Franchising

What is a franchise?

The term 'franchise' is derived from the Anglo-French word meaning 'liberty' and is now used to describe the act of business owners liberating (selling/releasing) the rights to their business logo and model to a third party.

Typically, buying into a franchise means that you will be entitled to trade under the brand name of the business in question, and they will be on hand to offer you help and support.

According to some research, 90% of franchise units (including new businesses) claim to be profitable, with franchising generally having a far lower rate of failure than start-up businesses.

There are a variety of franchising arrangements available, so if you are considering seeking out franchise opportunities then it is first important to understand what is on offer. Research suggests the most common form of franchise is known as business format franchise, with other set-ups including agency, licensee and distribution and dealership:

1. Business format franchise

This is the most popular form of franchise and involves a franchisor (company with a proven business model) granting a franchisee (another person) a license allowing them to trade independently as their own business under the brand of the franchisor (often in a specific geographical area).

Though the terms of each business format franchise will differ, generally the franchisee will pay an initial fee to the franchisor as well as an agreed percentage of the annual sales revenue or mark-ups on supplies. In exchange, the franchisee will receive the right to sell the franchisors products or services under the name or trademark of the franchisor, and help, support and training will be provided in order to give the franchise the best chance of success.

The franchisee is the owner of the outlet or unit that they operate the franchise from. However, the franchiser will remain in control of the product marketing, sales, product development, promotional activities and how their business idea is used.

2. Distribution and dealership

This arrangement involves the franchisee obtaining a license to sell the product of the franchisor but not to trade under their name. Generally, this means the franchisee has much more freedom over how they run their business, as they are not confined to the use of the franchisors business model.

Car dealerships often use this model as it allows them to sell products from multiple parent companies but still gives them the freedom to run their business in the way they see fit.

3. Agency

This form of franchising sees the franchisee selling goods or services on behalf of the franchisor.

4. Licensee

A franchisee is granted with a license that allows them to produce and sell the product of the franchisor.

5. Multi-level marketing

This franchising format involves self-employed distributors selling goods on behalf of the manufacturer and making commission on any sales made or on any sales made by other distributors they recruit.

Though many of these schemes are entirely legitimate and make good business sense, it is important to research the opportunity on offer thoroughly as unfortunately many of the schemes are both illegal and dishonest. Some multilevel marketing schemes have been likened to 'pyramid schemes' which are renowned for taking advantage of participants by taking money from participants without giving them an honest or viable business opportunity.

If you are considering joining a scheme selling goods and services it is advisable to first consult the Trading Schemes Guide from the Department for Business, Innovation and Skills, which provides information and guidelines as to your rights and the potential disadvantages.

Franchising - the advantages and disadvantages

As touched on previously, buying a franchise is such a popular avenue into business because it does not require starting from scratch. However, as with every positive there must always be a corresponding negative and it is important to give both the advantages and disadvantages of buying a franchise equal consideration:

Advantages

• You have the security of knowing your business is based upon a tried and tested model which has proven profitable and successful - checking the success of other franchises before committing yourself is highly recommended.

• Well-established large franchises will often have a national advertising campaign and a known trading name, thus increasing your chances of profitability and success.

• The franchisee will usually receive support, training and ongoing advice and assistance from the franchiser.  

• Obtaining finance for a franchise may prove easier than obtaining it for a start-up business. Banks feel more confident about lending to a franchise with a good reputation.

Disadvantages

• The cost of taking on a franchise may be higher than you anticipate. Though franchising is likely to be profitable far more instantaneously than a start-up business, bear in mind that a percentage of these profits may be owed to the franchiser and also take into account any ongoing management service fees that you may be required to part with in order to purchase products from the franchiser.

• Many franchising arrangements may enforce restrictions on how a franchisee runs their business - for example, you may be required to abide by franchisers standards, policies and procedures.

• There is a chance the franchiser may go out of business.

• Selling a franchise may prove difficult because you may only be able to sell it to someone who is approved by the franchiser.

Is buying a franchise the right option for me?

Although buying a franchise bypasses the long-winded process of setting up and establishing a company, what it does not bypass is the responsibility and challenges of owning a business. Whilst it is true that most franchisees will be provided with a strong support system and good training - the right skill set and attitude are also essential to success.

Before settling on the idea of buying a franchise it is first best to give some serious consideration to whether you truly feel that you could make it a success.

Consider the following points:

• Are you dedicated and prepared to put in the hours? Running a franchise is hard work and more often than not will involve long working hours.

• How do you react to stress? Running your own business is demanding work, so consider how you would react to any pressures you may face.

• If you are considering purchasing a franchise because you wish to become your own boss, how will you deal with the restrictions that franchises often enforce?

If you have spent time weighing up the positives and negatives and still decide that buying a franchise is the right business decision for you, the next step is to establish what type of franchise to buy.

It is advisable to seek out a franchise in which your personal knowledge and experience would be of use. For example, if you have spent your life working in manual labor, purchasing a florist franchise does not make good business sense.

Additional points to consider:

• Are you happy to work alone or do you prefer working as part of a team?

• Would you feel comfortable recruiting others?

• Could you provide thorough training to others?

• Would you be good at managing a team?

• Are you happy to deal with members of the public or would you prefer to sell to business customers?

• What are your weaknesses? If you are weak in a particular area (for instance marketing), could you find a franchise that provides support in those particular fields?

Giving some thought to the above questions may help you to build a clearer picture of what franchising opportunity is going to be the most appropriate for you and your individual circumstances.

Choosing a franchise

First and foremost, one of the most important factors when acquiring a franchise is that you buy one you know you will enjoy working within. All businesses, not just franchises - stand a higher likelihood of success if the owner is truly passionate about their product and/or service and enjoys working within that particular market.

Pleasure and proficiency tend to go hand-in-hand to some extent, as we all tend to excel in areas that we enjoy as opposed to ones we dislike. Working in an area about which you are passionate will mean that your enthusiasm will be conveyed to your customers and the people that you meet, all contributing to the overall success of your business venture.

Of course, there are thousands upon thousands of franchises and there will perhaps be numerous ones in your chosen business area. Making a quick and uneducated business decision could only take a few minutes to make, but may take a lifetime to correct - a mistake which could be easily avoided with proper planning and research.

When searching dig deep - visit existing franchises and ask questions, visit franchising exhibitions, conduct local market research to gauge the demand for the products/services you may be offering.

Assessing opportunities

Once you have gathered a shortlist of franchises you will need to assess them in order to establish which of them, if any, are going to be most suited to you and your circumstances. Consider the following:

• Profitability - Is the franchise successful/profitable, how long have they been in business and how many franchises do they have in the UK?

• What similar businesses are there on a local and national level? Making yourself aware of the potential competition is important in gauging how successful your franchise could be.

• Is it based around an unusual concept or does the franchise have a unique selling point?

• Location - does it have broad geographical appeal?

• Would it be easy to operate and how much training and support would you receive whilst setting up?

• Would the cost of running the franchise make it a good investment?

• Conditions and restrictions - are rules set in place stipulating that you can only run the franchise in a certain way?

• Franchise agreement - what is included, how long will it run for and do you have the option to renew it?

Most franchisers will answer most of the above questions in a summary pack which they present to potential franchisee's, however, if you are serious about purchasing a franchise you should always conduct your own additional research and ask further questions where appropriate.

A highly recommended and useful technique is to visit other franchises so that you can talk to them about their experiences. Ask the franchisor to provide a list of all of its franchises and visit a selection in as many locations as possible so that you are able to gain an understanding of the challenges you may face should you decide to go ahead.

It is also advisable to take advantage of professional information and advice sources. The British Franchise Association (BFA) - a regulatory body for ethical franchising in the UK, features a comprehensive list of local and national solicitors who specialise in franchising. Many high street banks now have their own franchising specialists and of course you have the option of consulting your family solicitor or accountant for information.

Writing a business plan

Business plans tend to be associated primarily with starting a business, when in actual fact they are key to the process of making other important business decisions. Drawing up a business plan when buying a franchise is just as important as doing so when starting a company. It will help you to assess the prospects of the business and also to identify any potential weaknesses. Furthermore, without a solid business plan your bank is highly unlikely to approve finance.

Ask the franchisor to help you with your business plan and take it to franchising specialists at your bank so that they can look over it and let you know if they feel your projections are unrealistic.

Franchise cost

You don't have to be an investment banker to understand the essentials of a good business venture. When it comes to purchasing a franchise the key points you need to consider with regards to the cost are what you get for it and is it good value?

So how much does it cost to buy a franchise? In most cases the business selling you the franchise will first charge you an up-front fee that will then be followed by a percentage of the profit you make. If the franchiser charges you a relatively low initial free and is relying heavily on taking a percentage of your profits, this is a good indication that they have confidence in their service.

As well as the up-front fee you should also anticipate having to spend extra on premises, equipment and stock to help you get started.

Another overhead you should prepare for is the cost of settling on a business entity. A business entity is essentially the company structure you will use to enter into the franchise agree - for example as a limited company, partnership or sole trader.

Aside from the initial outlay, franchisers will usually expect you to pay them a percentage of your profits through a management service fee, or it may be that you negotiate a fixed management scheme of some form. Either way, bear in mind that the cost of franchising will be ongoing and does not simply end after the initial payment.

You will also be responsible for the cost of rent on business premises, utility bills and the wages of any employees that you decide to take on.

However good the deal seems, check exactly what it is you are paying for and ask what you will be expected to pay for in the future. You may think that you have struck gold with a deal on offer, but if the contract is ridden with additional charges and you have to pay for training or advertising campaigns then upon second glance you may find the deal is actually not so rosy after all.

Signing the franchise agreement

Once you have settled on a franchise and have investigated the terms thoroughly it is time to sign the franchise agreement. The franchise agreement itself is a legally binding contract that stipulates the responsibilities of both the franchiser and the franchisee within.

You should under no circumstances, sign the franchise agreement or pay any money to the franchiser until a solicitor who has been approved by the British Franchise Association has reviewed the contract.

Once the agreement is signed, both parties are legally obligated to withhold the terms outlined within and any future disagreements will be settled using the agreement as a point of reference.

Whilst each agreement will differ, typically the following should be covered within:

• Length of contract - How long will the franchise last for and will you have the opportunity to renew when the initial contract expires?

• Location - Are you restricted to selling within a certain area should you decide to terminate the agreement?

• Cost - What is included in the initial up-front fee, are there any on-going costs for management and what percentage of the sales revenue will you be expected to pay? Close inspection of fees is essential as you may find that a management service fee that is a percentage of the gross sales is required each month regardless of the amount of profit earned.

• Training - Will you receive training form the franchiser as part of the package or will this be an extra expense? Either way, the duration, location and any expenses for training should be outlined within the agreement.

• Limitations - Typically the franchiser will put certain restrictions into place regarding how you run the business.

• Exit terms - Ill health or other unforeseen circumstances may mean that you are unable to carry on with business. In the event that this does happen, or indeed if you simply wish to sell your franchise on, what are the terms of exit?

• Trade Dress - 'Trade dress' is the term used to describe the use of the franchisers logo, store image, decor and employee uniform. Some franchisers may require franchises to decorate in a certain way, to wear uniform or to have particular signage on display. If this is the case then which party is responsible for paying for the trade dress?

• Trading Hours - What hours are you expected to open and are you prepared to meet this obligation? If you fail to meet your opening hour obligations then this could be considered by the franchiser to be a breech of contract.

• Product procurement - Must you buy all of your supplies directly from the franchiser or are you able to purchase from elsewhere?

Once both parties have signed the franchise agreement, the franchisee will usually be shipped the necessary equipment and supplies so that set-up can begin. After this, all that is left to be done is the completion of training and often a pre-opening check so that someone from franchise operations can put together a list of things that may still need to be done prior to opening.

Franchise termination

There are a variety of reasons as to why an individual may want to end their franchise agreement before the term is up. If this is the case then the franchisee will need to consult their franchise agreement to familiarise themselves with the exit terms. Each agreement will stipulate grounds for termination and how to begin the process.

Some agreements may allow the franchisee to simply close their contract and location, whereas others will charge a fee if a franchisee wishes to sell the franchise license on or transfer it to another.

The agreement is also likely to include terms that the franchisee must immediately stop using the franchisers name, that they must not disclose any information of a confidential nature and they must also not compete with the franchiser.

Because of the complicated nature of franchise agreements it is advisable to contact solicitor who specialises in franchising so that they can advise you on how best to proceed.

Do I need a financial advisor for a successful franchise acquisition?

Individuals who are considering taking on a franchise are advised to seek advice from experienced financial advisors such as a solicitor and an accountant as early on in the process as possible.

Though consulting an accountant or solicitor is not a legal obligation, having a team of qualified and experienced financial advisors to hand throughout the process of a franchise acquisition is extremely important if individuals wish to make informed business decisions.

Whilst in the early stages of choosing a franchise, an accountant will be able to help you to ascertain the financial strength of the franchiser. A specialist accountant with plenty of background experience in franchising matters will be able to assess the potential earnings and profitability of the franchise as well as helping to make sense of financial statements and in the development of a business plan.

Accountants are also useful in the assessment of the franchising agreement as they will be able to determine whether the royalty and advertising fees are reasonable as well as foreseeing any potential future issues and providing tax planning advice.

Individuals would also be best served to consult a solicitor to help them to understand their legal obligations under the franchise contract.

Almost all solicitors and some accountants will specialise in a particular field so bear this in mind when searching for one. The British Franchise Associations carries a list of accredited franchise solicitors who are experienced within the field though it is always best to inquire as to how much franchising experience they have just in case they are inexperienced in the field but are simply working for an accredited firm.

As it stands the British Franchising Association does not carry a list of accredited franchise accountants. However, if you are looking for a qualified accountant specialising in this particular area you can locate one with ease using our advanced search function.

Further help

• Trading Schemes Guide from the Department for Business, Innovation and Skills

• British Franchise Association