Linda Whitney’s jargon buster will help you make an informed investment decision
When you’re considering starting a franchise, there’s enough to worry about without having to figure out obscure jargon. But to make a properly informed decision about whether or not to go ahead, you need to understand it.
So here is a guide to basic franchise terminology. A couple of caveats: this does not cover all the terms you might come across and there’s often no fixed definition of franchising terms. If in doubt, call the franchise’s head office and ask what they mean.
Technically, business format franchising, which is a way for companies to increase outlets without opening company owned branches.
The company offers others the chance to open their own branches using the brand, systems, know-how and business model set out by the company in exchange for an upfront investment and (usually) monthly fees. Often called a ‘business in a box’.
Not to be confused with the kind of franchise that allows private companies to run rail services - generally a much less attractive proposition.
The company that creates and runs the franchise and sells it to you, the franchisee. It also runs a head office that off ers training, support and services for franchisees and collects their monthly fees.
You - the person who stumps up the investment required to buy and operate the franchise. In a successful franchise there may be dozens, hundreds or even thousands of franchisees.
A franchise in which you do the practical work yourself (eg, gardening or oven cleaning), but also run the business. Aka owner operator franchise.
You manage a team of staff who carry out the practical work (eg, care services franchises).
In some franchises, you can start hands on and move into management as the business grows and you take on staff .
The bundle of goods and services the franchisor provides in return for your investment.
As well as training, it can include a wide range of goods and services such as branded workwear and stationery, access to discounted vehicle leasing, relevant software, a page on the franchise website, marketing help and support from a franchise manager.
Check if you have to pay for any of it and if so how much.
The geographical area in which you have the (usually) exclusive right to operate your franchise, making you the only supplier of the brand’s good or services in that area.
Franchisors delineate territories based on demographic information, indicating that there are enough potential customers to generate a profit. If it’s not exclusive, you could be competing with another franchisee to sell the same brand in your area.
When a company is preparing to launch a new franchise, it usually runs pilot operations - a test to find out how well the franchising operation works and to iron out any bugs before making it available to potential franchisees.
If you’re looking at investing in a new franchise, make sure it has run at least one pilot operation (preferable more, covering several different areas), unless you have a high appetite for risk.
The legal contract between the franchisor and the franchisee, setting out the obligations and rights of both parties. Note that this is not like a contract of employment, but is a civil contract that can only be challenged under civil law, which is potentially costly.
It’s worth getting the terms explained by a franchise specialist lawyer before you sign.
Set out in the contract. Your right to run your franchise doesn’t last forever. Initial terms are usually for five to 10 years, though some are 25. Renewal options are usually included, offering you the chance to opt out at the end of each term.
Usually part of the overall franchise package. Typically includes local (sometimes national) media marketing, champagne, balloons, maybe even a celebrity and flooding your area with leaflets about your business offerings. Expect to see yourself in the local press.
Running more than one outlet of the same franchise, most commonly in neighbouring areas.
Most franchisors expect you to demonstrate success in one area before allowing you to invest in another one. Some franchisors, however, welcome investors seeking to go multiple right away, but investments are inevitably higher.
A franchise that’s being sold as a going concern often because the existing franchisee wants to move on or retire, but find out why.
Buying a resale requires a higher initial investment to cover goodwill (intangibles such as the existing customer base), but with a resale your business is up and running immediately.
Not to be confused with the total franchise investment. The franchise fee is only the initial fee you pay to the franchisor to gain access to its brand and franchise system. (You may have to pay VAT on top.)
Watch out, because in the UK there is no standardised way in which franchise costs are advertised. Some franchises publicise the franchise fee alone, even though you also need to budget for much more expenditure on top of that.
You need to know the likely total investment required, including equipment, working capital and other start-up expenses. Ask the franchisor for the total investment figure.
Most franchises charge monthly management fees, typically around 10-12 per cent of your monthly turnover (though some charge a flat fee).
Monthly payments to the franchisor to cover your share of the cost of national brand marketing.
The amount you need in ready cash to invest in a franchise - often 30 per cent of the total investment required, because banks will commonly lend the extra 70 per cent to creditworthy franchisees of established franchises.
The money you’ll need in order to be able to pay your business and personal bills until the franchise returns enough to do so, which typically takes 18-24 months.
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