Franchising: frequently asked questions

Richard Holden, head of franchising at Lloyds Banking Group, answers some of the most common questions he's asked about franchising

It’s not hard to see why franchising is an attractive route into self-employment. Experts generally regard franchising as a less risky option and statistics confirm that commercial failure rates among franchised businesses are much lower than independent start-ups.

Will franchising be right for me?

Of course, franchising is not right for everyone. For people who value independence or want to run a business without restrictions or reinvent the wheel, franchising might not be the right option. Anyone considering investing in a franchise must be prepared to ask some in-depth questions of the franchisor. The responses will help you to decide whether the franchise is right for you.

Running your own business requires self-motivation, hard work and stamina, and you’ll also need the ability to stick at it in adversity. At the same time, you must be prepared to accept the franchisor’s rules for its business system. Ask yourself the question:‘Will franchising be right for me?’ Be honest with your answer.

What is the best franchise?
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This is a frequently asked question that has no definitive answer. What is best for one person doesn’t necessarily mean it is the best for someone else. There are so many points to consider when selecting a franchise, including investment level, type of business, industry sector, market analysis, your own skill set, what you enjoy doing as well as potential earnings.There are many more points to ponder that can help narrow down the options to find the right franchise for you. This need not be a daunting task if you take a systematic approach.

How do I find the right franchise for me?
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If you’re planning on investing in a franchise, you need to be sure it’s the right one for you - the only way to find out, is to ask some probing questions. Lloyds TSB Commercial has produced a free guide of 3o key questions you should be asking to help you make an informed decision about the investment. This guide is downloadable from the www.lloydstsb.com/franchising website.

Common sense will also help you to decide whether the franchise you are considering will prove right for you. Don’t jump into the first franchise opportunity you are attracted to - take a step back, look at your options objectively and, above all, don’t be rushed into a final decision.

What should I do once I’ve found a franchise I’m interested in?
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As part of your research, speak to as many existing franchisees as possible. It is likely that the franchisor will want to manage that process - and that is fine - but don’t let it dictate who you speak to. Try to speak to a wide selection of franchisees, including some of the best and worst performers. You may also wish to speak to someone who has recently established their business - they will have gone through the same process as you, so their experience will be invaluable.

It’s also worth speaking to more established franchisees who have gone past the start-up stage. They will be able to highlight some of the pitfalls to avoid and where you can expect your own business to be in a few years time. Banks with specialist franchise departments, such as Lloyds TSB Commercial, are a good place to get independent and impartial guidance about your franchise options.

Who should I speak to if I need to raise finance?
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It’s always best to approach a bank’s franchise department in the first instance. The level of finance available will depend upon the strength of the franchise system, as well as your business plan. Typically, for well-established, proven franchise brands a bank will lend up to 70 per cent of the total set-up costs, including working capital. For newer, less proven franchise systems the amount of finance available may be lower.

The bank is likely to require security to cover the loan, which is most commonly a legal charge over a residential property with sufficient equity. Don’t be put off if you haven’t got any security to offer the bank. The Government backed Enterprise Finance Guarantee scheme may be available for those who have a strong business proposal, but who lack security that the banks usually require. Make sure you speak to the bank’s franchise unit to discuss whether you qualify for finance under this scheme.

The Enterprise Finance Guarantee scheme has proved hugely successful so far, with Lloyds TSB Commercial being ranked among the most active lenders. To date, we have offered over 4,000 EFG loans worth f317 million - 3o per cent of all loans granted through the scheme so far.

The bank will require a business plan to open an account and consider your financial requirements. Any lender will want you to demonstrate that you understand your chosen market and that you will be able to meet the financial commitment you are taking on.

How do I write a business plan?
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Most banks have business planning templates to help you, while some franchisors offer guidance with the business planning process. It is often assumed that a business plan is needed just to secure funding. While this is an important benefit, it should also be used as a management tool to monitor the ongoing performance of your business against the original benchmarks and identify areas for improvement. The plan is a working document and should be regularly reviewed and updated as the business develops.

The business plan should be precise - a common mistake is to make it too detailed. Ensure that it grabs the bank manager’s interest. Presentation of the plan is important to create a positive impression and you should practice delivery of your plan beforehand so that you come across professionally. Let the bank manager have a copy of your business plan in advance so they can prepare for the meeting. Expect your plan to be challenged and you should be able to confidently answer questions about the operational and financial aspects of your business.

Why should I choose Lloyds TSB Commercial?
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Lloyds TSB Commercial is fully committed to help new businesses get off the ground and create new jobs. Franchising occupies an increasingly important role in supporting enterprising individuals to set up their own business. The British franchise market continues to demonstrate strong growth and Lloyds TSB Commercial will remain at the forefront of this expansion by providing banking services and finance to encourage new franchise ownership.

All Lloyds TSB Commercial franchise managers receive initial training supported by the British Franchise Association and sector professionals, and they participate in regular refresher courses and an annual re-accreditation process. Our dedicated team of franchise managers are available throughout the country to offer support and guidance throughout the life of your business.

Why is it so important to get the legal agreement checked out beforehand?
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Many franchise agreements can be long and complicated documents. While franchisors will tell you the agreement is not negotiable and they will not amend the contract, it is important you fully understand the commitment you are entering into. The legal agreement should be checked and explained to you by an experienced franchise solicitor before signing. Lloyds TSB Commercial offers a franchise agreement review service, at a discounted rate, in conjunction with an experienced franchise solicitor.

Where can I go to learn more about franchising?
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The bfa runs exhibitions and seminars that provide an invaluable insight into franchise investment. Lloyds TSB Commercial sponsors a series of free evening educational seminars about the benefits and pitfalls of franchising across Britain, which are ‘must attend’ events for people starting on their franchising journey.For further details visit www.franchise-seminars.biz.