Franchising for Investors

The text book definition is that franchising is 'a form of business organisation in which a company which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and with the franchisor's advice and guidance, in exchange for a fee.'

So, five keys points to look out for when considering a franchise:

1. The franchisor should already have a successful business and should be able to provide accounts and other information to demonstrate this.
2. There should be a contractual relationship between the franchisor and franchisee, a written legal agreement that outlines the obligations of both franchisor and franchisee and describes the actions to be taken in certain situations.
3. The franchisee should operate under the franchisor's existing trade name and logo. Ideally, this will be a registered trademark.
4. The franchisor should offer advice and guidance to help the franchisee set up and run their business. This may be offered through a written Franchise Operating Manual, formal initial training, ongoing training programmes, regular review meetings and informal get-togethers.
5. The franchisee should pay a fee to the franchisor. Typically, this consists of an Initial Fee, a Licence Fee and an ongoing Management Fee. The Initial Fee covers initial costs such as training and support. The Licence Fee covers the licence to operate under the trade name and in accordance with the Franchise Operating Manual for a defined period of time. The Management Fee covers the cost of ongoing training and support. Some franchises also have an Advertising Contribution (sometimes called a Marketing Levy), a contribution that all franchisees make to a central marketing fund. Other franchisees may involve additional fees, for example, there may be a finders fee to locate a suitable premises or a fee to project manage the fit-out of premises.

What are the benefits

Becoming a franchisee can offer many benefits over starting a business on your own, but not all franchises offer all the benefits. Among those that you should be looking for are:

• Strong brand. Is the brand name and logo well known to target customers?
• Marketing support. Is there an existing customer base to work from? Is there a proven marketing plan to help you get and keep customers?
• Proven systems. Are there detailed systems and procedures for all aspects of running the business? Have these been proven to work over a number of years?
• Equipment and Materials. Does the franchise offer exclusive access to equipment and materials that provide a competitive advantage? Does the franchise help with fit-out and signage for your new premises?
• Location. Does the franchisor provide advice and guidance to help you find the ideal location for your business? Some franchisors have a portfolio of locations to be matched up with suitable franchisees.
• Finance. What support does the franchise offer to help you raise finance? An established franchise should be able to introduce you to the major banks and be able to provide financial projections and other documentation to support your application for finance. Of course, your application will also depend on you and your own track record with banks.
• Success. Statistics show that franchise businesses are far more likely to succeed than independent businesses. Does the franchise have successful franchisees in a similar market area to yours? Can you speak to them?

There are so many opportunities, how can I decide on the one that is right for me?

It is very important to establish some basic criteria to help you short-list franchise opportunities. These criteria should include things like:

• How much money can you invest?
• What personal income do you require from the franchise?
• How ambitious are you?
• Do you want to work from home?
• Do you want to employ staff?
• Do you like meeting and working directly with customers?
• What personal skills and experience do you have to apply to your new business? What additional skills and experience do you require to operate a successful business?

Frequently Asked Questions

What is the Franchise Agreement?

• The Franchise Agreement is a legal contract that outlines the obligations of both franchisee and franchisor. It describes what the franchisor will do for the franchisee and what the franchisee will do for the franchisor. It may also contain performance criteria to be achieved and steps to be taken in the event that the criteria are not met. It also generally describes the conditions under which the contract may be terminated and what happens after termination. It is important to get independent legal advice before signing the Agreement, ideally from a solicitor with experience dealing with Franchise Agreements.

What is the Franchise Operating Manual?

• The Franchise Operating Manual is a detailed description of how to run the business. In addition to describing how the core activity should be carried out, it should also contain sections on getting and keeping customers, recruiting and retaining staff, managing books and accounts etc. It is important to review the Franchise Operating Manual before signing the Agreement.

What is a Non-Disclosure Agreement?

• In order to make a fully informed decision, a franchisee will need information about the business that the franchisor would not normally divulge to other parties. Franchisors may ask prospective franchisees to sign a Non-Disclosure Agreement (NDA) or Confidentiality Agreement to confirm that they will only use the information in making their investment decision and will not pass the information on to any third parties.

Should I speak to existing franchisees?

• Do speak to two or more existing franchisees to find out how things are going for them. Where possible, make your own choices about who to speak with. But it is understandable if franchisees are hesitant to speak with you unless they know that you are a bono fide applicant. Why would they share details of their business with anyone who contacted them out of the blue? Have the franchisor make the introduction for you. Be cautious if franchisors are slow to or refuse to let you talk to existing franchisors.

What happens at the end of the licence period?

• It is normal to expect that your franchise licence will be renewed after the initial licence period. Check the conditions under which the licence will be renewed in advance.

Who else should I talk to?

• Do look for independent business advice from your accountant or professional business advisor and independent legal advice from a solicitor with relevant experience.
• Do involve your spouse or partner from an early stage in your decision to become a franchisee. They will be an important part of your business and should be involved from the earliest possible stage.

The above is intended only as a general introduction to franchising. Feel free to submit further questions to franchisequestions@irishfranchisemagazine.net

Once you have established your short-list, research each of the franchise opportunities before you make appointments to meet the franchisors. Be prepared with a specific list of questions for each franchisor. Generally, franchisors have a well-defined recruitment process, the objective of which is ensure that there is a good fit between franchise and franchisor. Ask about this process and use it to your advantage.

Once you have identified your preferred franchise, talk to franchisees, carry out your own market research and complete your own business plan to verify what you have been told. Take independent business and legal advice before you make your decision.