Growing by franchising
Building on someone else's success
Buying into a franchise is more common among the owners of existing businesses than you might think. It can be a lucrative way of expanding or diversifying your existing business portfolio. But it might not be for those who like to exercise total control, as Tom Whitney discovers.
Buying into a franchise enables you to capitalise on an established brand. As the franchisee, you buy a licence to use the franchisor's name, products, services and management-support systems. 'Effectively, you're buying a ready-made concern, allowing you to get started with the support of a bigger business,' explains Johanna Roughley, spokeswoman for the British Franchise Association (BFA).
'It can cost anything from a few thousand pounds for a cleaning business, to hundreds of thousands of pounds for a fast-food franchise.' As Johanna points out, franchises have a much lower failure rate than completely new businesses. 'The franchisor has already learned the secrets of success for their business. Fundamentally, this is why you buy a franchise - to minimise risk.'
�Fundamentally, this is why you buy a franchise - to minimise risk.�
According to the 2004 NatWest and BFA franchise survey, 95 per cent of franchises are in profit after five years, compared to only 45 per cent of other small firms. In 2003, the most recent published figures, there were 692 franchisors in the UK, comprising of some 34,000 franchisees, representing a total turnover of �9.65 billion.
'Some franchisors will not allow you to buy into their franchises if you already have a business,' Johanna warns. 'They want to make sure you'll be giving the franchise your full attention.' However, of those surveyed, approximately one-third already owned a business before buying into a franchise.
Business-format franchising is most common. This is when the franchisor grants a licence to use its business idea, often in one specific location. The franchisee sells the franchisor's product or services, trades under the franchisor's trademark (or name) and benefits from the franchisor's support.
�Don't sign until you have taken advice from a solicitor.�
The franchisee owns the outlet it runs, setting up as a sole trader, limited company or partnership trading under the franchise name. However, the franchisor oversees such things as marketing and quality standards.
As part of the deal, you will need to sign an agreement with the franchisor. This will cover the length of the agreement, sales territory, fees, support, restrictions and exit plan. This will run for a fixed period, during which time the franchisee pays an initial amount, followed by regular royalties on turnover or mark-up on products it sells.
'Don't sign an agreement, pay any fees or deposit, until you've taken advice from a solicitor,' says Johanna. 'Get them to inform you of any potential sticking points. Negotiate hard and don't think you have to accept the first set of terms put in front of you.'
'To be a franchisee you need to be able to stick to someone else's system without wanting to make changes,' says Johnny Sellyn of whichfranchise.com, a leading provider of free information and advice about franchising.
'Franchisors often look for a franchisee that will follow their methods - not someone who thinks they know better,' he says. 'Don't assume a franchise is an easy, risk-free option either. You'll still be running your own business - with all the responsibility and hard work that that entails.
�Don't assume a franchise is an easy, risk-free option.�
'Draw up a business plan to assess the prospects for the business and identify potential weaknesses. Speak to as many franchisees in the network as possible and ask them everything you want to know, such as how much support the franchisor provides, how long it took for them to make a profit, and how much time they devote to the business.'
One of the biggest hurdles prospective franchisees face is finding the necessary finance. With the average initial cost of starting a franchise likely to cost more than �32,000, it is not surprising that three out of five franchisees need to borrow money for their new venture.
In addition to the usual running costs, on average, franchisees pay an estimated eight per cent of their sales in regular fees to their franchisors. On the plus side, the franchisor normally provides support, including training and help with setting up the business. The franchise relationship is ongoing, but support is generally reduced after the initial period, with the franchisor only intervening if you get into difficulty.