Franchises: It’s all in the name
Take on a franchise and you could be on to a good thing, despite the recession…
Many people dream of running their own business and more often than not, it comes down to a choice between starting from scratch or joining a franchise. If the latter appeals, you are not limited to just big, famous restaurant chains, as there are scores of different brands to choose from covering lots of industries, which require varying levels of time and commitment.
Despite the recession, during 2010 the franchise industry increased turnover by £600 million to £12.4 billion, a survey by the British Franchise Association and NatWest has revealed. Since 2006 the number of franchise systems has grown by 15%, as has the sector’s turnover, even though the UK growth was only 9.4% in the same period.
The survey has also found that the number of franchise systems operating in the UK has grown to 897 over the past year, increasing the number of franchise business units to 36,900. An extra 56,000 jobs have been created, taking total employment in the sector to 521,000.
Now consider the flip side of the coin: if you were to begin a business on your own, the likelihood of still trading after five years is down to a measly 20% – and that’s not taking a global recession into account. Some of the benefits of joining a successful franchise as opposed to going it alone are obvious enough. For example, the market research will already have been carried out, the format is tried-and-tested, and customers will feel more confident about buying a product or service from an established name. Plus, you won’t have to spend as much on promoting your product or service because people already know the brand due to heavy, ongoing advertising.
How it works
Franchising is considered to be a safer way of growing a successful business, at a faster pace, because you enter the market with an established brand and a well-liked format. And businesses choose to sell franchises because the method allows for expansion and market penetration on a scale which would otherwise be too costly and difficult to achieve quickly. You, the franchisee, will own the business and can start trading once a licence has been issued by the franchisor. You will have full control of some things, such as the number of staff you hire and the promotions you run. Others, such as the look of the premises, staff uniforms and promotional materials, will be determined for you. If you deviate from what is set out in your contract, it could be terminated.
Generally, the trading location is also out of your hands. You can choose your location from a selection on offer, but naturally, the best locations have the highest licence fees attached.
Working with a partner obviously has many advantages with financial benefits topping the list. Good franchisors will often help with start-up costs and even if they don’t, banks will more readily agree to lend you the money to begin trading because you have the backing of a reliable brand. You also gain access to the bulk buying power of the franchisor, and of course, you should begin to make a profit quicker.
By joining an existing franchise, you will benefit from years of experience and a good partner will also offer you essential training and should also work on enhancing the skills you have. It is in the franchisor’s interest to ensure you succeed and following initial training, you should be offered guidance and support on an ongoing basis either in the form of a helpline or one-to-one visits from your representative. Providing you work hard, you have a potentially profitable business within your grasp.
Do your groundwork to ensure that it’s really the right business for you:
- What hours do you think you can realistically keep? If the business requires weekend work and you have a young family, chances are that you won’t be able to give it 100%.
- Calculate how much money you need to earn each month.
- Visit franchise fairs, read mags and research companies online – try www.whichfranchise.com
- Is there potential for your business in the marketplace? Don’t just take on a franchise because you love the product or the ideology – it has to reward you financially.
- Study the financial states of a few franchises that appeal to you and check that their business, on a whole, is on the up – if they fail, so do you.
- Have meetings with the company you are chiefly interested in.
- Study the franchisors’ projected returns figures. Are they achievable and good enough for you?
- Talk to other franchisees to check what you’re being told is the case.
- Look into how your potential business would fare in the event of a recession and whether now is a good time to start up. No business is entirely recession-proof, but some will weather the storm better than others.
- Examine the full history of the organisation and find out how many franchises have failed or been sold. Then find out why.
- Assess whether you have the skills to partner them.
- Identify your strengths and your weaknesses – honestly.
- Will the franchisor provide training and back-up to help you balance any weak areas?
- Double check your finances; what size loan can you get?
- Check the legal agreement and get a specialist franchise lawyer to look at it, too.
And the downside…
Naturally, there is a price to pay for being associated with a well-established name. There is an initial fee – which can vary between a few hundred to tens of thousands of pounds. Additionally, some franchisors will make sure you have set aside a certain amount of working capital before you are even considered. This is partly because you will still be responsible for your overheads.
Some franchises, such as Kumon – the after-school maths and English classes provider – requires an initial investment of between £3,000 and £5,000. Kumon franchise owners would then be provided with all the teaching material and training required to teach in the approved method.
On top of the initial cost of buying a franchise, costs for the ongoing support are covered by a regular management fee, or royalties, that are based on your turnover. Each time you renew your contract, you will need to pay a new fee, which is usually based on how well your business is doing. This is often the point at which some candidates decide a franchise is not for them.
Charanjit Toor, 42, from Berkshire, says: ‘My husband and I were considering a fast-food franchise and we were very keen to begin with. We had meetings and spent two days working in an outlet to see if it was for us. Once we looked at the initial fees and monthly royalties, we felt they were too high. It was like working for someone else, so we decided to launch our own business.’
That said, if the costs don’t deter you and you are ready to steam ahead, don’t assume that a franchise will automatically be offered to you. The big boys will need to be satisfied that you are worthy of representing them, and don’t mistakenly think that profits will automatically come your way. It’s up to you to make them.
Equal opportunities: Woman in mind
The flexibility of franchising appeals to more and more females…
The number of women franchisees rose by 86% in 2009, according to the annual NatWest/British Franchise Association survey. The reason being is the need for many women to work flexibly to fit their careers around their families. Many franchises – such as Kumon Educational, Heavenly Smoothies and YogaBugs Ltd – have been built around the concept of franchise owners being able to choose their own working hours and commitment levels.
Franchises also appeal to older people for the same reason – the average age of franchisees is currently 46 compared with an average of 40 a decade ago. They can work part-time to top up their income and work hours and days that suit them.