Franchising

1. What is franchising?

Franchising is a business model where you buy the rights to sell the products and services of an established business, using their company name, branding and systems. Buying a franchise can be a great way of running your own business, without the uncertainty of starting one from scratch.

For some franchises, you will be able to work as the primary - or even the only - employee. For others you will need staff.

Franchise opportunities exist across almost every industry, for both large and small businesses, including:

• cleaning services
• coffee shops
• children’s entertainment
• business services
• estate agents
• car dealerships
• fast-food restaurants
• furniture stores. 

Some well-known franchises include McDonalds, Tax Assist Accountants, RugbyTots, Molly Maid and BoConcept.

The cost of buying a franchise ranges from a few thousand pounds to substantial six and seven figure sums.

When buying a franchise, you are taking on a proven business idea and operating model. Established franchises have a lower failure rate than completely new businesses, however, you have less autonomy and you will pay fees and a portion of sales revenue to the main business.

2. Business format franchise

A business format franchise is the most common form of franchising. You are essentially buying and running a copy of an already successful business to deliver a consistent offering.

Structure

This format is based on two core elements.

• The owner of a business (the franchisor) grants another person or business (the franchisee) the right to trade under their name and business model - often in a specific geographic area. They then provide all of the training, operational systems, branding, marketing, and ongoing support that you will need.

• The franchisee must operate under strict operational guidelines to comply with the franchise agreement and deliver a consistent service to maintain the brand’s standards.

The franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue and other costs (like their share of advertising), with the potential for penalties if targets aren’t met. 

The franchisee owns the outlet they run, but the franchisor keeps control over how products are marketed and sold and how their business’s intellectual property is used. In this arrangement the franchisee benefits from the use of a well-known name, with brand recognition and national advertising campaigns, and proven business models.

Well-known businesses that offer franchises of this kind include: ChipsAway car body repair, Kumon study centres and Subway sandwich shops.

Process

If you were to take on a car valeting franchise for example, these are the key steps you would be likely to go through.

• Research the franchisor and create a business plan for your new valeting franchise.

• Complete the application process, pay the fees and sign your franchise agreement, and purchase and brand up the van you will use for the valeting service.

• Attend the company's training programme to learn how to valet cars and how to engage with customers, and understand expectations for professional conduct, including driving in the van.

• Receive a uniform, cleaning tools and manuals, a page on their main website, and logins to IT and accounting software.

• Pay monthly fees to the franchisor with other ongoing costs, including your share of advertising costs.

• Receive support from franchisor’s support team and national advertising campaigns as you progress and grow your business.

3. Advantages and disadvantages of franchising

Buying a franchise allows you to set up and run a business that benefits from the brand awareness, training, and operating model of a well-established company, without having to start a business from scratch. However you will have to run your business within strict guidelines, meet certain targets, and pay fees, ongoing revenue, and costs.

Advantages

• Buying into an established franchise will generally have a lower failure rate than starting a completely new businesses.

• You can check how successful other franchisees are before committing yourself to ensure the business is based on a proven idea.

• You’ll have permission to trade under a well-known brand name and trademark, which usually comes with exclusive rights in your territory, and hopefully awareness from national marketing campaigns and support for your own marketing.

• You will benefit from the training, advice, systems, software, processes, and logistics of a much larger, established company and the franchisor should continually improve these.

• Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.

• You can benefit from communicating and sharing ideas with, and receiving support from the franchisor’s staff and other franchisees in the network.

• Relationships with suppliers may already have been established.

Disadvantages

• Costs may be higher than you expect. You will pay upfront franchise fees plus the cost of setting up your business (including materials, premises, inventory etc), then you will likely pay continuing management service fees and costs. You may also have to agree to buy products from the franchisor. If you don’t make a profit these costs will likely still apply.

• You will probably pay a royalty fee, which is a percentage of sales, to the franchisor.

• The franchise agreement usually includes restrictions on how you can run the business and you might not be able to make changes to suit your local market.

• Other franchisees could give the brand a bad reputation, so the franchisee recruitment process will need to be thorough.

• The franchisor might go out of business.

• You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.

• If you choose to close the franchise you could find it difficult to exit the agreement.

4. Considerations before buying a franchise

You need to consider carefully whether you have got the right skills and attitude to run a successful franchise and whether this is the best option.

Assess yourself

• You will need some finance. Do you have access to the funds needed to buy and set up a franchise? Have you carried out due diligence to determine the costs needed to set up and run and your potential profits?

• You must be prepared to sell and you will need entrepreneurial flair. A franchise gives you a “business in a box” but it won't automatically give you customers. You will likely need to run local marketing, set up social media campaigns and help run PR and other ads to promote your business. 

• You'll need to work hard, probably for long hours. Do you have the time and dedication to attend the training, set up the business, potentially find and set up premises and recruit staff, meet your franchisee obligations, and meet any targets set?

• You'll need to cope with some stress. Think how you react to pressure, particularly as you will have ongoing costs to the franchisor, along with your operating costs and obligations to be met, alongside setting up a new business.

• You may want to be your own boss. Would you be happy with the restrictions imposed by a franchise arrangement?

• You may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.

The right franchise for you

• What is your previous career experience? It may suit you to buy a franchise that builds on your experience, for example if you are a teacher you may wish to consider tutoring, such as Tutor Doctor.

• What kind of work do you enjoy? Do you enjoy being with lots of people, working one-on-one, or do you prefer desk based work? For example, someone who enjoys one-on-one could consider coaching, such as ActionCOACH.

• Would you be comfortable recruiting, training and managing employees or prefer to work alone? This will determine whether you should opt for a franchise where you will need staff, such as Molly Maid or whether you can work alone, such as Ovenclean.

• Are you weak in particular business skills such as finance? You may want to find a franchise that offers the support you need in those areas.

5. Find and assess a franchise opportunity

You may already have an idea of a franchise you want to buy, or you might want to see what is out there. A good place to start is to search a franchise directory site such as Which Franchise to understand what franchises are available and see their costs, terms, and application processes. 

Key questions

Once you are interested in a particular franchise, it is important to carry out due diligence and assess whether this opportunity is right for you. 

Track record

• How successful is the concept nationally? Are there a large number of successful franchises in the UK? How long has it been in business and how financially successful are they as a company?

• Has the company won any awards for their franchise programme? Do they give you the opportunity to meet with other franchisees? Are there any reviews online?

Market insight

• Is there a sufficient need in your area for the franchise’s goods or services and what is the competition from other businesses in the same market sector - at local and national level? How does this offering compare?

• Is there any market research that has analysed the public perception of the industry or of the franchisor - e.g. the franchisor's brand awareness?

Finance

• How much will you need to invest in total to start, and what costs will you be liable for moving forward?

• Can you meet the initial investment needed?

• What are your, and your franchisor’s, projections for your costs and profits for the next few years? Are they realistic and sufficient?

Support

• What level of support, training, materials, and equipment is offered on start up? Is this sufficient? Are you offered enough training and support on an ongoing basis?

• What is the process for raising and dealing with grievances?

Terms and conditions

• What are the conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew? How much control is exercised by the franchisor in operations?

• Is there any opportunity for you to grow and operate more branches, or is your territory tightly restricted?

Further investigation

The franchisor will probably give you an information pack but you should ask questions and research online to look for evidence of their claims.

It's helpful to visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones. It is important to visit new and established franchises - of differing levels of success - in as many different locations as possible. This should give you a good idea of the challenges you will face should you decide to buy a specific franchise.

Take advantage of other sources of information and advice. Many banks have franchising specialists. Ensure you take legal advice before buying and signing the agreement.

How a business plan can help

A business plan will help you assess the prospects for the business and identify potential weaknesses. It is also essential for raising finance.

You should be able to get assistance with your plan from the franchisor. Banks with specialist franchise units can check how realistic your projections are.

6. Franchise cost

When calculating the likely cost of a franchise, you need to take initial and ongoing fees into account.

Initial costs

The franchisor usually charges an up-front fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.

Your largest initial costs are usually your investment in:

• premises
• equipment
• initial stock.

You will need to establish a business entity. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business. It is this business entity that will enter into the franchise agreement.

Your chosen business structure could be a limited company, partnership or sole trader or your franchisor might have specific requirements. Each business structure will involve different costs

Continuing costs

You usually pay a percentage of the sales revenue to the franchisor by way of a management service fee. Alternatively, you may pay a fixed management fee of some kind.

Under the terms of the franchise agreement, you may have to buy stock from the franchisor. Check what they charge. They may mark up the prices. Or they may be able to offer them to you at a discount because of their buying power.

You also have to pay the usual business costs - for example, rent for premises, utility bills or the costs of any employees you take on. Check if the things that you pay for through the franchisor have a realistic cost.

Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.

7. Franchise agreements

The franchise agreement is crucial and must set out your rights and obligations. 

Areas covered by a typical agreement include:

• the length of the franchise, the terms and renewal options
• the area your franchise covers and whether you have exclusive rights to sell within it
• the initial fee and percentage of sales revenue you will pay
• the amount of help and support you will receive
• any restriction on how you run the business
• selling the franchise.

Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice. You can find an experienced franchise solicitor accredited by the British Franchise Association.