Overview
Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn't have a specific business idea or prefers the security provided by an established concept.
The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the business offering you the franchise, and they give you help and support.
Successful franchises have a much lower failure rate than completely new businesses. However, you will still need to work hard to make the franchise a success and you may have to sacrifice some of your own business ideas to fit in with the franchisor's terms.
This guide will help you decide whether franchising is for you. It shows how you can find the right franchise, and highlights the key issues you need to consider.
What is franchising?
The term 'franchising' can describe some very different business arrangements. It is important to understand exactly what you're being offered.
Business format franchise
This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.
The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name, and benefits from the franchisor's help and support.
In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.
The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.
Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod and McDonald's.
Other types of arrangement
Different types of sales relationships are also sometimes referred to as franchises. For example:
Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
Agency - you sell goods or services on behalf of the supplier.
Licensee - you have a licence giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.
Multi-level marketing
Some businesses offer franchises that are really multi-level marketing schemes. This is where self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit.
Be aware that some multi-level marketing schemes may be dishonest or illegal.
Advantages and disadvantages of franchising
Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.
Advantages
Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
Relationships with suppliers have already been established.
Disadvantages
Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
The franchisor might go out of business.
Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
All profits (a percentage of sales) are usually shared with the franchisor.
As with any new business venture, you need to consider carefully whether you have got the right skills and attitude to run a successful franchise. You need to consider how much you enjoy managing people, selling to the public or working alone - as these are common requirements of different types of franchise. This page will help you decide whether franchising is right for you and which type of franchise plays best to your strengths.
Assess yourself
You must be prepared to sell and you will need entrepreneurial flair. A franchise gives you a business blueprint - but it won't automatically give you customers.
You'll need to work hard, probably for long hours. Do you have the necessary dedication?
Running your own business can be stressful. Think how you react to pressure.
You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.
The right franchise for you
Do you like office work? Or would you prefer a business that involves physical labour or using a particular skill?
Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?
The costs of a franchise
When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.
Initial costs
The franchisor - the business that sells you the franchise - usually charges an up-front fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.
Your largest initial costs are usually your investment in:
premises
equipment
initial stock
You will need to establish a business entity. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business - and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader - each of which will involve different costs - or your franchisor might have specific requirements.
You usually pay a percentage of the sales revenue to the franchisor by way of a management service fee. Alternatively, you may pay a fixed management fee of some kind.
Under the terms of the franchise agreement, you may have to buy stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their buying power.
You also have to pay the usual business costs - for example, rent for premises, utility bills or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.
Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.
How to purchase a franchise
There are a number of key things you need to consider when planning to buy a franchise. It is worth thinking about the following:
Assess yourself to see what kind of franchise, if any, will suit you.
Find out what franchises are available and draw up a shortlist.
Assess franchise opportunities carefully, ask questions and talk to other franchisees.
When you find a business, investigate its financial prospects. Base this on thorough research of performance figures. Include an analysis of three years' accounts - if they have been trading for that period - and management figures.
If you'll need to raise finance, ask your bank if it will consider a loan for the type of franchise you're considering.
Do your own market research into the business and the competitors in your area.
Draw up a business plan.
Check the franchise agreement and get professional advice.
However, it is advisable to make sure you don't:
take up the first opportunity before investigating alternatives
allow yourself to be hurried into making a decision
pay any non-refundable deposit
commit yourself before you're completely sure
assume a business will work in your area just because it works elsewhere
rely on the forecasts provided by the business selling you the franchise
sign any agreement without legal advice
Tips on franchise agreements
The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from an experienced franchise solicitor accredited by the British Franchise Association. Get a specimen contract for them to review.
Areas covered by a typical agreement
Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
Fees - what initial fee will you pay? What percentage of sales revenue will you pay? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
Support - how much help will you get starting the business? What continuing support will you get?
Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
Exit - what happens if you can't continue in the business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?
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