Professor Roy Seaman CFE Managing Director and Founder of Franchise Development Services
Have you ever wondered how much your company might be worth as a franchise? Applying basic figures, assume your business grosses £25 million annually, with a net profit of £5 million. The market value of your business might be between £5.5 million and £6 million. Beyond that, it will probably not generate additional long-term income.
However, if growth has been through franchising, each established franchise owner may eventually produce £500,000 in gross annual sales.
Assume further that franchise owners pay a monthly management services fee (MSF) for 20 years. That could mean £25,000 per year per franchise owner over that period in additional income. With a mature network of 50 franchise owners (the average in franchising) that equates to a substantial amount augmenting the market value of your business.
That is without the initial franchise fees payable on each new franchise assigned, or indeed any extra product sales when the brand goes nationwide. A network of fee-paying franchise owners can make the business worth many times the value had it not been franchised.
Franchise owners generate a huge cash flow from MSFs alone and thereby add enormous value to a company. Franchising is a veritable business growth hormone.
Of course, it does not always work that well. It depends how good a franchisor you are, i.e. well-funded, with a sound management infrastructure and skilled at selecting, training and guiding high-calibre franchise owners. The franchising route to growing a company and building the brand and its business beyond a core geographical area is an attractive option for ambitious MDs keen to expand but held back by lack of expansion capital or weakly-motivated line management.
It works simply - you provide the business system, brand, expertise and experience, and franchise owners invest money and effort in replicating your business in their area. It is a simple yet effective partnership for growth.
Almost any type of business can be franchised with many high street and household names having taken that route to national and even international growth. Among them are Holiday Inn, KFC, Dyno-Rod, Domino's Pizza, Rohan, CeX, Orange, London House, McDonald's and many more.
According to the new NatWest bfa Franchise Survey 2010, last year saw more businesses take up franchising as a business model, while franchisors' confidence for the future of their business grew with 94 per cent being optimistic about business conditions, compared to only 82 per cent the previous year.
Franchising, like any other business system, can misfire - but take the right advice at the right time and there is no reason why franchising should not transform an existing small or medium-sized business into a major one on a national or even international scale.
Written by Roy Seaman