10 must-know franchise questions answered
The Franchise Magazine's stand at the recent National Franchise Exhibition played host to hundreds of visitors curious about the concept of franchising. Stuart Anderson identifies and answers 10 of the most common questions asked
How successful is franchising in the UK?
Last year 1,025 franchised businesses opened their doors, according to the NatWest/British Franchise Association (BFA) 2005 UK franchise Survey - that's almost three a day!
In fact, the number of franchisees has grown year-on-year for over a decade. The survey reveals that the industry is now 45 per cent larger than it was in 1995 in terms of number of franchised units (there are now over a quarter of a million franchised businesses operating in the UK). These franchises have been awarded by 718 brands offering business format franchises (compared with 474 in 1995), and in total franchises turned over £9.1 billion last year.
Brian Lewis, Chairman of the BFA, confirms that franchising is set to 'explode' as awareness of the concept grows in the UK (see page 128), which is perfectly feasible when you consider that in the US, over half of all retail sales are generated through franchised outlets.
Do I need relevant experience of the sector?
'No prior experience required,' is one of the most common quotes you will read from a franchisor seeking franchisees. The reason for this is the commitment within the franchise industry to franchisee training, in fact all business format franchisors provide it. Comprehensive training opens up the availability of a franchise opportunity to a much wider population of potential franchisees, enabling the franchisor to select the best candidates in terms of commitment, drive and enthusiasm for the business rather than searching for relevant experience.
Do I need to know how to run a business?
The somewhat clichéd claim 'In business for yourself, but not by yourself' has become a classic marketing line for franchisors marketing their franchise opportunities, justified by the support services supplied to the franchisee network by the franchisor. In making available a franchise to individuals with no previous business experience, many franchisors recognise the need to assist new franchisees in getting their business off the ground. This support is funded by the ongoing management service fee paid by franchisees.
Basic pre-launch support will cover putting together the business plan, right the way up to pre-agreeing funding packages with lenders. Site selection is another area in which franchisors can provide assistance, while telephone support is practically a given when it comes to franchisee support.
Dedicated IT and operational support is usually offered for franchisees in more complicated sectors, while technical advice is essential for specialist areas. As franchisees gain more experience they will require less constant advice and guidance from the franchisor, leading many franchisors to promise an intensive initial support system followed up by a more general programme for the more experienced network.
Is my investment safe with a franchise?
The odds of survival for more than three years - never mind achieving a profit - for a new business start-up in the UK today are less than seven out of ten, according to VAT registration and de-registration statistics released earlier this year by the Department of Trade and Industry. That means one third of the UK's entrepreneurs that plough their business loans and nest eggs into new businesses will lose out to poor marketing, bad organisation, wrongly identified markets, inaccurate financial forecasts, management mistakes, shifting economic conditions... or any number of other pitfalls littering the road to building a successful business.
Meanwhile, according to the UK Franchise Survey just 1.4 per cent of franchises changed hands due to commercial failure last year, with an additional 0.3 per cent due to disputes. The reason for this is that by investing in a franchise, the majority of franchisees ensure that their business concept is offering a product or service with proven demand and profitability. The systems and procedures will be professionally constructed, supported by experienced management staff and the franchisee will benefit from realistic financial forecasts.
What types of businesses offer franchises?
The UK Franchise Directory identifies 13 sectors of franchising: Automotive; Business-to-Business; Cleaning & Maintenance; Delivery; Food & Drink; Health, Fitness & Beauty; Home Care; Leisure & Travel; Print & Design; Property Care; Real Estate; Retail & Fashion; and Sales & Distribution, plus Specialised to encompass the myriad of concepts that don't fit into these categories. For an impression of the variety of opportunities available via franchising, read through The National Franchise Showcase (see page 147).
The types of franchises can be divided into categories: Job Franchises, where the franchisee operates the business hands-on; Sales & Distribution Franchises, where the franchisee is on the road, selling and/or distributing products in his territory; Executive Franchises, where the franchisee runs a one-man, white-collar business; Retail Franchises, where the franchisee invests in commercial property, staff and inventory to help operate a shop-unit; Investment Franchises, where the franchisee puts up the capital and appoints a manager to run the business; and Management Franchises, where the franchisee manages a team of operatives.
What is the growth potential of a franchise?
Franchising offers the franchisor a route to national expansion that is usually much speedier than company-owned growth, because a franchisor will not need to build up huge staff and premises costs - rather the franchisor's capital can be committed to developing a small central organisation with a few highly skilled staff. By speeding up expansion through franchising, a network of franchisees achieves higher economies of scale earlier, stronger brand awareness, is much sooner able to challenge for national contracts and, in the case of a fledgling market, is in a much better position to capture early market leadership and establish a dominant position over its non-franchising competitors.
A reported 74 per cent of franchisees report turnovers over £50,000 per year, 35 per cent registering at the top end of over a quarter of a million (according to the UK Franchise Survey). Translating this into profitability, 79 per cent are reporting profits within their first two years and overall 88 per cent in total are earning an income from their business.
Will I have to cope with making sales and bringing in business?
This depends upon the role of the franchisee within the franchise system. Most franchises require their franchisees to take responsibility for generating sales for their own businesses, and many identify sales and marketing orientated individuals in their franchisee recruitment requirements.
However, there are a number of franchises, mostly termed 'job franchises', where the franchisor takes some or all responsibility for winning accounts allowing the franchisee to concentrate upon providing a high quality service. Similarly, some management franchises in-source this aspect to allow their franchisees to devote their time to building the infrastructure of the business.
What exclusivity do I have for my franchise?
Franchisors divide the UK up into territories when they are planning out their national franchise expansion programme. The size and nature of the territory awarded by the franchise agreement will depend on the type of business and specifics of the concept. For example, a site-based concept, such as a restaurant or a retail store, might be guaranteed a radius from their location within which no other franchises and/or company-owned operations will be sited. The size of this radius should depend upon the catchment area of the site. A restaurant located in a low population area should expect exclusivity for a sizeable area, while one sited in a city centre may expect to see other units open within the same city as the company seeks to maximise its brand presence and potential business.
This is one of many forms of per capita territory sizing, which allows the franchisor to award territories equal in potential across the network, or otherwise alter the franchise investment fee to create a fair investment return.
What are the limits to the development of a franchise?
A typical franchise will be limited by its territory, and a growing number of established franchisees are investing in multiple franchises in order to continue their ability to develop growth in their businesses. However, for more ambitious prospective franchisees some franchisors offer alternative franchises.
Area Development Franchises offer enlarged territories such as major cities or provincial areas in which the franchisee can develop a chain of managed outlets. Regional Master Franchises offer a similar territory, but allow the franchisee to sub-franchise - effectively becoming a franchisor in their area and earning a management service fee from their sub-franchisees' turnovers. National Master Franchises are awarded by foreign franchise brands seeking a suitable indigenous individual or organisation to develop a sub-franchisee network across the entire UK.
Is my franchise legally protected?
All franchisees sign a franchise agreement with the franchisor in order to secure their franchise, the main function of which is to clearly set out the extent of the rights to be granted, the territory in which those rights apply, the exclusivity of the rights in the territory and the term in which the rights exist.
A typical agreement will outline the franchisee's exclusive rights to market, build a business under, profit from and possibly sell sub-franchises under the brand within the territory for a reasonable term.
There are a number of specialist franchise lawyers operating in the UK, and many are affiliated to the British Franchise Association. Because they are familiar with the nature of the franchising relationship, these practices will be able to judge a franchise contract that not only protects your business, but also keeps in mind commercial considerations.