Louise Ramsay’s beginner’s guide to this tried and tested way of starting your own business
McDonald’s, Cash Generator and Bang & Olufsen. All household names, all franchised brands and perhaps an indication of just how successful franchising as a business model has become. Indeed, franchising is now applied across almost every industry sector, contributing £15.1 billion to the UK economy and providing around 621,000 people with jobs.
A means of becoming your own boss without going it alone, franchising appeals to individuals who want to gain relatively risk free control over their working lives.
It involves paying a fee to a franchisor for the right to do business using their name and proven business model, as well as access to a framework of services, such as training and support. In return, you run the franchise according to the franchisor’s tried and tested business methodology.
But while that might at first seem to make perfect sense, it can still be hard to work out how can you be quids in if you have to pay tens of thousands of pounds before you start, plus ongoing annual fees.
The franchising sector explains this by the speed you make money as a franchisee in comparison to an independent start-up. Essentially, because you make money more quickly as a franchisee, the upfront costs and ongoing fees are in theory better able not just to realise the potential for long-term returns, but also to do it faster.
Advantages and disadvantages
Advantages of franchising include reduced risk - franchises, statistics shows, are much less likely to go belly up than an independent start-up.
A good franchisor will have worked out all the potential pitfalls and will have either researched whether there’s a demand for its products or services in your area or can help you find out. As part of a franchise package, you’ll be provided with all the systems and support you need to run your business, including training, accounting and development. Your business will also benefit from any national or regional advertising campaigns, as well as on-tap promotional materials for local marketing campaigns.
Franchising, of course, doesn’t come without its disadvantages. While it might give you more control over your working life than being an employee, you’re not free to do exactly as you like. This might mean you feel more like a manager than a boss, which doesn’t work for everyone, particularly if you’re quite entrepreneurial.
Despite the advantages, cost might be an issue. Start-up fees can be expensive and ongoing royalty payments can affect cash flow. The fact you’re not alone can also have downsides. If the franchisor runs into problems, then those problems also become your own.
Pick your franchise
As a prospective franchisee, chances are your main concern is that you need to know you can make money by investing in a franchise instead of setting up on your own. To find this out, you need to ask lots of questions.
Are the franchisor and its existing franchisees profitable? What’s the franchise unique selling point? Is the concept viable? Is the industry the franchise is in expanding? Does the franchise have a good reputation? Do you feel you’ll be well managed?
Perhaps most importantly, how much time does the franchisor spend checking you out? Your success is all wrapped up with the company whose concept is being franchised, so if it takes you on too easily that doesn’t say much about the business’ integrity or commitment.
It goes without saying that enlisting the services of a solicitor experienced in franchising is crucial when assessing your franchise agreement - a legally binding contract between franchisor and franchisee.
A list of firms that specialise in franchise matters can be found on the British Franchise Association’s website.
Established franchise or new kid on the block?
There are benefits and drawbacks to both established and new franchises - and deciding which type you work with will be one of your most important decisions.
A successful franchise with a big name is very attractive. People are more likely to know and trust the brand and it also has a proven business model. It, however, may be situated in a saturated market, so it’s harder to make a profit and fees may be higher.
On the other hand, if you invest in an emerging franchise, you have the opportunity to get in at the start of what could be a very profitable business. Other benefits include lower upfront and royalty fees.
The downsides include working with an unproven business system and an unknown brand name, which increases the risk of failure.