What is a pilot franchise and why does it matter for investors?

If you’re considering investing in a franchise opportunity, you may have come across the terms “pilot franchise” or “pilot test.”

These concepts are central to how new franchises test their systems before rolling them out on a larger scale. We spoke to leading franchise experts to explain what they mean, why they matter, and what you should look for as a prospective franchisee.

What does the term ‘pilot franchise’ mean?

“A ‘pilot franchise’”, explains Vicky Wilkes, head of legal at Aston Villa Football Club, “is the name commonly given in franchising to a test phase. This phase aims to establish whether a proposed franchise is conceptually and financially sound. This is before becoming a full-scale franchise operation.

“A pilot franchise should allow both a franchisor and pilot franchisee to operate the franchise business with the aim of identifying any problems and considering any lessons they can learn.”

In essence, a pilot franchise is a trial run. It operates in similar conditions to those of future franchisees. It will typically run for at least 12 months, or longer if seasonal factors are relevant.

Wilkes notes that “in the event that a pilot fails, it justifies its value by averting more serious consequences of a full-scale operation.”

Does a franchisor have to run a pilot franchise?

John Pratt, senior partner at Hamilton Pratt, is clear: “There is no legal requirement on a franchisor to run a pilot franchise. Franchising is about granting rights to a proven business method.”

However, he adds, “In the early days, [franchisors] have to be able to point to their successful pilot operations. If you’re thinking of taking a franchise from a franchisor that has not had a successful pilot franchise operation, then you need to think again.”

Similarly, Vicky Wilkes confirms: “In practice, it is sensible for a franchisor to show that the franchised business can be run successfully as an independent business through a pilot scheme. Any prudent potential franchisee is unlikely to want to invest in a business if the franchisor can’t show it to be financially and commercially viable.”

How does a franchisor test its business concept and model?

Shelley Nadler, legal director at Bird & Bird, emphasises the importance of thorough testing: “It’s important a franchisor has adequately pilot tested its franchise system. This is so you can be satisfied you’re investing in a concept that works and a business that has been thoroughly tested.”

A pilot operation helps a franchisor:

● Provide evidence of the marketability of goods or services.

● Identify the optimum premises, layout and equipment.

● Develop an operationals manual for training franchisees.

● Establish business, operational and marketing systems.

How many pilot tests should there be?

Nadler advises that, ideally, “there should be more than one pilot test to ensure the franchise business model is robust. This eliminates any distortions arising from the results of one unit through the close attention it receives or the uniqueness of the location.”

Brian Duckett, former chairman of The Franchising Centre, adds: “In an ideal world, at least three pilots over a period of at least a year should be sufficient to measure consistency of operation. This will ensure that properly selected future franchisees are likely to be successful. If there is only one pilot, the outlet may succeed or fail simply because of the location or the operator.”

What are the benefits of buying a pilot franchise?

For franchisees, joining a pilot can offer unique opportunities. Pilot franchisees may enjoy financial benefits. Louise Harris, principal at Franchise Projects, explains: “As a pilot franchisee, you’ll typically not pay a full – or any – franchise fee. However, you’ll probably still have associated business costs such as premises, vehicles, equipment and marketing.

“You may also receive reduced management service fees or royalties and other benefits. This can make it a very attractive option for a more entrepreneurial franchisee.”

What are the risks of being a pilot franchisee?

While the opportunity to shape a new franchise is exciting, there are risks. Brian Duckett notes: “If things don’t go well or the franchisor abandons the project, all bets are off. You may be left needing to find alternative income.

“Becoming a pilot franchisee is inevitably more risky. However, it may present opportunities to guide the future development of the network.”

Essentially, pilot franchisees are part of the testing phase – they help refine the system but carry more risk than standard franchisees. You should be prepared for both the challenge and the potential rewards.

Conclusion

Pilot franchises and pilot tests are crucial for both franchisors and franchisees. They allow businesses to refine their model, demonstrate viability and reduce the risk of costly mistakes.

For prospective franchisees, understanding the scope, duration and results of pilot operations is essential to making a confident investment.

As Shelley Nadler puts it: “By successfully running a pilot operation, a franchisor will be able to put together all the elements of the franchise package that it offers to franchisees.

“In assessing a franchise, take great care to ensure pilot testing has been fully and thoroughly carried out.”