Finding out if franchising’s the best option for you
It’s not unusual to hear complaints about a lack of local, independent businesses on our high streets and retail parks.
Interestingly though, many of these national chains and familiar brands are run as franchise operations by local people, and at their own risk.
From fitness and fast food to greeting cards and coffee, franchising offers the clear advantage of a head start using a tried and tested business model and reputation.
In theory, it should reduce start-up risks and, at the same time, enable an established business to extend its reach quickly without all of the commercial dangers associated with expansion.
And sub-franchising, or becoming an area developer for a territory, is another option and a means of rapid expansion.
How franchising works — weighing up the options
A franchisee pays a fee for a licence of the franchisor’s name and branding, so their business looks the same and benefits from existing customer good will, while the franchisor provides guidance, services and training.
In return for those benefits, unlike an independent enterprise, the local franchisee is not in full control of their business and has to operate the business strictly in accordance with the franchisor’s standard methods and procedures (as set out in an operating manual).
The franchisee also has to acquire stock from an approved supplier, and undertake regular training to ensure the consistency of delivery and customer experience across the franchise network.
Costs incurred, some or all of which could be mandatory, could include
- Initial and ongoing licence, franchise or royalty fees
- Induction and continuing staff training fees
- Payments for fitting-out and upgrading of premises to standard requirements
- Purchase of stock from a specified supplier
- Purchase or lease of required equipment and upgrades from a specified supplier
- Costs for launch and ongoing advertising, marketing and rebranding and insurance costs
- Annual management or service fees
Franchising may be more expensive and less flexible than starting a business from scratch, especially when it comes to selling it or succession on death — but financing arrangements may be available, and it may offer a quicker return on investment by generating higher profits sooner, with less risk.
Assessing the options
In assessing a franchise option, it is important to look critically at the whole prospect.
This means looking beyond the attractive branding, product or service and its potential, and really examining the franchisor: what is required from them at the outset and in terms of ongoing support, whether they are likely to deliver what’s promised, and what they are getting out of it.
- How long they have been running the business as a franchise operation
- How many other franchisees they have
- Where they are, and to what extent they are in competition
- Whether any have failed and if so, why
You should also choose some other franchisees to speak to about their experiences
Usually a franchise is offered on a “take it or leave it” basis with a standard suite of documents, but do not assume, even if this paperwork is accepted by others, that the contract terms will be reasonable.
Some franchisors are surprisingly ill-prepared, especially if a franchise operation is fairly new, for example, it’s not unheard of for a prospective franchisee to discover that a franchisor’s brand name and logo was not yet registered as a trademark before they were being pressed into signing.
Franchise documents tend to be complex and it can be difficult to negotiate changes later, or for a franchisee to terminate arrangements without facing hefty financial penalties.
In the same way the behaviour of one franchisee can negatively impact the brand as a whole — for example in food poisoning incidents — the behaviour of the franchisor can potentially have an adverse effect on the franchisee, particularly when you consider customer brand perception following, for example, allegations of tax avoidance.
And from the franchisor’s perspective, it’s not ‘easy money’ either. There is a lot of planning and preparation required, together with considerable ongoing responsibilities, required to make things work: not least of which is managing adverse publicity in scenarios such as those mentioned above.
We represented a client whose franchise failed partly because the franchisor did not provide updated equipment that the franchisee could not get elsewhere.
Meantime, the competition was offering better facilities with up-to-date equipment so was able to get ahead, meaning the lack of flexibility and the franchisor’s failure put the franchisee at a commercial disadvantage.
Consider the proposition. Understand the implications
So the advice is really that, as with any business venture, it’s important to carry out checks and consider the proposition carefully — and in great detail — to ensure that a particular franchise is right for you.
- Make sure you fully understand the implications of signing the documents
- Don’t be pressured into signing quickly
- Be prepared to walk away if they are not acceptable
- And of course, taking independent legal advice before signing could help you avoid expensive mistakes.