Top Tip
If you are considering starting your own business ensure you are familiar with all the terminology listed, take your time and don’t be afraid to ask questions. Due diligence is a crucial part of the process.
A no-nonsense guide to franchising
Franchising is a ‘business marriage’ between an existing business (the franchisor) and the newcomer to the business ownership (the franchise owner).THE FRANCHISE OWNER buys licensed rights to clone the whole business package from the franchisor in a specific territory for a specific period,...
HOW FRANCHISING WORKS
Franchising is a ‘business marriage’ between an existing business (the franchisor) and the newcomer to the business ownership (the franchise owner).
THE FRANCHISE OWNER buys licensed rights to clone the whole business package from the franchisor in a specific territory for a specific 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 support services.
THE FRANCHISE OWNER invests capital, time, effort and any relevant past experience to create his business, replicated from the franchisor’s business formula.
THE FRANCHISOR gains a new outlet in a new territory with minimum capital investment in setting it up.
THE FRANCHISE OWNER gets a safer, more structured, brand-led way of moving into independent business.
THE FRANCHISOR expands his network cost-effectively with the franchise owners investment.
BASIC TYPES OF FRANCHISES
Investment Franchise
Where the franchise owner invests substantial funds and capitalises on a high-cost franchise system. Although they retain overall strategic management, they invariably hire others to manage the franchise outlet. Examples are the big hotel and multi-unit restaurant franchises.
Management Franchise
Where the franchise owner controls several territories or a region, or manages a team of operatives. Examples are van-based franchises run from regional headquarters, depots or hubs.
Executive Franchise
Where the franchise owner runs a one-man, white-collar business in areas such as finance, personnel, consultancy or project management services and where premises are not vital, since work tends to be undertaken on client premises. Examples are debt and cost control consultancy franchises.
Retail Franchise
Where the franchise owner makes a significant investment in commercial property, equipment and staff to 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 are high street fashion and hi-fi chains.
Sales/Distribution Franchise
Where the franchise owner is largely on the road, selling and/or distributing products in the territory and where other driver-delivery personnel can be employed to cover additional areas as the customer base grows.
Mobile Servicing (Job) Franchise
Where the franchise owner makes a lower level of financial commitment to buy the right to operate (typically) a man-and-van, home-based business in areas such as cleaning or motor services.
Bear in mind that most franchisors now like to view their opportunities as more mature ‘management franchises’. Even those that start out as job-type franchises are generally accompanied by encouragement for franchise owners to aspire to develop a management franchise, whereby they will employ operatives and focus more on managing and growing the business further.
YOU WILL INVEST
Capital
You’ll be using 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
You’ll be living and breathing the business to the exclusion of all else (certainly at first) so it builds on a stable foundation.
Effort
You’ll be committing to learning, building and sustaining the business, and that will often involve unsociable hours and going an extra mile (or two).
Family/Spouse
They’ll often be expected to assist in running the franchise.
Security
You’ll be giving up paid employment, unemployment benefit, company pensions and possibly control over a re-mortgaged home or savings in favour of borrowing commitments, debt servicing and debt chasing.
Experience
You’ll be utilising your management, accounting, technical and administrative skills where relevant and/or applicable.
Competitiveness
You may well need to absorb the effects on your margins of tied supplies, mark-ups, Management Service Fees, marketing and other per cent levies.
Freedom
Unlike a self-start business, you’ll be limited by a contractual relationship (albeit a constructive one) with the franchisor – especially regarding work methodology, operating procedures, maintenance of quality standards, supervision and monitoring. You’ll be foregoing the right to conduct a similar business of your own devising and being restricted in the choice of buyers for your business when you want to sell it on, either to realise your investment or to move on and pursue something else.