Set up a franchise

By at home

Are you thinking about setting up a business? if so, the thought of joining a franchise has probably crossed your mind.

And you’re not limited to McDonald’s and Burger King restaurants as there are scores of different brands to choose from covering a vast array of industries.

New figures from the NatWest/British Franchise Association survey shows the industry is now worth a staggering £10.8bn – in 1999, it was £7.4bn. Even more impressive is the fact that an incredible 93% of franchises claim to be trading profitably – up from 88% in 2004. The sector is growing at twice the rate of the UK economy and it now employs 371,600 people.
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% – a massive difference.

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 as opposed to from a new, unknown company.

On top of this, you won’t have to spend as much on promoting your product or service because people already know what to expect from the brand. So hopefully, by the time you open your doors, you should have a small army of customers waiting. And if you don’t, no need to fret too much as a good franchisor should help you to find them and teach you how to retain them.

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 that would otherwise be too costly and difficult to achieve in a small space of time. For example, the property sales and letting company Northwood has built up 43 outlets in the space of three years. It is difficult to imagine how that could have happened via any other route.

You, the franchisee, will own the business and can start trading once a license has been issued to you by the franchisor. There are some aspects that you will have full control of, 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 by the franchisor. 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. It is chosen carefully by the franchisor, as where you are situated is considered to be key. The franchise will make sure that its traders are not encroaching on each other’s territories, and that new outlets will operate in areas where they have the greatest chance of attracting the maximum number of customers. You can choose your location from a selection on offer, but naturally, the best locations have the highest license fees attached.

The benefits..

Working with a successful partner obviously has many advantages and financial benefits top 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 trading name. 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’ll benefit from years of experience and be able to avoid common pitfalls to ensure a shortcut to success. A good partner will also offer you training and work on enhancing the skills you have. For example, electrical goods company Bang & Olufsen’s induction training programme is available for both franchisees and their staff. It is an intensive five-week course, and includes a trip to the international head office in Struer, Denmark.

It’s in the franchisor’s interest to ensure you succeed and, following initial training, you should be offered guidance and support on an on-going basis either in the form of a helpline or visits from your representative. Providing you’re willing to work hard, you have a profitable business within your grasp.

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’re even considered. This is partly because you will still be responsible for your own overheads, like rent, rates, bills and salaries.

On top of this, the on-going support you receive is covered by a regular management fees or royalties, based on your turnover. Each time you renew your contract, you will need to pay a new fee, which is most likely to be based on how well your firm is doing.

This is often the point at which potential candidates decide a franchise is not for them. Charanjit Toor, 39, 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 even spent two days working in one outlet to see if it was for us. Once we sat down and looked at the initial fees and monthly royalties, we felt they were too high. It was almost like working for someone all over again, so we decided to launch our own business instead.’

Even 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 to you. You must demonstrate your willingness to drive the business forward, and both you and your family must be prepared for long, unsociable hours when needed.

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