If you're thinking about expanding your business, franchising may be the answer
Thinking of expanding your business? Franchising could be the way forward. Many of the businesses that touch our lives every day are often unsuspected franchises: Clarks Shoes, Belvoir! letting agents, Snap-on Tools, Anytime Fitness gyms, hairdresser Toni & Guy and Thorntons chocolate shops.
Increasing numbers of businesses are choosing the franchise route to expansion rather than the usual method of opening more branches. Franchising allows you to increase your spread of outlets, but with part of the investment provided by their operators - your franchisees. It looks on the surface like a more cost effective and faster way to expand. Done properly, it is.
So is franchising the way forward for your business? Here’s what you need to consider:
1. Are you cut out to be a franchisor?
It may seem strange to start with a consideration of you rather than your business, but for many business owners their business is their ‘baby’. Becoming a franchisor means relinquishing control of your baby - and some owners cannot bear to do that.
Consider your current relationship with your business. If you are no fan of strategy, planning, management and admin, but prefer the more practical, hands on tasks, think carefully. Are you ready to give up doing the things you love?
As a franchisor, you will mainly be setting overall business strategy and managing your relationship with your franchisees. That’s not like managing employees, either.
Franchise consultant Len Rainford, whose book, Franchising Your Business: The Keys to Success is due for publication soon, says: “Instead of just building your business, you will become a coach and mentor to your franchisees. They own their businesses, so you cannot just give them orders as you might employees.
“They will sometimes want to change the way things are done and you have to listen to them. If you are a control freak, forget franchising.”
2. Is the business successful?
Your business needs to show a history of success and profitability. No potential franchisee will want to invest in a business model that looks likely to end in failure. Slim profits won’t be enough. There must be a sufficient profit margin for both franchisee and franchisor to benefit.
Ideally, it should be at least two years old. Potential franchisees (and the banks they may want to borrow from in order to invest in your franchise) will want to see financial evidence of success, which is hard to prove in a business under two years old.
3. Is it replicable?
Pip Wilkins, chief executive of the British Franchise Association, advises: “Ask yourself, can the model be replicated and transferable to other territories? Can you teach people what you do? There is little point having a franchise that only a few people in the world would be capable of running.”
If you think you and your business will suit franchising, get started. Consider getting a franchise consultant to help you. There are plenty to choose from on the bfa website.
“Franchising a business is not easy and it can be costly if you do it wrong, so get the right advice from specialist franchise lawyers and other franchising affiliates,” Pip says. “The bfa can point you in the right direction.”
The bfa also provides help via its Franchise Gym through business coach Maria Hartnell.
“She can mentor and coach businesses on their franchising journey, from deciding whether franchising is for you, to ensuring you make the right choices at the pivotal time,” Pip says.
4. Build a business model
This is the basic model of the franchise in which you will be asking franchisees to invest.
This will vary, depending on the kind of franchise: a food franchise model will be significantly different from a mobile automotive services franchise. It will affect the kind of people you seek as franchisees, the training you provide and the investment level. Unless you have previous experience of this, it is likely to be easier to do with the help of a franchise consultant.
5. Build a financial model
You need to take into account the initial franchise fees you will charge to new franchisees, the ongoing management services fees, what marketing fees you will charge and more.
Len says: “You will also need to prepare cash flow and profit and loss forecasts to provide to potential franchisees, so they know what to expect in the first couple of years. These will be based on your experience with your company so far.”
He also recommends that the model should allow franchisees to earn at least £30,000 a year, unless it is a part-time franchise, on the grounds that this is a little above the UK average wage.
“Otherwise they might just as well get a job,” Len says.
6. Prepare an operations manual
Franchisees need an operations manual that sets out exactly how the business should be operated.
Pip says: “The manual shows how everything in the business must be done, such as sales, marketing, operations and everything in between.”
“If you don’t already have one, you will have to prepare this yourself or with the help of a consultant or specialist franchise manual writer.”
7. Get the legals right
Going the franchise route involves a degree of risk to your intellectual property and business as a whole, so you need a franchise agreement.
Pip says: “The agreement will document how the relationship between yourself and your prospective franchisees will work. This is here to protect your brand and will set out the rights and obligations of all parties.”
Use a solicitor from a firm that is experienced in creating franchise agreements (see the list on the bfa website).
Jane Masih, franchise specialist at solicitor Owen White, says: “A legal agreement protects your business systems, products, brand and processes, so you can control your franchisees and ensure they follow your systems, standards and rules.
“A basic set of legal agreements and advice for turning a small business into a franchise typically costs £4,000 to £5,000.”
That said, franchise consultants will prepare you a draft agreement, but it should always be checked by a franchise solicitor.
Len says: “Around 75 per cent of the content of most agreements is fairly standard, but the other 25 per cent is very important and it’s essential to get everything right, so I would always insist on any franchise agreement being checked by a specialist franchise solicitor.”
8. Run a pilot franchise
This is not essential for every franchise, but banks are more likely to lend to your franchisees if your model has been tested and proven viable.
9. Recruiting your franchisees
Recruiting franchisees is often the hardest part of turning your business into a franchise.
Len says: “You need a recruitment strategy. This will vary according to the type of business. Some franchises, for instance, recruit mainly by networking. Other routes include advertising on your own website, advertising on franchise recruitment websites, social media, exhibitions or in the press.
“Almost all of these charge for advertising and it can take a long time to get the right candidates, so build that into your budget.” Do not accept as franchisees anyone with just a pulse and a cheque book.
Shaun Thomson, chief executive of the Sandler Training (UK) franchise, says: “I decline a lot more franchise applicants than I accept. You have a brand and standard to protect; your customers must be assured that they will get a high standard of service.”
10. When not to franchise
Shaun says: “Franchising is not and should not be considered as a cheap way for businesses to scale. It’s only a great model for the right products and services and as long as the business can tick certain boxes.”
Taking steps towards the healthy feet franchise
Qualified foot care practitioner Debra Rose started Healthy Feet Mobile Clinic, a company providing mobile foot care, in 2011. It became a franchise in 2018.
Debra says: “Originally, the business grew organically. I was soon so busy, I started using other qualified foot health practitioners as subcontractors. Then my business partner, Sophie, came on board and started taking on subcontractors too, so we knew the system could be replicated.”
Meanwhile, the Healthy Feet website was attracting inquiries from people looking for advice about how to start or run their own businesses, so it was clear there was a pool of potential franchisees.
“A franchise was the obvious way to expand, but we knew little about franchising,” Debra says. “We went to the Manchester franchise exhibition and everything we saw there convinced us.”
The pair engaged a franchise consultant to help them. Debra adds: “They gave us the structure, the method and the tools we needed, plus advice about recruiting franchisees, but we did most of the work ourselves.
“We rebranded the business, created a bespoke franchise website, wrote operations manuals, contracts and the franchise prospectus. The extra work could have impacted on running the existing business, so we worked on the franchise at night. It took about four months.”
The franchise was launched last October and there are already two franchisees up and running and two more in training.
“It was the right way forward for us - we are very optimistic about the future,” Debra says.
Food for thought: the humpit restaurant franchise
Jonathan and Simon Phillips loved hummus, but couldn’t find anywhere to eat it in traditional style: in a bowl with a fresh warm pita on the side. So in 2014 they borrowed a gazebo, bought a small fryer from Argos and started selling their food around the streets and parks of Leeds.
Now they have six outlets and recently did a deal with the National Union of Students to open outlets in students’ unions.
Jonathan says: “In 2017, we decided that offering Humpit as a franchise would deliver more outlets faster than expanding the head office and branches with lots more staff and higher overheads.”
Jonathan and Simon decided to create the franchise themselves. Simon says: “I’d worked in franchising in Singapore, trying to bring franchises to Europe, and two of our board directors are corporate lawyers with franchising experience.
“We already had operations manuals and logistics in place, so we had consistency of quality and supply. We had already installed an electronic till system that could gather data from lots of outlets, so creating the Humpit franchise was quite simple. It took three to four months. I don’t know what it cost because we did it in house, with no outside experts to pay.”
The Humpit franchise was launched last September. Simon advises others considering franchising their business: “Wait until you have one successful outlet and then open a few more before you consider franchising. Use careful planning and experience to ensure you get the franchise right from the start.”
How much will it cost?
This varies according to how much of the work you do yourself and whether you use franchise consultants.
Big name national consultants can cost up to £30,000, but at the lower end consultants may charge £12,000-£15,000. Prices vary regionally. You can negotiate.
Legal costs are likely to be around £4,000 for an agreement from a franchise solicitor, but you may be able to save money by getting a franchise consultant to draw one up and have it checked by a franchise lawyer.
The typical cost of an advert on a franchise recruitment website could be around £300 a month.
Don’t forget, you need enough working capital to keep your business afloat until sufficient royalties start coming in from successful franchisees, which will take time because you need three or four franchisees before your investment pays for itself.
You may be able to borrow to fund the transformation to a franchise, but typically the maximum amount you can access is 50 per cent of the total cost and you will usually have to provide personal guarantees backed by security, such as a charge on your home.