Franchise investment opportunities: what to consider

If you're thinking of investing in a franchise, there are some key considerations you need to make, says Richard Holden, head of franchising at Lloyds Banking Group

There are a wide variety of franchise opportunities available in the UK across a broad range of industry sectors. The choice of franchises can sometimes be bewildering, so thorough research is essential to select the right franchise for you.

Generally, most well established franchise systems offer a tried and tested business model with initial training and ongoing support throughout the life of the franchisee’s business.Belonging to a network of businesses has many benefits for franchisees, including brand recognition, greater buying power and proven marketing strategies. The opportunity to share best practice and to talk through your problems with other franchisees is also a valuable resource that should not be overlooked. In addition, there is evidence that franchised businesses tend to grow quicker and survive longer than new independent start-up.

Less risky
—————

It is for these reasons that banks with specialist franchise departments, such as Lloyds TSB, generally consider franchising as a less risky way of operating a business. Franchising doesn’t suit everyone and will not guarantee success. Running any business takes a great deal of drive, commitment and enthusiasm and it is important that potential investors seek professional advice before making a commitment.

Lloyds TSB has a pedigree in supporting businesses during challenging times. Year-on-year net growth in advances in Lloyds Banking Group’s core commercial business was three per cent at the end of December 2011.This continues to compare favourably with the six per cent decline in net lending growth across the industry, as reported in the latest Bank of England figures.

We are actively involved in a range of government schemes, including the Enterprise Finance Guarantee. We are one of the most active lenders in this scheme and by the end of December 2011 we had offered more than 4,850 EFG loans worth £362 million - nearly 29 per cent of all loans granted through the scheme so far.

However, the bank’s support goes much further than providing finance for prospective franchise owners. If you are thinking of investing in a franchise, there are some key considerations you will need to make. Lloyds TSB sponsors a series of free evening educational seminars held at locations throughout the UK that offers prospective franchisees expert guidance about their investment options.

Matt O’Neil, franchise manager at Expense Reduction Analysts, has this advice for would-be franchisees:

“I believe that anyone thinking of investing in a franchise would do well to come along to the free seminars to learn about the benefits and burdens of franchising before they make a decision.”

Stephen Watson, managing director at Agency Express, adds: “We find that potential franchisees who have attended one of the seminars are generally better prepared and more knowledgeable. They know the questions to ask, are more clued up about the general decision process and I am sure that they find raising any required finance much easier.”

bfa member brands
————————-

It is relatively easy to eliminate the opportunities that will not offer you the financial return you need or are too expensive. You will then need to analyse a range of franchises to see which one is most suitable for you. It is sensible to begin your research with the British Franchise Association member brands. While bfa membership is no guarantee of success, it is a good starting point.

The best approach is to consider franchises that have a successful track record and are well established. Franchise systems that are proven over a number of years and have prospered through the ups and downs of the economic environment are viewed by banks as less risky than franchises that have not been fully tested.

Consider what you are good at and what you will enjoy doing. You don’t have to stay in the industry you have spent the whole of your working life in, but you should be looking at franchises where you will benefit from your existing skills and experience. Your family life and personal circumstances are another important consideration. Ensure your loved ones are involved in the selection process from the outset.

Those entering franchising sometimes neglect to fully evaluate what the business they are considering investing in actually does and the market in which it operates. Speak to relevant trade associations for their view of the type of business you are interested in. Also, research the history and track record of the chosen franchise brand.

Speak to as many existing franchisees as you can - don’t let the franchisor cherry pick who you talk to by asking for a contact list of the entire franchisee network. Look for franchisees with a similar background to yours and speak to franchisees at differing stages of development.

The Lloyds TSB Franchise Unit is a great source of impartial advice. Some banks view most well established franchise brands favourably. However, to get the best advice and support make sure you speak to the bank’s franchise department rather than contacting your local business manager direct.

Financial projections for the business are another vital assessment tool. Most franchisors will provide you with illustrations of possible trading performance, but it is up to you to dig deeper. Find out what the financial projections are based upon and the assumptions that have been used. You need to research the local market conditions when compiling your own projections and it is always prudent to get an experience accountant to check them over.

Important document
—————————

The franchise legal agreement is an important document and you will need to fully understand it before you sign on the dotted line. Lloyds TSB offers a franchise agreement review service at discounted rates in conjunction with an experienced franchise solicitor.

Franchising offers the opportunity to run your own business with a potentially high success rate, provided of course you select the right franchise in the first place. There are never any guarantees in business, but you can increase your chances of success by following these key steps. Don’t rush your research, as your decision could result in a long term commitment and you’ll have plenty of time to reflect on a mistake - so try not to make one.

10 STEPS TO SUCCESS
———————————-

1. First of all, consider whether you are suited to franchising.

2. Attend a franchise seminar to learn more about the benefits and pitfalls.

3. Eliminate brands that are too expensive or will not deliver the income you require.

4. Start your research with well established British Franchise Association member brands.

5. Research a range of different franchise brands across many industry sectors.

6. Self assessment - what are you good at and what will you enjoy doing?

7. Does the business fit in with your family’s requirements?

8. Take a close look at your chosen franchise and the market it operates in.

9. Seek professional advice from franchise specialist banks, solicitors and accountants.

10. Have you made the right choice? If you have any doubts, start again at step one.