Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn’t have a specific business idea or prefers the security provided by an established concept. The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the business offering you the franchise, and they also give you help and support.

Franchises have a much lower failure rate than completely new businesses. But it isn’t all plain sailing. Some franchises are better than others. And some people find that running a franchise just isn’t for them.

What is franchising?

The term franchising can describe some very different business arrangements. It is important to understand exactly what you’re being offered:

• Business format franchise: This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area. The franchisee sells the franchisor’s commodity or services, trades under the franchisor’s trade mark or trade name and benefits from the franchisor’s help and support. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage royalty on sales. The franchisee owns the outlet they run. But the franchisor keeps control over how commodities are marketed and sold and how their business idea is used.
• Distributorship and dealership - you sell the commodity but don’t usually trade under the franchise name. You have more freedom over how you run the business.
• Agency - you sell goods or services on behalf of the supplier.
• Licensee - you have a licence giving you the right to make and sell the licensor’s commodity. There are usually no extra restrictions on how you run your business.
• Multi-level marketing: Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer’s behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit. Be aware that some multi-level marketing schemes may be dishonest or illegal.

Advantages and disadvantages of franchising

Buying a franchise can be a quick way to set up your own enterprise without starting from scratch. But there are also a number of drawbacks.

Benefits:

• Your business is based on a proven idea. You can check how growthful other franchises are before committing yourself.
• You can use a recognised brand name and trade marks. You profit from any advertising or promotion by the owner of the franchise - the “franchisor”.
• The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchisor won’t sell any other franchises in the same region.
• Financing the business may be easier. Banks are at times more likely to lend money to buy a franchise with a good reputation.
• Risk is reduced and is shared by the franchisor.
• If you have an existing customer base you will not have to invest time looking to set one up.
• Relationships with suppliers have already been established. 

Disadvantages:

• Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy commodities from the franchisor.
• The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
• The franchisor might go out of business, or change the way they do things.
• Other franchisees could give the brand a bad reputation.
• You may find it tricky to sell your franchise - you can only sell it to someone approved by the franchisor.
• Reduced risk means you might not generate large profits.

You decide

As with any new business venture, you need to think about carefully whether you have got the right know-how and attitude to run a growthful franchise. Analysing your own temperament can also help you decide which type of franchise would be right for you.

Assess yourself:

• You must be prepared to sell. A franchise gives you a business blueprint - but it won’t automatically give you customers.
• Do you have the necessary stamina?
• Running your own enterprise can be stressful. Think how you react to pressure.
• You may be setting up a business because you want to be your own boss. If that is the case, would you be happy with the restrictions imposed by a franchise arrangement?
• On the other hand, you may decide to limit your risk. You might be more at ease with a franchise than starting a new business from scratch.

The right franchise for you:

• Do you like office work? Or would you favor a business that involves physical labour or using a particular skill?
• Are you content working on your own? Or would you be good at recruiting, training and managing employees?
• Do you prefer dealing with members of the public? Or would you like a franchise where you sell to business customers?
• Are you weak in particular business know-how such as finance? Can you locate a franchise that offers the support you need in those areas?

Find out about possible franchises

You can find out about possible franchise opportunities from a range of sources. A helpful starting point is the British Franchise Association (BFA). As well as offering guidance and seminars on franchising, it also provides details of members who may be offering new franchises and existing franchises for resale.

Franchises are advertised and written about in a variety of national newspapers and in trade publications such as Dalton’s Weekly and Franchise World.

Websites can be a useful source of information on franchises. You can find other listings using a search engine and employing search terms such as franchise opportunity or franchise directory.

Attending a franchise exhibition can also be a good way of finding out what’s on offer.

But tread carefully. Advertised franchise opportunities - particularly multi-level marketing schemes - can be untried, dishonest or even illegal. Assess the franchise opportunity carefully and check if the business offering the franchise is a member of the BFA.

Assess a franchise opportunity

To assess if a franchise represents a sound business opportunity, you’ll need to consider:

• what the business is and how it operates
• the location of the franchise
• the growth of the franchise concept - the number of franchises in the UK and how financially growthful they are
• the strength of competition from other businesses in the same market sector
• how long the franchisor - the business offering the franchise - has been in business and how financially secure it is
• levels of initial and ongoing costs
• how much training and support you’ll get in setting up and running the business
• conditions and restrictions in the franchise agreement, including how long it will run and whether you’ll have the option to renew

The franchisor will probably give you an information pack but you shouldn’t just rely on this. Ask questions and look for evidence of their claims.

Visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most growthful ones.

Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers such as Business Link, your solicitor or your accountant.

The costs of a franchise

When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.

Initial costs:

The franchisor - the business that sells you the franchise - usually charges an up-front fee, which should be relatively low, and covers the costs of administration. Good franchisors make the most of their profits from continuing royalties.

Your largest initial costs are usually your investment in:

• premises
• equipment
• initial stock

You will need to establish a business entity. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business, and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader - each of which will involve different costs - or your franchisor might have specific requirements.

Continuing costs:

You usually pay a royalty - a percentage of sales - to the franchisor. Alternatively you may pay a management fee of some kind.

Under the terms of the franchise agreement, you may have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.

You also have to pay the usual business costs - for example, rent for premises, utilities or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.

Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.

How to purchase a franchise

There are a number of key things you need to consider when planning to purchase a franchise. It might be worth thinking about the following:

• Assess yourself to see what kind of franchise, if any, will suit you.
• Find out what franchises are available and draw up a shortlist.
• Assess franchise opportunities carefully, ask questions and talk to other franchisees.
• When you find a business, investigate its financial prospects. Base this on a thorough research of performance figures. Include an analysis of three years’ accounts - if they have been trading for that period - and management figures.
• If you’ll need to raise bank finance, ask your bank if it will consider a loan for the type of franchise you’re considering.
• Do your own market research into business and competitors in your area.
• Draw up a business plan.
• Check the franchise agreement and get professional advice.

However, it is advisable to make sure you don’t:

• take up the first opportunity before investigating alternatives
• allow yourself to be hurried into making a decision
• pay any non-refundable deposit
• commit yourself before you’re completely satisfied
• assume a business will work in your area just because it works elsewhere
• rely on the forecasts provided by the business selling you the franchise
• sign any agreement without legal advice

Franchise agreements

The franchise agreement is crucial. Don’t sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. Get a specimen contract for them to review.

Areas covered by a typical agreement:

• Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
• Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
• Fees - what initial fee will you pay? What royalties will you pay on sales? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
• Support - how much help will you get starting the business? What continuing support will you get?
• Restrictions - what restrictions are there on what you’re allowed to do and how you must run the business?
• Exit - what happens if you can’t continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?

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