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Buying a franchise

6.01.2016

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?

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.

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.

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.

For more information contact Blair Gulland [email protected] or Sarah Astley [email protected] 

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