Franchising my business – what exactly is involved?
If you’re a business owner that feels the time is right to expand then its possible you may have thought about franchising – granting the right to budding entrepreneurs to operate the exactly the same business you’ve built, using the name, identity, systems and reputation you’ve developed.
After all, there are many businesses in the UK that have become ‘big’ because they’ve effectively harnessed the virtues of franchising. Think of Domino’s Pizza, Cash Converters, Dyno-Rod, TaxAssist, Costa, Subway. In fact, become a franchised business and you’ll be joining a buoyant ‘club’ that now has over 950 member companies that collectively contribute nearly £15 billion to our GDP.
Franchising is certainly a great way to operate a business, and for most it offers a very compelling growth strategy. It can be a faster and more cost-effective way to expand, because the people you select as franchise owners will pay you a respectable fee for giving them the ‘know-how’ and they will invest in the resources such as premises, vans, equipment, staff and stock, not you. It also provides a wholly reliable base for delivering great service to customers – nothing beats the drive and enthusiasm of business owners for consistently impressing customers.
So, if you’re interested in franchising your business what do you need to consider? Perhaps not surprisingly, the most obvious issue is having the funds to invest in putting together a robust franchise model and getting it launched. You will obviously need a solicitor to prepare a franchise agreement – a solicitor that is bfa accredited is essential – and unless you have the time and expertise available you will also need to appoint a consultant to advise on an appropriate franchise model and to correctly prepare the documentation and systems required to support a franchise network.
Once the infrastructure of your franchise is built you then need a budget to market the opportunity. For example, a web site explaining the franchise opportunity must be built, a sales prospectus has to be designed, advertisements produced and an efficient lead handling process developed. And you’ll need a media campaign plan.
How much will all this cost? It will vary depending on the type of business and the resources you have available but expect to invest £25,000 at the very least. It is however an investment for which a return can be quick to achieve. In most cases the initial expenditure will be recovered from the gross profit generated by the franchise fee of the first 2 or 3 franchise sales.
Having the necessary funds is not the only issue. The cultural impact of franchising on the business must be carefully considered. A franchisor:franchisee relationship is built on the principles of partnership – both parties have a level of dependence on each other, and a vested interest in each other. The relationship must respect the fact that a franchisee will be an independent business owner, operating under a licence that they’ve paid to acquire. You will precisely govern the way in which the business is operated by the franchise owner – trading style, service delivery, product supply, administration, marketing, financial controls - but the day-to-day decisions will be the sole responsibility of the franchise owner. So, the management style needs to be focused on guiding, advising and mentoring– you must persuade and influence, not dictate. That is a style which some business owners can take time to adjust to, particularly as it can frustrate the rate at which changes to business strategy are made.
What else? To franchise there is an implicit assumption that your business is well established, proven and profitable. People who buy franchises are usually seeking a route to fulfilling the ambition of being self-employed that involves less risk than setting up a business from scratch. So the track record of your business will be an important matter for a prospective franchise owner. If you can’t demonstrate the pedigree, provenance and progression of your business, and, importantly, show that it can be run profitably then the chances of selling any franchises are slim.
Another important point to think about is whether it’s practical to train another person to operate the business and if so how it would be done. If the required capabilities will take several months to fully perfect, then it’s doubtful that the business will work as a franchise because of the impact on the trainee of being without any income for the duration of the training course. You may alternatively be able to find people with the required skills but that might make the potential audience for your franchise rather small. Plus, appointing franchisees with ‘industry knowledge’ is rarely advisable; you want fresh people who can be fully indoctrinated, not those with pre-conceived ideas about how the business should be run.
Also, the business must be sustainable. You need to be alert to developing trends in the market in which your business operates. If a likelihood exists of your product or service being adversely impacted in the near future by new technology, consumer taste or regulation for which the consequences are unknown or insurmountable then franchising would be ill-advised. It is simply not ethical to ask people to invest in a business with an uncertain future.
Finally, you need to be certain that franchising is a route that you want to take. It must be a long-term commitment. Usually you will enter into a 5 year agreement with a franchisee and you, and the franchise owner, will be required to fulfil their respective obligations throughout the agreement’s term. Obviously there will be room to negotiate variations and exit arrangements but this will have cost and resource implications. So it’s important that once you decide to adopt franchising as an expansion strategy you remain fully focused on building a network of successful franchise owners.
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