Thinking of buying a franchise?
Buying a franchise allows you to set up your own business without starting from scratch. You use a tried and tested formula, and benefit from the experience and support of the franchisor (the company offering the franchise).
Franchisees can enjoy many of the benefits of self-employment with less risk. Successful franchise operations have a much lower failure rate than completely new businesses. You can make a good living but you need to be aware of the potential pitfalls.
- A franchise is usually based on a proven business idea. You are basically copying a product or service which the franchisor has already shown can work.
• It is easy to check with existing franchisees whether the business really works.
• A good franchisor will continuously research and update the business idea. You may be able to use a recognised brand name. It can be easier to sell to customers who are familiar with the name.
• You will benefit from any national advertising or promotion undertaken by the franchisor. This is often funded by additional management fees.
You will also be able to use any trademarks the franchisor owns.A good franchise operation will give you full support. Typically, this includes:
• Introductory training, usually covering general skills (eg bookkeeping), as well
as training for that particular business.
• Help in setting up the business such as finding suitable premises.
• A detailed operations manual which tells you how to run the business.
• Ongoing support and advice.
Top franchisors often provide a franchise award manual. It will contain all the information needed to conduct due diligence.
You will almost always be given exclusive rights to the franchise in a specified region or to an exclusive client base.
• There will still be competition from other related businesses.
Financing the business is likely to be more straightforward. It can be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven start-up.
• Some franchisors have relationships with banks and can help you borrow money, and local enterprise initiatives may supply start up finance.
The cost may be more than meets the eye.
• You pay a fee to buy into the franchise (often £5,000 to £10,000, but it can be as much as £250,000).
You also have the usual business costs (premises and equipment, stock and other supplies). Some of these will be bought from the franchisor.
• You pay a continuing royalty on sales, or a management fee, regardless of whether you are making a profit or not. This can be a fixed amount or a percentage of sales or a mixture of both.
• Some extra costs may be charged separately. For example, a contribution towards the franchisor’s advertising costs or fees for the training you receive.
You have to agree to operate within certain limits.
The contract between you and the franchisor will usually regulate what you are allowed to do.
• You cannot change the business. For example, you cannot introduce new products to suit your local market.
• You can only sell your franchise to a buyer approved by the franchisor.
Your relationship with the franchisor means you are exposed to certain risks which are outside your control.
• The risk of the franchisor failing to fulfil its obligations (eg providing support in the form of brand advertising or training).
• The risk of the franchisor going out of business.
• The risk of the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with.
• The risk of actions by the franchisor or other franchisees giving the brand a bad reputation.
Evaluating a franchise:
The franchisor should provide a prospectus that answers all the basic questions.
What is the business? You need enough detail to give you a broad understanding of the business concept.
• What trading locations or territories are being offered?
• Who are the competitors? A good franchisor should provide a realistic assessment of the competition.
• What steps does the franchisor take to extend and update the business concept?
Who is the franchisor?
• How long has the business been going?
• How long has it been a franchisor?
Many franchisors are members of the British Franchise Association. If yours is not, why not?
• What experience and achievements do the key people have?
• How solid are the franchisor’s finances?
How much support will you receive?
• What training is provided at the start?
• Will you get help to set up the business?
Some franchisors will provide advice on the premises and equipment you need, legal support (eg with planning permission), and so on.
• What continuing support is provided? This can vary widely from almost nothing to full support.
• Can you get help when you need it?
The franchisor may have support staff you can telephone whenever necessary.
• Does the franchisor pass on its market research to you?
What are the terms of the franchise agreement?
• How long will the franchise agreement run (typically five to ten years)? Check whether you have an option to renew the franchise after this time.
• Will you have exclusive rights in your area for the full term of the franchise?
• What conditions and restrictions are there if you want to sell the franchise?
• What happens if you die or cannot continue the business for some reason?
If you are seriously thinking about buying a franchise, gather information from a variety of sources. Aim to know as much about the industry and the market as you would if you were starting your own business from scratch.
Contact the British Franchise Association (bfa) (www.thebfa.org.uk; 01235 820470).
• The bfa publishes a variety of handbooks and supporting information, including a full list of bfa members (franchisors and advisers).
• For further help and advice visit www.whichfranchise.com or
Talk to your bank.
• Most banks have franchising specialists and can offer information and advice.
Read the trade press. Publishers include:
• Franchise Development Services (01603 620301 or www.fdsfranchise.com).
• Franchise World (020 8605 2555 or www.franchiseworld.co.uk).
• Business Franchise (www.businessfranchise.com).
Keep an eye on the rest of the press. Many franchisors advertise in the business-opportunities sections of national papers.
As always, research thoroughly, talk to existing franchisees and listen to qualified advice.