Low Cost Franchising What are you paying for?

The investment requirement for setting up a franchise ranges from six figure sums down to under £10,000. But do the opportunities at the low cost end of the market offer value for money?

The credit crunch has led Britain to become a nation of bargain hunters with purse strings tightening by the second. Primark, The Independent has reported, 'has become the UK's biggest value fashion chain with a 25 per cent increase in its half-year takings.' While disposable fashion and other cheap commodities can be purchased on a whim, the decision to invest in a franchise should not be taken as lightly. Although cost is not always indicative of quality, a prospective franchisee should not be tempted to invest in a franchise simply because it is at a bargain price, especially if it promises large profits for next to no work.

Franchise Development Services Managing Director Roy Seaman CFE explains: 'It takes substantial capital and time to establish a profitable business. Prospective franchisees should not be misled into believing every promise made by a franchisor unless substantiated with proof. There is no shortcut or free lunch in franchising so prospective franchisees should follow their instincts, question everything and ask for proof of any claims made.'

With the opportunity to work from home in your own time, the typical low cost franchise package can be a solution for many women who want to earn extra cash while looking after their children at home. The cheap price of the franchise may make prospective franchisees feel it is a less risky investment because a smaller amount of their money is involved, but the reality can be very different as Roy explains: 'Only 20 per cent of low cost franchises offer a genuine business format franchise. This means that unless the prospective franchisee has researched the franchisors carefully and is able to identify a good opportunity where the franchisor is able to provide proof of support, training and previous franchisee success, they will be entering the most vulnerable sector of the franchise market.'

Jacqueline Rogers, Managing Director and co-founder of low cost franchise The Athena Network, states her belief that prospective franchisees who choose a franchise because it is the cheapest are normally left disappointed and out of pocket: 'In the past we have had prospective franchisees look elsewhere because they think The Athena Network fee of £6,950 is too expensive! Later they have returned to review their options with us because the other venture has fallen through and the franchisees have regrettably paid for a very expensive 'how to' manual.

'I find it distressing when I hear and read of companies who do not deliver what they promise. Although it is not just companies posing as franchisors that fail to deliver, but also those who charge a great deal for a franchise and fail to deliver adequate support.'

The vulnerability of the low cost sector is not always the low cost franchisors' fault though, as Roy highlights with the sun bed industry. 'In recent years sun beds have become less popular due to research into the anti-ageing affects of sunbathing either outside or in a tanning booth and the associated increased risk of skin cancer. No one would have been able to predict this.

'Often franchisees in this situation are those who had the wrong impression of franchising in the first place. They expected the franchisor to become their long term business partner rather than a safety net and feel let down when they are left to run their business independently once the training is completed.'

Karen Sherr the founder of low cost children's franchise Musical Minis has noticed that the most successful franchisees in her network are those who realised from the outset that running a business would be hard work. 'If customers phone you to book into a class you have to return calls, you have to promote the business locally and administration needs to be done regularly,' she reflects. 'The franchisees that are motivated, organised and want the business to succeed do. Franchisees who sit back and aren't proactive have problems.'

One of the main decision to make when investing in a low cost franchise is whether or not it represents value for money. Part of the franchisor's role is to provide ongoing training and support to its franchisee network and with a minimal initial investment how are the franchisors able to do this and run a profitable business? Dream Doors recognised the importance of increasing the value of its franchise package and decided to re-design its franchise package, which was facilitated through increasing its initial investment fee. Managing Director Troy Tappenden reveals: 'When Dream Doors launched the investment was only £5,000 as the investment opportunity was for a part or full time business venture that could be run from home. I soon found that it was hard to get enough commitment from franchisees with such a low initial investment and the opportunity was not attracting enough quality prospects so I decided to improve the package.

'Justifying the price increase was easy. Before, at the lower investment level, Dream Doors did not have a proper prospectus, memorandum or operational manual but I have rectified this situation. From my personal experience a franchisor cannot support a franchisee network with a low initial fee as the funding goes quickly. Now, Dream Doors has improved its support with three Franchise Managers instead of one, outsourced training courses in sales, finance, building regulations, customer care and motivational conferences with Craig Goldblack.'

Some low cost franchises have been able to sustain a franchisee network with a minimal initial investment fee below £10,000. The main reason for their low price is minimal overheads because the venues are rented as opposed to being bought. Established in 1990 as a local group, children's music group Musical Minis began franchising its successful concept in 1997. As a full British Franchise Association member with 17 franchisees in its network and a further 12 licences to Sure Start Children's Centres the company measures its success on its franchisee renewal rate: in the past two years over 70 per cent of the franchisees and 68 per cent of licencees have renewed their franchise agreements.

Karen Sherr explains how Musical Minis can support a franchisee for an initial fee of £8,000 plus VAT: 'Most of the large costs in establishing Musical Minis were incurred when the business was set up, for example recording the music. Musical Minis has established an infrastructure of support that initially is time intensive but not overly costly. This includes the use of Regional Managers, a franchisee forum and a seven-day a week helpline. The initial training is conducted at a place chosen by the new franchisee and is provided either by head office or the Regional Manager.

'The franchise fee includes full training, comprehensive operating and training manuals, an initial advertising budget, music especially recorded at a pace suitable for young children through MCPS, CD player, musical instruments, lessons plans, puppets and stories. Additional capital is likely to be extremely modest, perhaps another £100 in the event of upfront payment for halls. The fee is low because the overheads are minimal given the business can be run from home and the location for the classes can be rented.

'I have intentionally grown the business slowly for two reasons. First of all I wanted to ensure Musical Minis was and is able to support every franchisee properly. Secondly, I wanted to balance the business with my family life. In the first year a franchisee's earning potential is usually between £4,000 and £5,000 with the majority of franchisees recouping their initial investment within 18 months. On average a franchisee will earn £15,000 per annum by year five although this figure depends on whether the franchisee runs most of the sessions or employs staff to run them.'

Musical Mini franchisee Cathie Flynn owns the Merseyside territory. Happy with her decision to invest in September 2002 Cathie has renewed for another five-year term. 'I chose Musical Minis because I had been going to Musical Minis class with my daughters and loved it,' she says. 'Head office's response to my enquiry was positive and friendly without being pushy. At the moment my franchise is generating a turnover within the region of £30,000.'

Stitch Club was launched with two sewing classes in West London in Autumn 2005. Within one year the company had grown to 26 classes a week across the South East and in May 2007 the company began franchising. Company founder Alison McNicol explains how with an initial fee between £3,995 and £5,995 (depending on area size and location) Stitch Club is able to support its franchisee network. 'Included in the initial fee is an exclusive area, a Stitchclub starter pack, which contains everything from sewing supplies to booklets, fabrics for the first 50 pupils, six Janome sewing machines to marketing materials, a three day teacher training course and a solid support network. In terms of support Stitch Club offers regular mentoring phone calls, an online franchisee forum, ongoing training and an annual franchisee conference. All of this is covered by the initial fee and ongoing management service fee.

'Franchisees are required to have at least £1,000 in working capital to cover supplies, hall hire and advertising in their first year. Overheads are minimal because franchisees do not have to run classes from permanent premises. The franchisee's earning potential depends on what the franchisee can charge for classes in their area and how many classes they are prepared to run each week. The returns can vary from as little as £8,000 to as much as £38,000 depending on how many different classes they teach to juniors, teens, adults and how many parties or school holiday clubs they run.

'While I would like to see a Stitch Club franchise in every town I also want the franchise to grow at a pace that will allow the company to spend time helping each franchisee achieve a successful launch and the existing franchisees to grow their businesses.'

Reported by Jess Sturman

For more information on any of these franchises please call 01603 620301