Business Franchising: How It Works

Many people dream of owning their own business. But, the market is competitive and the economy is still stabilising, so you may not be ready to take such a risk. Another option you might consider, is buying into a well-known brand – through franchising. It’s a huge industry, with around 930 franchise brands in the UK, about 39,000 franchised outlets, with an overall turnover of well over £13 billion1. This guide gives you a few handy pointers to becoming a franchisee and covers the pros and cons of franchising.

Buying into a franchise can enable you to sell an established product or provide services under a brand that’s already a household name. But, it’s not all just about buying into a brand.

Investing in a franchise can offer you the peace of mind that comes from knowing that you’ll be working with a proven business model. You could also get expert advice on various aspects of running your business, such as finding the ideal site for the business. Once you have a location, the franchise may also help with designing the premises and even help with construction.

Because the franchise will usually want to maintain a certain level of quality and consistency, most will include training as part of the package. Make the most of this, because once you’ve been trained by the franchise, you’ll probably then be responsible for training staff that you take on in the future. And you’ll be expected to ensure that your employees have the training needed to be able to deliver the standards stipulated in your franchise agreement.

Depending on the franchise that you choose, you may benefit from increased spending power through bulk purchasing with all the branches in the franchise. That means that when you order certain products, because your fellow franchisees are also buying them, the suppliers may give you a better deal than you’d get if you were operating on your own.

The ‘cons’ of operating a franchise include that you may never be absolutely independent or allowed to run the business as you want – you’ll have to agree to run the franchise exactly as your agreement demands. That can include only being allowed to operate within a certain area and you may be forced to buy from suppliers that wouldn’t normally be your first choice. It’s worth checking that any package you’re considering really is as cost-efficient as it seems. Also note that you’ll probably be told which prices to charge and which hours to be open. And depending on the franchise, you could be forced to pay towards an advertising budget, whether you think it’s working or not.

On the other hand, if you choose to operate your own business, you’re on your own. This can be both a positive and negative thing. On the one hand you’ll have the freedom to devise your own procedures from scratch, organise any training and consider your own marketing. But on the other hand, that’s a lot of work that might not necessarily be your forte. With your own business you’ll also be able to choose your own suppliers, but you won’t be able to tap into any group buying power that being part of a franchise brings.

You’ll be able to choose your own opening hours – but whether you go it alone or buy into a franchise, you’ll probably end up working all hours anyway. And whichever business model you choose to follow, find out as much about it as you can.

If you’re about to become a franchisee, make sure you do your homework and ask plenty of questions so that you get a good understanding of the business concept. And be sure to search online for reports and information on the franchisor, along with unbiased franchise reviews. Are the franchisees happy with their investment?

You’ll no-doubt want to go through the exact terms of the franchise agreement with the franchisor, so be sure to get answers to any questions you may have.

• Will the trading location or exclusive territories give you a good chance of success
• Get all the costs. How much will you need to pay up-front? Can the franchisor justify all the fees?
• Will the franchise do well against the competitors in your proposed area?
• Is the business concept regularly evolving?
• How many years has the franchisor been in the franchise business? Is the management team experienced? Will this experience be passed on to you?
• How many franchisees have failed?
• Can the franchisor demonstrate a good track record? Is it on a sound financial footing?
• Have there been any legal issues you should be aware of?

If you have the opportunity to do so, try and speak with an existing franchisee. They could be your best source for unbiased information on the franchise. Remember, he or she may not be willing to share everything with you.

• Are the returns satisfactory? Are they in line with what was projected?
• What’s his or her impression of how the franchise works on the ground?
• What was the total investment, including any ‘hidden costs’?
• Did the franchisor give all the support that was promised?
• Was the training practical and were you provided with simple to follow guidance?
• Is there much unwanted interference from the franchisor?
• Does the franchisor quickly help with any issues?
• Is there a real demand for what the franchise offers?
• Any regrets about going into the franchise? – Was it all worthwhile?

However, you may want to be selling rather than buying the next big business franchise idea.

If you already run a profitable business that you’d like to expand, you might consider turning it into a franchise. However, to have a chance of success, your business has to be able to generate enough profit to satisfy both the franchisor and the franchisees that you’re hoping will buy into your brand. Here are some tips on rolling it out as a franchise:

• Know your business inside out – you’ll need to be able to give precise directions to a franchisee on how to operate, that could include everything from finding suitable premises and dealing with the relevant authorities to interior decoration of the outlet and how to train staff
• Put together an ‘elevator pitch’ that explains what the franchise does in 30 seconds – you need to be able to sell the idea fast
• You may consider taking on the services of a franchise consultant, as they could help with everything from assessing if your business is suitable for turning into a franchise, to helping create a franchise prospectus. Although they will need paying, the expertise that a specialist can bring to you may be worth it
• You could promote your franchise at franchise fairs, on the internet and through targeted advertising, that’ll appeal to people who’re interested in starting a business
• Once you get people interested in becoming a franchisee, screen them carefully. They’ll be representing your brand, so you need to know if they’re likely to put in the effort needed to make it a success. Try to find out if they’re likely to measure up to your high standards
• Decide upon a fair price for the franchise licences – a specialist franchise consultant could be invaluable in helping you to set up a deal that’s acceptable to both you and the franchisees

And once you’ve set up a franchise:

• Build up a good rapport: your franchisees may give you valuable feedback that improves the whole business
• Check that franchisees are maintaining your high standards – and provide support where it’s needed
• Make sure your pricing remains competitive and is consistent across your network

Whether you want to be the franchisor or franchisee, you’ll need to make sure that you meet all the legal requirements for your business.

If you decide to buy into a franchise, have the franchise agreement checked over by a legal expert, preferably one that’s experienced in this area, as he or she will more likely to spot any hidden scams or unduly onerous terms and conditions. And note that termination or expiry of your franchisee agreement will probably mean the end of your business.

It’s also important that you understand the business codes of practice and laws and regulations that will be relevant to the type of business you’ll be operating. These vary from business to business, so you’ll need to research this carefully.

One requirement that affects just about every type of franchise is tax. If you decide to go ahead and buy into a franchise, you’ll need to decide on the tax structure that it will take. So, for example, you may choose to become a sole trader2. This is the most basic business format, but be careful about choosing this as you’ll be liable for all the debts that the franchise may end up with. You might prefer to set up a limited company so that you’ll have some protection against debts that the business creates. Once you’ve considered your options, you’ll need to register your franchise for tax with Companies House.

The franchisor (the person selling a franchise package) has to pay tax on any initial lump sums taken for having the right to use the brand name, the good will of the business and training. There will also be tax to pay on any continuing fees or commission on goods or services provided by the franchisor.

Both the franchisor and franchisee need to keep receipts for all these transactions for use in future tax returns. And, the franchisee will have tax to pay on the profits that their new business creates. You may want to get expert help with your tax arrangements, but it’s also worth taking a look at the information specifically on franchising provided by HM Revenue & Customs.

Before you get as far as paying tax, you may need help to buy your franchise. Because you’re (hopefully) buying into a proven business model, usually armed with detailed business plans, many of the High Street banks might be interested in helping.

Generally, the banks and even some of the franchises will want you to already have about a third of the money needed to fund a franchise3. Many franchisees rely on savings to cover this third of the franchise funding. The other two thirds are often covered using a business loan.

If you don’t have a third of the money needed to start up a franchise, look out for franchises that offer a finance package that could fund your new business. However, before signing up to any funding deal, check around to make sure that you’re getting a reasonable deal. Friends and family may be interested in pitching in, or perhaps you could go into a franchise with a business partner that’s prepared to put up some of the cash. Beware of having to borrow so much cash that just servicing the debt becomes an issue that threatens the success of your venture.

Once funding is in place, you’ll need an account to (briefly) look after your start-up cash and then to carry out your franchises’ future transactions – from paying suppliers to staffs’ wages. When trying to weigh up what the various accounts offer, compare what you’ll be charged for the various services that you’ll need.

There can sometimes be hurdles to opening a High Street business bank account, such as having a poor credit rating or being a fairly new immigrant to the country. There are alternatives, such as business prepaid cards.

These are a hassle-free alternative to what the traditional banks offer and they’re usually quick and easy to apply for online –without credit checks being involved.

Whichever business current account you settle upon, once it’s up and running, you should transfer what you want to use as your wages into your personal account, to ensure that what then becomes personal spending doesn’t get mixed up with business transactions.

Finally, once you’re doing well, look after at least some of your profits in a business savings account so that you have money put by to make further investments in your business in the future.

References:

1: http://www.whichfranchise.com/feature_template.cfm?featureId=371 (Correct as of 21 August 2014)

2: http://www.retail-franchises.co.uk/Type/86-Sole-Trader-Franchises-Business-Opportunities (Correct as of 21 August 2014)

3: http://www.franchisedirect.co.uk/information/fundingthefranchisebusiness/gettingfranchisefinancefromabank/55/1683/ (Correct as of 21 August 2014)