Forecasts suggest franchising will see strong growth in the next two-three years. Here’s how to pick a winning concept
During my 25 years in franchising, I’ve been asked many times how a prospective franchisee should decide which sector or brand they should consider joining. My response has been consistent over the years. However, as we’re in the middle of a global pandemic there are factors that should now be considered in addition.
Adapting to change
As we endured the first period of lockdown from March to May, it’s fair to say most businesses suffered and confidence was often low. However, businesses rallied and, where they could, adapted to change, introduced new policies and procedures, improved communications with staff and customers and made the most of a difficult situation.
Some businesses boomed. For example, logistics businesses saw a massive increase in turnover, with people ordering more online than ever before. Food delivery businesses also experienced an increase in turnover, as people were less willing or able to visit restaurants or venture out.
The franchise industry was not immune to the challenges of the pandemic and lockdown restrictions. However, in these times of hardship, we have seen numerous examples of franchisors going above and beyond their standard obligations to their franchisees. Many introduced weekly video conferences with franchisees. Some amended the terms of their contracts to allow for adjusted working practices that enabled their franchisees to continue to trade or trade in a way that was both safe and within government restrictions. The best franchisors did all they could to increase communications and work with their franchise networks. Many will come out of the pandemic stronger and more resilient.
Choosing the right franchise
So what should you consider when choosing the right franchise brand for you?
Think about which sector you want to operate in. Some people will want to stick to what they know and choose a business in an industry they have experience in. However, many will choose a new sector in which they have no previous experience.
This is possible in franchising, unlike in non-franchised self-employment, because the franchisor will have a proven system and track record and should offer full and detailed training, help and support that gives you the skills needed to succeed.
How has the sector been affected by COVID-19? Have the businesses operating been able to maintain turnover and profitability. If not, how quickly are they likely to bounce back? If you’re determined to open a business in a sector that’s currently suffering, contemplate deferring your decision until the economic outlook in that sector is better and you can see the impact of lockdown and a path forward. Alternatively, consider a different sector, perhaps one that has seen growth over the last six months.
Decide how much you can invest
You’ll also need to decide upon the investment level you can afford or are willing to commit to a new business venture. There are franchises at all levels of investment, ranging from under £10,000 up to hundreds of thousands of pounds. Often a franchise fee will include a turnkey package of equipment and stock. However, sometimes there are additional expenses on top of the franchise fee. You should investigate this carefully and calculate how long it will take to reach profitability and, therefore, how much additional working capital you’ll need.
Ask the franchisor specifically about projections pre-pandemic and during pandemic and understand how your profitability may be affected. While only around half of new franchisees need to borrow money, the franchise friendly banks will lend, for the right franchisor and subject to status, between 50 per cent and 70 per cent of the required funds.
A key element to think about is the time it will take to recoup this initial investment. As a rule of thumb, for an investment of £10,000-£20,000, you should expect a return on capital invested in 12-18 months. For larger investments, this timeframe could be longer.
You should determine the term of the franchise agreement and the renewal clause to ensure you have enough time to both recover your investment and build a profitable business.
Create a shortlist
When you’ve decided on your sector and investment level, you then need to investigate the franchise brands that match this criterion.
Some sectors can have many franchisors operating in competitive markets. Often, however, a franchisor may operate in a niche market with little competition.
Some people will want to join an established franchisor with many existing franchisees. Others may prefer to invest in an opportunity with a business that might be new to franchising, but has the experience of operating company-owned outlets. These ground floor opportunities often have the benefit of having more available territories and may even offer a lower franchise fee for the first franchisees.
Make a shortlist of franchises that meet your criteria and look interesting to you. This may include ‘safe’ options in a sector you’re familiar with, but may also include more ‘exciting’ options in market sectors you may have had no previous exposure to.
You should then apply for information on their franchise offers, research their websites and commence your investigations.
Thriving despite uncertain times
While it may be assumed all businesses in a particular sector may be struggling with lockdown restrictions, there are almost certainly examples of businesses that have adapted and found a way to prosper where others have struggled.
A good example of this is a food and beverage client of mine, which switched its focus from sit down, eat-in meals to take out and delivery and offered waiters and restaurant staff the opportunity of becoming delivery drivers as an alternative to furlough. Throughout lockdown, this business has not only maintained but improved profitability.
Many franchisors have seen growth in sales in 2020 and some have recruited record numbers of new franchisees. We’ve seen franchisors in the lawn and garden care sector and in-home improvements achieve record results in the last six months.
Since March and the start of lockdown, I’ve attended and presented at many webinars both in the UK and internationally. The strong prevailing theme is that the franchise industry will see strong growth in the next two-three years. There are two key factors that will lead this growth.
First, a lot of good people will either be made redundant or make a decision to start their own business. This is always good for franchisee recruitment and strengthens franchise networks.
Secondly, franchising is built on networks of like-minded business owners, who constantly look for opportunities for growth and share their successes with their franchisor and each other. A franchisor’s role is to work with every one of their franchisees to understand what is and isn’t working and share that knowledge for the benefit of the network.
In conclusion, some franchise sectors have remained strong, including care, gardening and home improvements, pet care and cleaning. Some sectors have adapted, such as food and beverage brands doing more delivery. Unfortunately, there are those that have struggled, but will hopefully bounce back.
For those people ready and willing to invest in a franchise brand, there will be a sector and franchisor that’s right for you and which can provide a platform on which you can build a successful business.
Alan Wilkinson is head of franchise development at The Franchising Centre.