A Quick Guide to Franchising

Franchising opens up a world of business opportunities to people with the desire to own a business but who may lack the financial resources, know-how, or confidence to do so. All investments carry risks and simply buying a franchise is no guarantee that it will be a success. To help you decide if you possess the determination, dedication and commitment needed to make a franchised business successful, and to help you begin identifying the good from the bad, we have produced this quick guide to kick-start your own research into franchising.

What is Franchising?

In simple terms franchising is: a 'business marriage' between someone with a blueprint and system for doing business (the franchisor) and someone keen to replicate that blueprint locally (the franchisee).

The franchisee invests capital, time and effort in developing the business, and gains a safer route into independent business supported by the franchisor. The franchisor invests in branding, manuals, operational systems, experience, training and support, and benefits from faster national and even international expansion.

Franchising has been proven to be a safer way into business ownership than starting out on your own, which is why the main high street banks tend to look more favourably on lending to franchisees.

But how do you go about researching franchising, identifying the opportunities that may be suitable for you, financing the business, and finally starting out as your own boss? First you must understand your obligations as a franchisee and decide if franchising really is for you.

Are you Ready for Franchising?

The first question you should be asking yourself is can you work within a system? By paying a franchise fee, you will be buying a format for doing business. Whilst you are your own boss in the sense that the business will succeed or fail by your own efforts, the franchisor will expect you to operate within their framework. To maintain uniformity the franchisor may impose restrictions on franchisees, such as what products you can sell or services you can offer; what marketing materials you can use; if you own a retail outlet, when you can open and close; what supplier(s) you can use; and in which area(s) you can trade.

While this may sound dictatorial, successful franchising hinges on the business owner investing time, effort and capital in following a tried, tested and proven business system. So forget franchising if you are unwilling to learn or follow a system, unable to work as a team player, or content to be a passenger.

Other questions you should be asking yourself are what do you want from your business - an income, to build an asset for the future, independence, a better lifestyle, more time to spend with the family? Will you be able to meet the demands of self-employment, which do involve long hours especially in the early start-up phase? What skills and experiences can you bring to a franchise? Do you have, or can you raise the finance? Will you have the support of your friends and family?

With so many franchised businesses on offer in such a huge variety of sectors, you should also be asking yourself what sort of business do you want? Do you have a particular interest or hobby such as plumbing, performing arts, computing, cars, or working with children? Do you want to run your business from home or an office? Are you interested in retail, sales, or performing a service? How many hours do you want to work? Will you want to operate the business yourself or hire a manager? Will you want to open in more than one territory, or open more than one outlet?

The bottom line is that you should select the type of franchise most appropriate to your background, experience, skills, preferences, ambitions and budget.

How much will it cost?

Initial franchise fees range from as low as a few thousand pounds for a home operation up to £250,000 plus for a well-known management brand - although it's rarely recommended to opt for anything that costs less than £10,000, because this may imply inadequate central funds for training and support. It is your responsibility to research your intended business - including a precise calculation of the total investment cost. Other costs, in addition to the initial fee, may include premises rental and fit-out, initial stock or equipment, hardware/software.

In addition, calculate your working capital requirements to help you cover your personal expenditure until you begin earning a profit - such as any mortgages, rents, utility bills, school fees, property maintenance, insurances, food etc. Also bear in mind that franchisees may be subject to ongoing additional charges such as a Management Service Fee (MSF), which can be calculated as a percentage of the franchisee's gross sales, paid to the franchisor at regular pre-determined intervals, or as fixed fees regardless of turnover. Franchisees may also be expected to contribute to a national marketing fund.

Where funding may be a barrier to becoming your own boss, it's not all bad news. Prospective franchisees now enjoy the availability of a wider choice of finance packages to assist them in funding a franchise. All the major high street banks have franchise departments in recognition of the higher success rate of franchises.

What should you look for in a franchise?

Just like any investment, buying a franchise carries risks and there will inevitably be bad apples. A genuine business format franchise must include the purchase of rights to use a comprehensive business package, which is a total system of doing business under a protected brand name in an exclusively protected territory. The package should also include comprehensive initial training and support, through ongoing training and field backup.

Be careful of franchise clichés, generalisations, and media hype by getting the franchisor to spell it out for you: what is actually meant by 'intensive', 'ongoing' training and support; what does a 'fully equipped' vehicle include; what is meant by 'exclusive territory', how is the franchise a 'proven system', what does the 'franchise package' include etc. The Franchise Agreement is the most important document and many are non-negotiable, allowing the franchisor to ensure continuity is maintained throughout the network. It should be win-win for both parties and cover all possible eventualities. Points to watch out for include ongoing fees territory exclusivity, and the right to renew once the contract reaches its conclusion. Ensure you have the contract checked clause by clause, by a franchised-experienced lawyer and that you understand your own and the franchisor's obligations.

Check before cheque

Before signing on the dotted line make sure you have thoroughly researched the opportunity: Read all the literature such as magazines, newspapers, and franchising guides to learn about and understand franchising; attend exhibitions and seminars and make direct comparisons between opportunities; evaluate yourself; verify brochure claims to ensure you know exactly what the package includes; talk to existing franchisees, talk to the experts such as bankers and accountants, franchise consultants and lawyers.