- franchise fee (e.g. the fee to use the brand and system)
- any necessary equipment (e.g. stationery, machinery, office equipment)
- any necessary initial stock
- initial training
- initial marketing or sales launch
- any necessary property costs, including fittings
- any necessary vehicles (specified whether this is the total cost of the vehicle or the first repayment if on finance)
- any necessary subscriptions/memberships/licences, etc.
- any necessary staffing costs
- any other element necessary for the initial launch of the business.
It does not include:
- working capital.
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: www.thebfa.org
Skill up while serving
Many of the personal qualities required to make a franchise work are also highly prized in the Forces. Self-discipline, self-motivation, initiative, willingness to work and the ability to get on with others are key to a successful 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 nothing should be dismissed until it has been checked out.
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 is also likely that the potential franchisee will 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 the 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 do not 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.
What will it cost?
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 any other kind of business – they may even be less than in a lot of employment options – they still exist. Franchising is not for people 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.
A convenient research tool is one of the array of franchise exhibitions held in the UK each year, where you can see for yourself the wide variety of businesses available, attend seminars and talk with independent experts about franchising. There is free professional advice from leading banks, solicitors and franchise consultants. In addition, a number of free seminars are held, providing potential franchisees with sufficient knowledge to make informed, calculated choices about franchising options.
There are franchise seminars throughout the UK, where experts and franchisees provide advice – the next Prospective Franchisee Seminars take place on 25 September (Manchester) and 30 October (Oxford). There are also exhibitions, where franchisors take stands and there are opportunities to seek free expert advice. These include the National Franchise Exhibition, to be held next at the NEC in Birmingham on the 4 and 5 October. For a full list of UK franchising events, visit www.thebfa.org/events Other sources of advice 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.