Buying a franchise6.01.2016
Many people want the flexibility and the freedom to run their own business and buying a franchise allows you to start up your own business, but without having to start from nothing. You may have moved to a new area and spotted a gap in the market for the provision of specific services or goods, or seen a new trend in another country and that is often where looking into a franchise business is a smart idea.
Franchises are typically a tried and tested formula, and benefit from the experience and support of the franchisor. Franchisees can therefore enjoy many of the benefits of self-employment but with much lower risks. Successful franchise operations do usually have a much lower failure rate than brand new businesses and it is possible to make a good living from them.
How should you go about selecting a franchise?
Many franchisors are members of the British Franchise Association so you can do your own research to find out as much about them as you can and also how they operate. There are also regular shows and events around the country, so visit those and talk to as many people as you can about their experiences. Don’t skip on the financial due diligence, ask for three years’ audited accounts and a bank reference.
Look at how many franchisees the franchisor has both in the UK and overseas. If there are only a small number, it could indicate that the concept is not very well tested. Look into how many franchisees have failed and what the reasons for failure are. Consider whether you will have exclusive rights geographically and also whether these rights last for the full duration of the agreement. A franchise agreement will typically run for five to ten years and it is important to establish whether you have an option to renew the franchise at the end of this time.
Be aware that many of the earlier franchises in a business lifecycle may have the easiest or most profitable territories, so really giving thought to the franchise and your location is very important. Be wary of promises of high returns from a small investment which are typically unrealistic.
Make sure you check if the franchisor is completely independent or are they for example the UK licensee of a US company. Always check what the original owner’s rights are and how these could affect you.
Master Franchisees or as the Americans call them “Area Developers” are generally experienced, capable businessmen or women who buy
the right to set up, for example, a network of branded fast food outlets in the UK, using a proven US brand and operating system. The Master Franchisee pays the US company for this right usually, a one off upfront fee and thereafter an annual share of turnover (typically, 10%).
A Master Franchise can in the medium to longer term provide a very healthy (and cash positive) return on your initial investment. That initial investment will usually require between £200,000 and £1million equity. Once up and running, a successful Master Franchise provides a reliable, healthy and scalable income for relatively little ongoing effort.
What are the advantages of a franchise vs setting up your own business?
- The franchise is typically based on a proven business idea and you will be reproducing that product or service which the franchisor has already shown can work, following their guidelines and under their business name.
- Always do your own research and it is worth speaking to other existing franchisees about whether the business really works for them.
- A good franchisor should stay in touch with the franchisees and carry out regular research about customers and the business and look to update the business idea, so make sure you work with someone who is proactive in this way.
- Some franchises are household names and you can benefit from national advertising or promotion undertaken by the franchisor. This is however often funded by additional fees. It is easier to sell to customers who are familiar with the company, brand or products and services on offer and you will be able to use trademarks the franchisor owns in relation to the business.
- There should be a full range of business support services on offer with the franchise such as introductory and ongoing training. This usually covers general business skills as well as training for running that particular business. You should receive help in setting up the business and finding suitable business premises. You should be provided with a comprehensive and detailed operations manual, which tells you how to run the business. There should be ongoing support and advice.
- You should ensure you are given the exclusive rights to the franchise in a specified region or to an exclusive client base.
- If you are looking to access finance to fund a new franchise business, then it can be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven start-up. Always talk to a few sources of business information and finance to get advice, especially as they may have experience of dealing with similar businesses.
There are several different types of franchise available and understanding the differences between them may influence your decision on the type of business you choose. For example, there is a full business blueprint that as the name suggests should provide you with and equip you with everything you need to set the business up.
Other franchises offer a less complete package and this may be reflected in the price. Whichever one you choose, it is vital to understand the terms and conditions of the relationships with all third parties.
- An agency arrangement allows you to sell goods on behalf of the supplier.
- Distributorships and dealerships allow you to have an agreement to sell the product, but do not usually trade under the franchise name and have more scope to run the business as you choose.
- A licence allows you to make and sell the licensor’s product/s, usually with no other restrictions on how you run your business.
- Multi-level marketing (or network marketing) is also a form of franchising, but is a looser type of business arrangement and it can be harder to make a good financial return from.
Are there any disadvantages to taking on a franchise?
The cost factors involved, especially the unknown costs, are likely to cause the main issues for would be franchisees.
- Up front costs might be high. To buy into a franchise there is a fee which can vary from around £5,000 to £250,000. On top of this there are also the other fixed costs associated with running the business on a day to day basis such as premises, equipment, stock etc.
- Ongoing costs might be high. You will pay an ongoing premium or fee on sales, regardless of whether you are making a profit or not. This can be a fixed amount or a percentage of sales or a combination of both.
- There may be further additional costs such as a contribution towards the franchisor’s advertising, or for ongoing training. You need to be satisfied that the franchisor’s services will justify these future costs.
- There will be restrictions within your agreement which allow the franchisor control over how aspects of the business operates. For example, the contract between you and the franchisor will usually regulate what you are allowed to do.
- You cannot just make changes to the business for example, you would not be able to develop and introduce new products to suit your local market.
- Typically once you decide to exit the business, you can only sell your franchise to a buyer approved by the franchisor. You also need to plan for what happens in the unfortunate circumstances that you may not be physically able to work, or if you were to pass away.
- There is a degree of risk associated with a franchise as there would be any arrangement with a third party, who may not fulfill their contractual obligations as well as the ongoing business support.
- There is a risk of the franchisor going out of business and despite your success, consider the impact that could have on you.
- There is also a risk that the actions of the franchisor or other franchisees could give the brand a poor reputation. Once you have made up your mind, it is vital to ensure the legal framework is satisfactory, so appoint a solicitor with a solid track record in franchise agreements to examine the contract.
Prepare a realistic business plan, as you would for any other start-up business. Include your own market research and financial projections - not just those provided by the franchisor.
It may sound rather obvious, but you should ensure you know what you are doing and about your chosen sector. Find out as much about the industry and the market as you can, in the same way that you would if you were starting your own business from scratch.