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A BEGINNERS GUIDE TO FRANCHISES
Ever considered investing in your own franchise business? This could prove a safe bet, with franchises offering budding entrepreneurs tried-and-tested business systems, brand awareness and a whole host of other benefits.
The UK franchise industry is looking healthy, too. According to the 2018 bfa NatWest Franchise Survey, the industry is currently worth £17 billion and creates 710,000 jobs. So, now could be the perfect time to further your franchising research and enquire with brands about the profitability of their franchise opportunities.
Benefits of buying a franchise
If you invest in a franchise, you can rest safe in the knowledge that you’ll be offered:
- A proven business model:A franchisor will be able to demonstrate that their concept works and that their franchisees are utilising it and reaping the rewards. Before investing you will also be able to speak with other franchisees to find out how they have made the business model work for them.
- A tried-and-tested concept: The reason why a business will adapt a franchise model is because the business owner firmly believes that their concept can be easily adopted and perform well on a broader scale.
- A support system: Franchise businesses are renowned for offering a stable and professional support system. A franchisor should able to demonstrate they offer ongoing support, which will come in the guise of guidance, advice and help throughout your time as a franchisee. Franchise Support Managers and Regional Support Managers are employed to carry out this very job.
- Training: When investing in a franchise, you will often undergo in-depth training. This will often entail shadowing a current franchisee, as well as undergoing thorough training at a franchise’s headquarters - the amount of time this takes varies per franchise. You will often receive refresher training in order to support your staff and prepare you for any organisational or system change.
- Brand awareness: A franchisor will have invested a great amount in marketing their brand, which allows you to start a business that is already recognisable to the public and future clients.
- Funding: Most franchise businesses have a good relationship with banks, meaning it is easier to gain funding as a budding franchisee than as an independent business owner.
How franchises work
Franchising is essentially having a business template or framework to work from, and adopting it. The general concept involves the franchisor (the original business owner and typically the founder of the enterprise) sharing the concept of the business with franchisees, who will benefit from running a company attached to an established brand, with a proven concept and consumer loyalty.
Many people go down the franchise route as it offers a business-in-a-box with a toolkit which allows for a new enterprise to become established quickly and cost-effectively, while utisiling marketing, training, funding and support resources from the franchisor.
Well-known UK franchises, such as Subway, have proven processes and they offer investors the option to run their own store or unit as a franchisee. The franchisee will be responsible for their store, staff and products, but they operate using the name and systems put in place by the brand and franchisor.
Franchises like McDonald’s and Clarks Shoes are partly franchises, meaning that there are corporate-run stores, as well as units run by franchisees.
Franchising doesn’t start and end with food or retail aconcepts, either. Franchise businesses can range from petcare to home maintenance, gyms and vending machine operators. Many franchises offer flexibility, allowing franchisees to run a business from home or in a van, and allows the business owner to dictate the hours they work.
Brands will often charge an initial franchise fee, which will allow the franchisee to use the brand name within a specific, agreed territory and to be trained up on the processes of the business. Generally, the franchise fee is between five and 10 per cent of the total investment.
There is also a royalty fee, which is an ongoing amount that is payable to franchisor and is usually taken from a percentage of sales, and is generally charged on a weekly or monthly basis.
What is a franchise? Who is in control?
While franchisees adopt the business model, systems and practices of the brand they invested in, they still have independence as a small business owner. That means that franchisees are responsible for the time that they spend on building and scaling their business - if a store is failing, it’s on the franchisee to put in the hours and strategy to save it. That being said, the ongoing royalty fees cover training and support, so if the business is encountering a blip, it can hopefully and swiftly be remedied with the assistance of the franchisor.
A key responsibility of a franchisee is the ability to lead your business to success, whether you are the sole employee or you employ staff. While you will receive support and training from your franchisor, you should be able to assume a leadership role seamlessly and be able to absorb new skills and lead a team.
The role of the franchisee is versatile and you will be expected to wear many different hats. For instance, you will likely be required to manage all of the business’s daily operations, while also meeting with customers, handling payroll, gaining new clients, promoting the business locally, carrying out administrative tasks and more. Of course, the roles and responsibilities will differ depending on the type of business you are running.
As franchisees are responsible for the hiring of staff, it is important that they’re aware and genned up on employment laws to ensure the business runs smoothly. This can include registering as an employer with HM Revenue and Customs, adhering to the National Minimum Wage and National Living Wage, writing a contract, checking whether candidates have the legal right to work in the UK, and other important details.
Franchisees will also be responsible for the dismissal of staff, so it’s important to be well versed when it comes to employee rights, redundancy pay, disciplinary procedures and other factors involved in the termination of a contract.
How Do You Buy A Franchise?
Firstly, you’ll need to partake in some heavy research. When assessing your perfect franchise fit, you will need to take into account budget, desired location, qualifications and whether the company operates in a sector of personal interest. Luckily enough, investment for franchises suit most budgets and can range from under £10,000 all the way up to £1 million and beyond.
Resources like What Franchise can offer you an insightful shop window into whether a brand offers what you are searching for, but it’s also worthwhile attending trade shows and franchise discovery days to gain a better understanding into the operations, support and direction of the franchise.
When contacting a franchise and enquiring about the opportunity, many will supply you with a Franchise Disclosure Document (FDD), information pack, brochure or prospectus, which should outline all of the information you require.
While communicating with a franchisor is extremely worthwhile, it is imperative that you check sources and corroborate claims. You may also wish to see whether the franchisor is a member of the British Franchise Association, which is stringent when it comes to franchises demonstrating the ethics and sustainability of their business.
What Is A Franchise Agreement?
A Franchise Agreement is a legally-binding document signed by both the franchisee and franchisor, and must be fair and comprehensive. It is unique to the franchise and is not simply a prospectus but a bonafide legal document.
The bfa states that: “A good Franchise Agreement will ensure that the obligations and rights of both parties - i.e. franchisor and franchisee - are set out as required and the final contract is likely to run to 40 or more pages.”
When weighing up the Franchise Agreement, it is important that you check how long it runs for, and whether you have the option to renew the franchise after the time has expired. Other factors you will need to look out for is whether you have exclusive rights in your area for the full term of the franchise, and what restrictions and conditions come in to play if you wish to sell the franchise. The bfa also recommends turning to a bfa-affiliated lawyer, as many solicitors aren’t as well versed as they should be when it comes to complexities of navigating a Franchise Agreement.
DIFFERENT TYPES OF FRANCHISES
Before investing in a business - which many people rightly express as one of the biggest decisions in a person’s life - it’s important to assess which is the best opportunity for you. Whether you’re looking to operate a business that fits your lifestyle - for example a part-time position or something that you can operate from the comfort of your own home - or you’re looking to purchase a franchise from a franchisee selling their business, the beauty of the franchising business model is that there’s a multitude of different options to choose from.
According to the bfa, the UK’s history with franchising began with the advent of the tied pub system. Franchising first became widely used and understood in the US in the early 1900s, when the car dealership model was formed by General Motors and comprised granting exclusive rights and territories. Shortly thereafter, oil companies and grocery stores began employing the business model in a bid to gather fast growth and national distribution.
There are over 1,000 franchise systems employing over 710,000 people in the UK, according to the bfa. A bfa/NatWest Franchise Survey states that 97 per cent of franchises are profitable and register a £250,000 turnover. The franchise industry is flourishing, and is showing no signs of stopping any time soon.
If you would like to buy a business that has been in operation for a while and with a well-known local presence and client list, then a franchise resale could be the best option for you.
A franchise release is when you buy an existing franchise business from a franchisee, thus owning the rights to operate the franchise in the purchased territory. This can involve the sale of a company or a sale of the assets of the franchisee’s business.
Franchise resales are often explicitly documented within the franchise agreement and give the franchisee the right to sell their business. However, when buying a franchise from a franchisee, the franchisee will negotiate the purchase price and the terms of sale, but it will need to be approved by the franchisor.
The franchise model is extremely appealing as there are business and investment opportunities catered to all budgets and lifestyles. Many budding entrepreneurs relish the opportunity to purchase a business that requires very little overheads or staff, which makes it a cheaper investment proposition.
A low-cost franchise is usually categorised as being under £5,000, but some broaden the amount to be in the region of £5,000 to £10,000. Franchises that typically sit within this price range are domestic cleaning, children’s activities, vending, van-based and many other business types. They often offer benefits such as working from home and operating the business part-time.
Low-cost, however, does not necessarily mean low-growth. With a low-cost franchise you can capitalise on the business-in-a-box format that franchising offers, while allowing your business to eventually expand and take on more staff or further territories, if you and your franchisor so desire.
CHOOSING A FRANCHISE
Choosing a franchise can be one of the toughest decisions in your life and the decision-making process can’t be entered into halfheartedly. Here, we list the essential advice and information you need to seek out before embarking on your franchise journey.
Comparing Franchise Opportunities
Don’t just leap headfirst into investment. The journey from initial enquiry to ownership needs to be sustained and entails a thorough level of research and intel gathering. Firstly, investigate which sector or franchise is best suited to your experience, skillset, budget and lifestyle arrangements. Then, send an array of enquiries using the What Franchise submission entry to find out further details about franchising with a brand. You need to look out for:
The main investment fee is the franchisee fee, which is what you pay when joining a franchise. Including in the franchise fee is the permission from the franchisor to use the brand, name, logo, products, business model and services and replicating them with your business. John Pratt, senior partner at Hamilton Pratt, states the initial franchise fee is to reimburse the franchisor of the costs it will have incurred when recruiting and training the franchisee. He also states: “The initial fee should generally not contain a profit element for the franchisor because otherwise there is a risk that the franchisor’s business is the sale of franchises, rather than doing everything necessary to ensure that franchisees are successful.”
- Royalty fee: The royalty fee is an ongoing amount that is paid by a franchisee during the length of a franchise agreement in return for use of the franchisor’s systems, trademark and more. This ongoing fee - sometimes referred to as a management services fee - can sometimes be a flat fee, but is more often than not a percentage of the sales you receive from the franchise. Ongoing service fees are generally paid weekly or monthly to the franchisor, and the amount can vary, but it usually is around six to eight per cent.
- Advertising fee:An advertising or marketing fee is normally taken on a monthly basis as is a percentage of your gross sales. The value differs but typically ranges from one to four per cent. While it is very common for franchises to apply a marketing fee, not all franchisors will charge.
- Franchise renewal fee: Extending the contract for a franchise sometimes means incurring a fee. This will be outlined and agreed upon in your franchise agreement.
- Franchise resale fee:If it turns out that you require selling your franchise, then you are sometimes responsible for paying a fee to the franchisor, which can cover new purchaser approval and other factors.
- Insurance: An approved insurance cover and provider should typically be in your franchise agreement - if it is not, then it’s best to consult your franchisor about their preferred company before gathering quotes.
How to fund a franchise in the UK
According to a NatWest / British Franchise Association survey, the average set-up costs for a franchise range from £50,000 to £60,000, although in reality it can start from £500 and can cost in the millions. Here are the options available to budding franchisees looking for funding:
- Bank Lending:Many high street banks have dedicated franchise teams who will lend up to 70 per cent of the total start-up costs. For the average investment, your loan is going to be around £15,000 to £20,000. Many people source this initial 30 per cent investment from savings, property investments, inheritance or sometimes redundancy settlements.
- Loans and overdrafts:Once you obtain that 30 per cent investment, a bank should typically lend you the rest via a loan and/or an overdraft. Many respected franchises have good relationships with the main banks, so make sure you ask your franchisor about their preferred bank choice.
- Crowdfunding:A slightly newer phenomenon, many budding franchisees could go down the crowdfunding route and generate the finance you need to start the business. Due to the nature of crowdfunding, though, it will mean that you will own less of the company, meaning less of the rewards.
How the Application Process Works
Here’s generally what the process of investing in a franchise entails:
- The prospective franchisee makes an inquiry, either via a franchise directory website or to the franchisor directly
- The franchisor will send prospect information or a brochure covering the business or a Franchise Disclosure Document
- The franchisor will make a follow-up call, when the interested party can ask any questions they may have about the business and the franchisor can initially vet the prospect
- Prospect is invited to meeting with the franchisor or allocated a place on a discovery day
- Prospect completes further due diligence of the franchise, including conducting researching and communicating with and shadowing with current franchisees
- A second meeting takes place and the business proposition is discussed in more detail, including financial information
- The prospect will consult with financial and legal experts regarding the franchise agreement and forecasts provided by the franchisor. A business plan is completed and bank funding is secured, if necessary. If the business is a brick-and-mortar operation, a location or unit will also be sourced at this stage.
- The franchise agreement is signed
- Initial training begins
What’s The Quickest Way To Buy A Franchise?
While franchise businesses are renowned for their business-in-a-box reputation, it is probably not the best idea to be too hasty. Many franchisors have worked for years - even decades in most cases - on perfecting their systems and ensuring that the integrity and reputation of their brand is maintained. Therefore, it is critical that they don’t allow the wrong person to invest in their brand and tarnish its reputation. If a franchisor or franchise representative is pressuring you to invest and start your business within an alarmingly quick amount of time, it would be wise to consult a professional or conduct thorough research on the business.
How Many Franchises Should You Have?
Multi-unit franchising, where a franchisee owns and operates more than one outlet, is growing in popularity. It is reported that in 2015, 29 per cent of all franchise units were owned by multi-unit franchisees - this figure was up from 25 per cent in 2013. Around a third of franchisees now operate more than one franchise business, compared to just a quarter five years ago, according to the BFA-Natwest 2018 survey.
Advantages of owning multiple franchises
- Franchising is about expansion: Once you have one franchise outlet up and running and turning a profit, your ample experience will make it easier to open up more.
- Economies of scale: With more outlets, it means that supplies can be purchased in bulk and marketing costs can be spread.
- Staff flexibility: Most multi-unit franchisees will be running units within close proximity of one another, which means they will be overseeing a large workforce. This means that you should be able to move employees around to support the demand of each respective location, making it less of a burden on the franchisee.
Risks Of Having Multiple Franchises
- Extra work: With extra businesses comes extra work and further fund sourcing. This can pile the pressure on a multi-unit operator - growing an enterprise requires a high level of business savviness and experience
- Reduced profits:While the equation of more locations and a growing business will reap more rewards sounds simple, running more branches can be anything but. Opening a new unit can be a risk and the success of your original branch may not be able to be easily emulated.
UK FRANCHISE COMPANIES
If you’re seriously interested in investing in a franchise, there are numerous different professionals you can speak to and a whole world of avenues to explore. Here are just a few:
Many brands will employ their own Franchise Recruitment Managers or a recruitment team, which will be on hand to answer any questions you have after making your initial enquiry. They will usually sound you out and offer honest feedback on whether you will be a good fit for the brand and visa-versa.
A franchise broker worth their salt with help budding franchisees to choose the best business for them, and will showcase the viable opportunities on display from the franchisors that they represent. A franchise broker will usually be employed a franchisor, or multiple franchise companies, to go out in the field and sell franchises to interested parties.
A franchise broker will not charge the would-be franchisee - they charge a commission each time someone buys a franchise. A franchise broker will typically charge from 40 to 50 per cent of the franchise fee paid by the franchisee.
Online franchise directories, like what-franchise.com, offer budding entrepreneurs the opportunity to browse hundreds of franchise opportunities. Many directories will give a comprehensive view of the investment opportunity, including franchise fees, royalty fees, demand for the brand, expected revenue after two years and more.
What’s The Difference Between Franchisee and Franchisor?
Franchisors sell the right to sell their products or services using their tried-and-tested brand, intellectual property and expertise. The franchisor usually tends to be the original business owner and founder.
A franchisee is the small business owner who purchases the rights to run the brand. Many people wrongly refer to a franchisee as a “franchise owner”. “There is only one ‘franchise owner’, and that is the franchisor, i.e. the business that developed the concept that’s the subject of the franchise and which owns the rights associated with that concept,” explains Brian Duckett, chairman of The Franchising Centre.. “The business to which those rights are granted in order to operate clones of the proven concept and system are franchisees. They may be international master franchisees, regional franchisees, area development franchisees, unit franchisees or multi-unit franchisees, but they are all franchisees.”
What’s the Best Franchise?
What Franchise’s UK franchise directory includes the top franchises currently in operation. Covering a diverse range of franchise opportunities, including cleaning, home-based, education franchises and more, you’ll find an investment opportunity that will suit any budget or lifestyle - there are even full- and part-time and low cost franchise opportunities available for sale across the UK. Head to our regularly updated and expertly written directory list for further details.