Franchising: For yourself, but not by yourself...
A franchise offers a proven route into business ownership to thousands of people every year. Stuart Anderson examines what makes a franchise.
Become your own boss, working for your self but not by yourself'. This is the proposition that attracts thousands of people to look into franchising every year. In fact, last year the total number of franchised businesses operating in the UK rose by an estimated 2,300 (according to the 2006 NatWest/British Franchise Association (bfa) UK Franchise Survey) - that translates into over 40 new franchises opening every week.
These franchised businesses have been started by 'franchisees', individuals who have invested a capital sum in a franchise from a 'franchisor' company, such as McDonald's, Cash Generator, or Belvoir Lettings. These are recognisable high street names whose expansion is being achieved either completely via franchising, or in tandem with company-funded openings, and the UK Franchise Survey estimates that 759 such companies currently offer franchise opportunities in the UK.
A franchise need not require investment in a high street unit - franchising has been embraced as an expansion philosophy by automotive aftercare providers, parcel couriers, talent agencies, commercial cleaners, travel agents, vending machine distributors, tradesmen, business coaches and consultants, hairdressers, domestic care providers...as a franchisee you could find yourself operating out of a van, a kiosk, a restaurant, an office, a shop or from home.
This diversity of choice is reflected in the investment levels required to take on a franchise. The UK Franchise Survey estimates the average initial franchise charge to be £46,300, covering the franchise fee (£17,300), equipment (£10,100), stock (£5,600) and working capital (£13,300). However, this is dependent on the requirements of the business concept, size of the territory, value of the brand, extent of the training and support provided, etc. A cursory look through The Franchise Magazine will reveal concepts with franchise fees as low as £3,450 and as high as £150,000.
In return for the initial franchise fee, the franchisor will provide initial training, set-up and launch support, a protected territory or location, use of an established brand, operation manuals and, most importantly, the concept and methodology of a business that has been proven by a pilot operation, and possibly by an established set of franchisees depending on how long the franchise has been trading. Most franchisors look to operate their pilot for at least a year before franchising, as this will allow them to identify the potential pitfalls and challenges facing the business.
Other benefits of joining a franchisee network are: economies of scale in sourcing services and products; support from fellow franchisees who will be ready and willing to pass on their own experiences to assist you in getting your own business off the ground; national marketing and accounts (as the network grows); recommendations and referral business generated by other franchisees; trend and training updates provided by the franchisor; as well as other forms of ongoing franchisor support. The costs generated by the provision of these ongoing services by the franchisor are covered by a Management Service Fee - usually charged as a percentage of the franchisee's turnover. The UK Franchise Survey found that these average at 8.1 per cent, although again this is highly dependant on the value of the package you are provided by the franchisor.
The valuation of the total package of benefits and comparison with the cost of the investment should be a part of your research into a franchise opportunity prior to signing up as a franchisee. A valuable source of information about the franchise opportunity and the franchisor is its own franchisee network. Most franchisors will offer serious franchisee candidates a list of contact details of every franchisee in the network, and most franchisees will be very happy to talk to you about their experiences. Beware an incomplete list - this implies a biased selection on the part of the franchisor - and also ensure you speak to a number of franchisees to ensure you are getting a balanced view of their satisfaction.
An advantage of working to a proven system is that the franchisor will be able to advise on the optimal speed of expansion of the business, and provide reasonable expectations to the franchisee in terms of turnover, profits and the scale the business can grow to.
The franchisee may seek to expand the business further by investing in multiple units within their territory (i.e. additional shops, vans, etc.) or investing in a second territory. In certain circumstances some franchisors will reserve a neighbouring territory for the franchisee to purchase once they reach a certain level of turnover.
For franchisees with chain building ambitions an option offered by some franchisors is a Master Franchise, which provides a territory covering a region or whole country. National Masters are mostly available from brands originating from other countries, who will be seeking individuals or organisations to tailor their brand and concept to the UK market before establishing a pilot and expand via sub-franchising. Regional Master Franchises may similarly allow sub-franchising,
While many business opportunities and pyramid schemes have tried to classify themselves as franchises, true Business Format Franchises offer a comprehensive package of brand, exclusive territory, training and support in return for a significant investment from the franchisee. There are plenty of professionals who can help you sort the wheat from the chaff in this respect - lawyers, accountants, bankers, franchise consultants and the British Franchise Association will all be able to provide valuable advice and guidance. There is also a wealth of books, magazines, newspapers and websites covering the franchise industry which will give a well rounded view of the opportunities available.
Franchising offers a route into business ownership to enthusiastic, motivated individuals who haven't had a 'eureka moment', or who don't have the capital to risk in taking a 'trial and error' approach to developing a winning business model. It will require you to put your money where your mouth is up front, but as an investment in skipping the gestation period and launching straight into a proven business, with expert assistance included in the price, franchising is enabling thousands of new businesses to achieve an unprecedented survival rate which, according to the UK Franchise Survey, saw just 1.7 per cent require a forced change of ownership last year.