Introduction to Franchising

If you’re new to franchising, this introduction will give you a basic understanding of the concept, the variety and the requirements of a format for rapidly replicating a proven successful business with the support and branding of a national organisation

HOW FRANCHISING WORKS

Franchising is a ‘business marriage’ between an existing business (the franchisor) and an individual (the franchise owner). The franchise owner buys licensed rights to clone the franchisor’s business concept in a specific territory for a specified period, backed by full training and support from the franchisor. The franchisor provides a ready-made, established and tested business format including name, corporate power, know-how, training and ongoing support services.

Investing capital, time, effort and any relevant past experience to create their business, the franchise owner replicates the franchisor’s business formula/system, gaining a safer, more structured, brand-led way of moving into independent business. The franchisor gains a new outlet in a new territory with minimum capital investment in setting it up.

BASIC TYPES OF FRANCHISING

Investment franchise:
The franchise owner puts up substantial funds to capitalise on a high-cost franchise system and, although retaining overall strategic management, invariably hires others to manage the franchise outlet. Examples are hotel and restaurant franchises.

Management franchise:
The franchise owner controls several territories or a region, or manages a team of operatives. Examples are van-based franchises run from regional HQs, depots or hubs.

Executive franchise: 
The franchise owner runs a one-man, white-collar business involved in areas including financial services, personnel, consultancy or project management. Premises are not vital because work tends to be taken to client premises. Examples are debt and cost control consultancy franchises.

Retail franchise: 
The franchise owner makes a significant investment in commercial property, costly equipment and staff to help operate a high-yield business system, which can often be sold at a profit should the franchise owner wish to retire and capitalise on the investment. Unlike the investment franchise, owner-operators are the norm here. Examples here are high street fashion and mobile phone chains.

Sales & distribution franchise: 
The franchise owner is on the road, selling and/or distributing products in the territory and where other driver-delivery personnel could be hired to cover areas as the customer base grows.

Mobile servicing (job) franchise:
The franchise owner makes a lower level of financial investment to buy the right to operate, typically, a man-and-van home-based service, installation and/or repair business in areas like cleaning, motor services or maintenance. Bear in mind that most franchisors now like to view their opportunities as more mature ‘management franchises’. Even those that start as job-type franchises are generally accompanied by encouragement for franchise owners to aspire to developing a management franchise, whereby they employ operatives and focus more on managing and growing the business.

YOU WILL INVEST:

Capital:
Savings, rollover, redundancy pay, compensation, inheritance, loans to set up and operate the business in return for access to the franchisor’s systems, know-how, training and ongoing support.

Time:
Living and breathing the business to the exclusion of all else, certainly at first so that it builds on a stable foundation.

Effort:
Committing to learning, building and sustaining the business, often with unsociable hours and going the extra mile.

Security:
Giving up paid employment, unemployment benefit, company pensions and control over a possibly re-mortgaged home or savings in favour of borowing commitments, debt servicing and debt chasing.

Freedom:
Unlike a self-start business, you will be limited by a contractual but constructive relationship with the franchisor, especially regarding work methodology, operating procedures, maintenance of quality standards, supervision, monitoring, foregoing the right to conduct a similar business of your own devising and being restricted in choice of buyers for your business when you want to sell it on to realise your investment or simply to move on to pursue something else.

YOU WILL NEED:

Support from your family:
Family members are often expected to assist in running the franchise.

Experience:
Where relevant and applicable, for example management, accounting, technical or administrative skills can be transferable.

To be competitive:
You may need to absorb the effects on your margins of tied supplies, mark-ups, royalties, marketing and other per cent levies.