Franchising could be a cost efficient and less risky way to build your business, Charlie Pattihis, a solicitor with Healys law firm, says
If you’re a business owner and looking to expand, have you thought about franchising?
Expansion is risky, whether by franchising or opening new facilities under your existing structure. You have an established product or service, a proven model and the drive to take your business to the next level, but there’s no guarantee the hard work you’ve put in to make your business successful will work on a larger scale.
All commercial decisions have an element of risk. However, franchising could present a cost efficient and less risky opportunity to help you rapidly grow your business.
Is franchising appropriate for your business?
When thinking about whether franchising is right for you, there are four key questions you must ask yourself:
If you can answer ‘yes’ to all these questions, you have taken the first step towards deciding whether franchising is right for you.
Pros and cons of franchising
Before deciding whether or not to franchise, you need to be aware of the pros and cons involved.
Pros - franchising can:
- Apply to many types of businesses, with many opportunities available in the UK across a broad range of industry sectors.
- Boost your brand recognition.
- Help you become more attractive to potential investors keen to invest in a tried and tested business model.
- Incentivise franchisees to maximise growth and profitability for your franchise network, as they will have a personal financial investment in the franchise business.
- Enable you to utilise a franchise network to take advantage of collective buying power.
- Help your cash flow, as franchisees are responsible for the costs and operational issues associated with running their individual businesses. You are only required to provide support and structure.
- Provide a quick and easy way to expand your business through franchisee capital.
Cons - franchising can:
- Place you under financial burden, as there are unavoidable upfront investment costs involved in establishing a franchise network.
- Take several years to recover your initial capital investment.
- Require considerable management time to establish a franchise network, which could have a negative impact on your current business.
- Involve continuous investment in the infrastructure of your network, with the understanding you will not be able to cover your franchise running costs until your network grows and generates sufficient fee income.
- Threaten your brand and goodwill. There’s an inherent risk in granting someone a licence to operate under your brand name, as your success as a franchisor is tied to the way each franchisee manages and operates their business. An incompetent, undercapitalised or unscrupulous franchisee can cause significant damage to your reputation and the goodwill you have worked hard to build. Enforcing and/or renegotiating the terms of the franchise agreement can be costly and time consuming.
How to be a successFor your franchise to thrive, we have established four key aspects to get sorted from the start:
- Your brand. Your brand and logo should be properly protected by the appropriate trademarks to prevent other businesses imitating them or passing their business off as part of your network. Your brand is your business identity and it’s critical to put the time and resource into creating one that’s distinctive and has a clearly defined image, message or concept.
- Support and motivation. As a franchisor, your job is to select the right franchisees and provide an environment to incentivise and get the best out of them. A major factor enticing investors to become franchisees is the provision of the initial training, brand standards and operations manual, plus the knowledge you, as franchisor, will be on hand to guide and provide ongoing support. You therefore need to be clear as to what will be covered in your training programme, who will deliver the training, what goals you set for your franchisees and what level of support you will offer to help them achieve those goals.
- Your network. We have established that a crucial first consideration is whether your current business is appropriate to franchise and that you have a proven business model. For your franchise to be a success, you need to know your system can be easily replicated across your network, you have a reliable method of monitoring performance and your operations manual contains the correct know-how and procedures for your franchisees to follow. A pilot scheme will reveal if your franchise will work. It will also allow you to fine tune your system before your franchise is up and running.
- Your franchise agreement. This is a legal document that sets out the terms under which you agree to grant franchisees a licence to operate within your network. It describes the relationship, both parties’ obligations to one another and, importantly, protects your brand, know-how and network. All franchisees will sign up to this agreement and, as a rule, all franchisees should substantially be on the same terms. If you have a strong brand, you may be less inclined to negotiate the franchise agreement terms and have an agreement that favours you over the franchisee. Keep in mind however that, in order to be enforceable, your agreement must be fair and reasonable. It’s important you get the proper advice and we suggest you speak to a lawyer specialising in franchising to prepare your agreement.
- Make sure your business model is proven to be successful and that franchising is an appropriate option for expansion.
- Consider the pros and cons.
- Invest in your brand, make sure it’s distinctive and, most importantly, protected.
- Commit to your franchisees, spend the time to recruit the right ones, invest in the right training, brand and operations manuals, and clearly set out realistic goals.
- Speak to experienced franchising consultants and a lawyer specialising in franchising to make sure you get the right advice.