Suki Dehal, franchise development manager at Lloyds Banking Group, gives would-be investors the inside track
With numerous external risks in the current economic climate, it’s understandable why more and more people are looking at investing in a franchise as a potential route into business.
Investment in a tried and tested business model, with the initial training and ongoing support from the franchisor, who knows the business model inside out, is a compelling reason to choose a franchise rather than starting your own business independently from scratch.
When you also take into account that an established brand name will attract customers from day one and a network of franchisees covering the UK provides the opportunity to pick up national account work and negotiate better terms with suppliers, franchising becomes even more attractive to a prospective investor.
The clinching argument to support franchising over starting up your own business is that the failure rate for franchisees is considerably lower, at less than two per cent, according to the most recent British Franchise Association survey of franchising in the UK.
However, franchising is not a get rich quick scheme and thorough research is necessary before making any commitment to invest. Running any business, even with the backing of a franchise, takes a lot of energy, commitment and hard work for you to succeed.
Research is the key to finding the right franchise opportunity. With so many brands out there, each will be looking for different key skills and offer different levels of investment to suit each individual’s requirements.
There are many places to research franchise opportunities. However, it should be noted that it’s not always clear what the true investment costs are. There is no standardisation across the franchise media regarding advertised investment levels, which can be confusing.
You need to know the likely total investment costs, including all tools, equipment and working capital needed. Ask the franchisor for a full breakdown of the investment, plus the ongoing costs.
You should also consider how much personal income you’ll need to draw from the business to maintain household costs, which should also be factored into your working capital needs from the business.
When you’ve selected your chosen franchise, you will be asked to sign a franchise agreement. These contracts are lengthy and rarely written in plain English, so it’s essential you get the agreement checked and explained to you by an experienced and reputable franchise solicitor, preferably someone who’s affiliated with the British Franchise Association.
The franchise agreement will set out all the ongoing costs. However, some are not entirely transparent. You’ll usually know what the management services fee will be and that there will be a contribution to a national marketing fund, but some of the other costs you may encounter may be less obvious.
These may include a mark-up on any goods or services provided to you by the franchisor, a commitment to spend a minimum amount of turnover on local marketing, a commitment to purchase a minimum amount of product from suppliers, software licence fees, vehicle leases, additional training fees, charges for new business leads, bookkeeping services, central invoicing and payment collection and licence renewal fees.
Be alert to fixed management services fees and where there’s a minimum amount payable, ensure these are set at reasonable levels.
It’s right that a franchisee should be paying for the support and guidance they benefit from to help them grow a successful business in their chosen location, but be aware of all of the upfront and ongoing costs before you make a commitment to invest. You don’t want any nasty surprises when you’re up and running.
Franchising only works if both franchisor and franchisee can make a reasonable living from the business.
Most franchisors are transparent once they know a potential investor is genuinely interested in buying into the franchise. Nevertheless, make sure you fully understand the commitment you are entering into.
If you’re investing in an international brand that’s operating in the UK under a master licence agreement, bear in mind that the master franchisee is likely to be paying a portion of your licence fee and ongoing management services fees to the franchise brand owner.
Your initial costs and ongoing fees will therefore be higher to reflect that this additional party, based overseas, will want its cut as well. Therefore, be mindful of the expected underlying profitability that will be generated from your territory to ensure it will be sufficient for your needs.
Franchising remains a less risky route into self-employment and offers potential investors a wide range of opportunities across many different industry sectors and varying investment levels.
It’s likely there is a perfect fit for you out there, but there is no substitute for methodical research and understanding the true costs before you commit to your chosen franchise brand.
Covering the cost
Covering the cost can be done by either using your own savings or with the help of bank funding, so feel free to speak to your bank to see how they can help support your business ambitions.
Lenders with a specialised franchise department, such as Lloyds Bank, are the essential route for funding the franchise opportunity you’re considering.
They will have a team of trained managers who understand franchising and are likely to have a track record of funding existing franchisees in the brand you’re looking to invest in.