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THE PANEL OF EXPERTS

Franchise Consultant
Tony Urwin is a Franchise Consultant and Regional Director of FDS Northern. He has three decades of franchising experience, and regularly speaks at regional events.

Franchisor
Godfrey Lancashire is Managing Director of professional investigations franchise London House, is a bfa member, and also serves as the current President of the Credit Services Association.

Star Letter

"I am considering investing in a franchise to build as an asset. What are my options when I wish to sell the business?"
JS, N Lincs

Tony Urwin: This is a very good question. A franchise business is an asset, and developed properly can provide a good return on investment. If you choose to invest in a franchise with a view to maximising your return, here is some basic advice:

• Choose your franchise carefully, with a view to maximum capital value. Management franchises tend to deliver the highest returns when sold, as they contain a team of people operating under the franchisee's direction who are generating sales and profits - the franchisee himself is not the sole profit centre.
• Ensure that your franchise agreement contains a clause allowing you to sell the franchise. The franchisor will likely have final say on the purchaser. When it is time to sell, you will have several options:
• You can find a buyer yourself.
• Your franchisor may be able to find a buyer for you (but is likely to ask for a sales commission).
• You may be able to split the territory into two or more parts to maximise value.

The franchisor needs to be in the loop, as it has a responsibility to ensure that the selling price paid is fair and reasonable. The new franchisee needs to be able to realise a return on his investment too!

Be aware that there will likely be clauses in your franchise agreement that will restrict your ability to operate a similar business in the same region for up to 12 months after the sale.

Godfrey Lancashire: Most franchisors will tell you that the purchase of the franchise is indeed to be shown as a fixed asset on your balance sheet. If anything it should appreciate and not depreciate for two reasons.

First, as the franchisor's whole business develops year-on-year, so will the value of your own franchise. For example, if a franchisor was able to demand £10,000 for the franchise area today, in three years time that price may have risen to £15,000.

Secondly, over time, you will be expected to generate local business and your portfolio of local clients will come to be regarded as a premium or 'goodwill' of your business, so that when you come to sell you should be able to obtain at least as much as you paid originally and probably considerably more as a going concern business.

Most franchises are freely saleable, may be passed on by inheritance or assigned to third parties providing the franchisor takes out the same level of reference as he would have done on you - this is, of course, to preserve the reputation of the whole franchise.

If you do decide to sell your franchise, most franchise agreements will allow you to sell to a third party of your choice (as a result of your own local advertising or networking) subject to the caveat above. Many franchisors will offer help with the sale for a nominal commission and include your franchise in any national advertising.

Some franchisors will insist that they have an option to buy back. If this is the case, make sure that it is at a realistic market price and that you seek independent advice from your accountant or business professional to advise you in all these matters. Thereafter normal commercial considerations should apply and you and the seller should each enlist your own professionals to draw up a proper purchase/sale agreement.

"I am looking at a van-based franchise, but what can a franchise offer me that I cannot do myself?"
James Gillies, Invernenesshire

Tony Urwin: If you decide to establish your own van-based business, you will need a lot of patience, ingenuity and available cash, because no matter how much research you do, you will still be learning by trial and error. It takes some time to refine a business model and make it profitable. If you buy a van-based franchise, you will start with a proven business model which has had all of the kinks worked out for you. You should be able to start generating profit relatively quickly.

If you start your own van-based business, it can take years until you can enjoy any name or brand recognition in your local area. Unfortunately, your anonymity will work against you for some time, as most consumers will choose to deal with a name and brand they know. If you buy a van-based franchise, you will benefit from an established national brand. This invaluable brand-recognition, together with the launch programme put together for you by your franchisor, should provide you with a quick uptake and surprisingly quick market penetration.

If you are running a van-based business of your own design, who will you turn to for advice and guidance? No one will know your business other than yourself (and perhaps your competitors). You will have to answer most questions for yourself. However, if you are operating a van-based franchise, your franchise manager will be there with advice and guidance. After all, it is their job to help you. You will also be able to confer with fellow franchisees whose experiences may be similar, but whose solutions may be novel.

You could well go it alone, but franchising offers many salient advantages that should not be underestimated. The statistics speak volumes: according to a 2006 survey conducted by Natwest, 92 per cent of franchisees reported trading in the black and only 1.5 per cent of franchised businesses failed. Compare this to recent Equifax statistics which showed SMEs as a group to be nine times more likely to fail.

Godfrey Lancashire: It is my experience based on 25 years with Barclays Bank (the last five as a Senior Manager in Risk Management head office), and latterly 12 years as the Managing Director of a franchise, that starting on your own is a huge risk.

Most importantly, the risk is minimised by joining a proven franchise operation so that you can learn not only from the things that work really well but also from mistakes that were made in the early days by others so that you do not fall into the same trap.

Of course, it is also a huge advantage to benefit from national branding and to be able to say that you are part of a well known national company, perhaps readily recognised in the high street, which would not be true if you started entirely on your own. If there are referrals from the franchisor company, then they will also help to get your fledgling business off to a flying start.

Perhaps one of the most important benefits of joining a franchise is the help and support that can be provided, not only by the staff at the franchisor's head office but also by colleague franchisees who have been there, seen it and done it. Working on your own can be lonely and it is extremely useful to have a support network to help you, not only with technical aspects of the job but also with marketing and the business development aspects.

Statistics show regularly that franchisees have well over a 90 per cent chance of success and this is certainly not the same story for somebody starting on their own. So it is up to you: if you have a real risk mentality then perhaps you are up to challenging the competition on your own. I you're not, but still would like the opportunity to work on your own with the freedom that that brings, then maybe the franchise option is better for you.