Expanding a franchise business could be achieved by increasing sales by targeting a different market sector, or you could consider running a similar franchise in a different area.

Overview

If you already run a successful franchise business, you may feel you are ready to expand. You may see an opportunity to increase sales in your area by targeting a different market sector, or you may have the chance to run a similar franchise in a different area.

This guide discusses the various issues that you will need to consider before and during expansion. It helps you assess whether you are ready to grow your business, examines the advantages and disadvantages of growing, and looks at other issues such as risk management

Are you in a position to grow your franchise?

Although you may have ambitions to grow your franchise, it's essential to decide first whether the business is ready for expansion and discuss this with your franchisor. There are several important issues to take into account, such as funding, potential structural changes and the process of due diligence. You should involve your franchisor in all decisions and make sure you have their approval before going ahead.

Financial implications

It is unlikely that you will be able to expand without additional funding. Expansion of a franchise usually involves increasing the areas in which the business operates, which will probably involve payment to the franchisor, or to the holder of an existing franchise you want to take over. You may have accumulated sufficient financial reserves in the business to do this, but if not you will need to source the necessary funding before you take any significant acquisitive action.

You and/or your partners - if your business has joint owners - may be able to raise money through re-mortgaging property or sale of personal assets. The business itself may be able to borrow money from a bank, or outside investors.

Structural changes

If your business is going to increase its geographical spread, you may need additional premises, or more space at your existing premises, and you may need to increase the number of vehicles that you operate. This will depend on the type of franchise business you run, but you should take into account the costs involved in expansion, as well as the administration, personnel and time resources this will involve.

Assessing your current performance

An important consideration before deciding whether to expand is the current financial situation of your business, as any future growth will impact on this. There are several ways to do this - one of the simplest is to do a SWOT analysis of your business, which assesses your:

• strengths
• weaknesses
• opportunities
• threats

This will help clarify the health of your franchise and help you to assess what you need to do to expand.

Due diligence

If you are going to grow your business by acquiring an existing franchise, you will need to look at the new business in detail and undergo the process of due diligence. Apart from checking the financial condition of the business, you will need to assess its growth potential, where you can make improvements or efficiencies, and how you can protect yourself and your existing business from any contingent liabilities.

Due diligence can be an extremely complex process and you may benefit from getting professional help from financial advisers, auditors, or a specialist acquisitions consultant.

What is needed to grow your franchise

Growing a franchise business is similar to growing any other type of business - there are specific considerations that you need to take into account before expanding. As with all businesses, manageable growth is vital - if you grow too quickly you can create problems which may be difficult to resolve.

Updating your business plan

A business plan is a fundamental tool for every business and if you do not have one for your existing franchise, you should seriously consider whether you are ready to expand. A business plan will help you get additional funding, measure your current performance and plan your future growth. It is also important that your existing plan is revised as part of the strategic planning process for your expansion.

Training

A well-trained workforce can be a considerable asset, helping to sustain and grow a franchise business. It pays to review your current training and look at ways of enhancing it to encourage further business growth. If you are taking over an existing franchise, you may need to train new employees to improve the overall skills of the new workforce.

Technology

Investment in new technology enables business efficiency to be maintained and it can have a major positive impact on business growth. It is, therefore, one of the key areas to consider if you want to grow your franchise, either organically or through acquisition. Modern communications systems may mean that you can expand your geographical coverage without the need for additional premises.

Marketing

Marketing will have a significant impact on your success and on the achievement of your growth objectives. By targeting the products or services that you sell more precisely at customers and potential customers, you can increase sales and improve margins. Targeted marketing also helps prevent wasting time and resources and maximises business efficiency.

Your franchisor will be able to help and advise on effective marketing, particularly for products that are less successful in your area, and you can learn from other franchisees as well.

Customer research

Getting to know your customers and knowing what they want and don't want can provide a solid foundation on which to build a growth programme. Customer research can help you resolve problems quickly and efficiently and can enable you to develop more efficient ways of selling your product or service. You may also be in a position to advise your franchisor of opportunities that can be exploited.

Advantages and disadvantages of growing your franchise

You should carefully consider the arguments for and against growing your franchise business. Buying another franchise can be a quick way to expand your own business, but it is important to know when it's the right time to expand and not put your existing business at risk.

Arguments in favour of growth

The main reason for wanting to grow your franchise - apart from the satisfaction of building up your business - is that you should become financially better off. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.

If you grow through acquisition and buy an existing franchise, you have the benefit of acquiring a business that is already established. This means you will not have to pay start-up costs or raise finances to acquire new premises.

A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases. You should also be able to tap into existing market information to facilitate the growth of the business and boost turnover and profit further.

Arguments against growth

Expansion is not the only option, however. If you are happy with your business as it is, and you can foresee a reasonably successful future, you may not wish to grow. It is likely you will have less free time, certainly in the short-term, and face more pressure and stress.

Although a bigger business can make more money, if mistakes are made they can be more costly. Successful growth cannot be guaranteed, but careful planning and management improve your chances of success.

You must also check that your franchisor is happy for you to expand and that there are no restrictions in your franchise agreement - otherwise you could be putting this in jeopardy.

Legal considerations when growing a franchise

There are many legal issues that you will need to take into account when growing your franchise business.

Employment

You need to consider recruitment and employment laws and regulations for any new employees you take on.

If you are acquiring an existing franchise, you will have to consider your responsibilities under the Transfer of Undertakings (Protection of Employment) Regulations 2006.

Premises

If you take on new premises as part of an acquisition you will take on additional responsibilities, including possible leaseholder obligations, repair covenants and health and safety requirements.

Tax

A bigger business may change your tax status and you will need to consider the resulting financial implications. One difference may be that your business was not previously registered for VAT because your turnover fell below the threshold, but you now need to register the new and enlarged business.

Your franchise agreement

It is possible that the terms of your franchise agreement may change as a result of the business expansion. It is important that you look carefully at your existing franchise agreement and examine any new contract that you sign as part of your expansion. It is advisable to get specialist advice from a solicitor who is accredited by the British Franchise Association (bfa).

Franchising support and networks

Expanding a franchise business is a major step to take, so it is worthwhile knowing the range of support and advice available to you. This can range from businesses who have taken similar steps, or are in the process of doing so, through to guidance from professional advisers.

The British Franchise Association (bfa) is a voluntary, self-regulating body forUK franchising businesses. The association provides a range of information, including links to franchisors and professional advisers, which can be helpful.

Your local Chamber of Commerce can provide support and advice, as well as networking meetings for businesses of a similar size and in similar business sectors.

The trade association for your business sector can also offer advice on expanding your business.

Managing risk when growing a franchise

Expanding a business creates risks, and it is important to manage these carefully by assessing what could go wrong, how likely this outcome is, and putting in place systems to deal with problematic events as they arise. It is impossible to prevent risk entirely as many eventualities are outside of your control. However, by attempting to predict what could go wrong, you will be better prepared and able to deal with problems if they arise.

It is advisable to work with your employees when attempting to predict business risk, as a collaborative approach can engender a clearer idea of what could potentially go wrong. You may find that by engaging your staff in discussion they will be encouraged to support the expansion programme, which will increase its chances of success.

It is important to keep your staff motivated and behind the expansion. Staff will be important in helping to protect the integrity and success of your existing franchise operation, which should not be allowed to suffer if you are distracted by difficulties that emerge as a result of expansion.

It is important to keep your staff motivated and behind the expansion. Staff will be important in helping to protect the integrity and success of your existing franchise operation, which should not be allowed to suffer if you are distracted by difficulties that emerge as a result of expansion.