Running a profitable franchise is not as easy as it seems. You need excellent managerial skills and a lot of hard graft to make it work.
For anyone thinking of setting up a business, it’s likely that the thought of joining a franchise has crossed your mind. And you are not limited to McDonalds and Burger King restaurants as there are scores of different brands to choose from covering lots of industries.
New figures from the NatWest/British Franchise Association survey shows the industry is now worth a staggering £11.4bn – in 2007, it was £10.8bn. Even more impressive is the fact that 90% of franchises claim to be trading profitably. The sector is growing rapidly and now employs 467,000 people.
Now consider the flipside 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. Plus, you won’t have to spend as much on promoting your product or service because people already know the brand.
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 training and should 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.
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 own overheads.
On top of this, the ongoing support is 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 business is doing. This is often the point at which some 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 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 like working for someone else again, 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 demonstrate your willingness to drive the business forward, and both you and your family must be prepared to work long and unsociable hours when needed.
Step-by-step guide to getting a franchise started
- Think about whether you really want to be self-employed.
- Consider the hours you think you can realistically keep.
- Calculate how much money you need to earn each month.
- Visit franchise fairs, read franchise magazines and directories, and research companies on the internet – try www.whichfranchise.com
- Once you have shortlisted the sectors you are interested in, think about whether there is potential for your business in the marketplace.
- Study the financial states of a few franchises that appeal to you and check that business for them is on the up – if they fail, so do you.
- Have meetings with the company you are chiefly interested in.
- Research the projected returns figures provided by the franchisor. Do you think they are achievable and are they good enough for you?
- Talk to existing franchisees to check that anything you are being told is the case.
- Look into 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 be able to partner them.
- Identify your strengths and your weaknesses as honestly as you can.
- Find out whether the franchise will provide training and back-up to help you balance any weak areas.
- Look at your finances and work out how much money you have available, and how much your bank is prepared to lend you.
- Check the legal agreement and consult a specialist franchise lawyer to look at it too.