Q&A to put you on the right track to buying a franchise

By Nick Riding, Editor, Franchise World magazine

ThisQ&A seeks to address the fundamental issues of franchising for the beginner.

Q What is franchising?

It is simply a system for marketing goods/services that is not unlike dealerships, agencies or concessions

The franchisor sells you, the franchisee, the rights to set up your own local branch, or cluster of branches, to market the company’s goods/services

Q Would the company not be better off owning its own branches?

Yes, in terms of operating profits, but it would have to find the money to set them up, whereas it is the franchisee who funds the branches, usually through bank loans

The other big advantage to the franchisor is that it can expect that, as you have invested your own money, you will be more motivated and committed over the long-term to make the business successful than an employee

Q What is it going to cost me?

This, of course, depends on the franchise A business that you can run from home, for example, will obviously cost a lot less to set-up than one that needs premises, particularly in the high street

You pay an initial fee to cover your training, and the rights to use the brand and the business system for the period of the franchise contract

Also you will pay regular ongoing fees, a fixed fee, or based on a percentage of your turnover, or a mark-up on the goods that you are obliged to buy from your franchisor. There may also be an advertising/marketing levy, again based on a fixed fee or turnover

Q Will the initial fee be higher for the larger, ‘better known’ franchises?

Not necessarily The franchisor shouldn’t be setting out to make a profit from the initial fee, but from the ongoing fees

This is one of the important principles of the franchise system because it creates the incentive for the franchisor to help you build your business and continue to develop it Putting it simply, in order for the franchisor to succeed, you must first succeed

Q What is likely to be the scale of my profits?

This will, of course, depend on the franchise you choose, the territory or location you buy, and particularly how hard you work

The latter is critical Franchising is not about investing money, sitting back and spending the profits Launching and developing a new business, even with the back-up of a competent franchisor, is hard work

Franchisors are seldom looking for what are known as ‘absentee investors’ They need hard-working, fully-committed franchisees

The question can best be answered by looking at the franchisor ’s projections for the business and asking current franchisees whether they found them to be realistic

If the figures are impressive and you are prepared to work equally as hard as the franchisees you have met, you should be able to look forward to similar profits. After all, you will have had the same training and help that they did so on that basis, given your location offers similar potential to theirs, whether you succeed or not at the end of the day is down to you

Q Would it be better for me to go it alone in a conventional business and not have regular fees to pay?

You would miss the many benefits of being a franchisee, such as training, the use of the franchisor ’s proven business system and branded, marketing and ongoing development

You would also face much less risk than you would if you were starting out on your own, particularly in a type of business in which you had no knowledge or experience.

With a franchise you have all the help you need to set-up your own branch of a business in which success has been demonstrated by its existing franchisees

Speak to them, and ask their opinion of aspects such as the standard of their initial training, the accuracy of the franchisor ’s financial forecasts (income, outgoings, etc ) and the level of ongoing support they receive

Q Which franchise should I buy?

This is the big question only you can answer It’s rather like asking what house or car should you buy? As with them, it depends on your personal situation, preferences and available finance

What can you afford? What are your personal aptitudes and working background? What would you really like to do for the rest of your career? Would the business need the support and participation of your family? Would the franchise be profitable enough to support your lifestyle? Would it meet your work/lifestyle balance aspirations?

Before looking at these questions indepth, you need to ask yourself whether you are, in fact, suited for selfemployment, and whether you would be prepared to run the business according to the franchisor ’s rules

You will at the end of the day own your own business, but you must accept the fact that you are not entirely your own boss as you must run it according to the franchisor ’s system.

This is necessary to maintain the quality and integrity of the whole network After all, you are buying into the system not just to benefit from the brand but also its proven business system so why try to change it?

Q I often see franchisees described as franchise owners. Is this true? No, it’s misleading It is the franchisor who is the franchise owner.

Cer tainly, the franchisee owns his business, but it is only able to trade in a par ticular franchise under a contract with the franchisor for a stipulated period, usually with the option to renew for a fur ther ter m

It is only by owning the business that the franchisor can be in the position to police the network and ensure that each franchisee maintains the brand’s standards and reputation

This issue was made clear by one of the UK’s earliest and most successful franchisors who prefer red to call the system ‘business leasing’, as it is a process in which the franchisee ‘leases’ the franchisor’s brand and businessfor mat for a contracted period

Q Might the necessity to strictly follow the franchisor’s formula make the business insufficiently challenging?

This question is often overlooked. Some franchisees are, of course, more ambitious than others There are those who are looking mainly for a comfortable work/life balance, rather than making large profits

However, franchising does offer the ambitious the opportunity to become a multi-unit franchisee with a significant regional chain of outlets

If you are highly ambitious, negotiate with your prospective franchisor at the buying stage to include in the agreement an option on extra territories/sites Some franchisors particularly welcome franchisees who have aspirations to open a number of outlets and are particularly looking for candidates with the ambition to become multi-unit franchisees

The benefits for the franchisor is that it doesn’t have to face the costs of recruiting and training the ambitious franchisee and, most importantly, knows that he is successful in the business. You suit them, and they suit you Also financing extra units is easier as it can come from the profits of the earlier branches.

True entrepreneurs are, however, unlikely to be fulfilled in conforming to what they increasingly see as restraints imposed by the franchisor and they may, in fact, be better suited to starting a conventional business from scratch and go on to develop it as a franchise system.

Q What does the phrase, comfort zone mean in the context of franchising?

It describes the stage at which the franchisee’s business has become so profitable that he chooses not to develop it further He has reached his ambition and is happy with his work/life balance.

This causes two problems for the franchisor Firstly, it puts a cap on the future royalties it receives from taking a percentage of the franchisee’s turnover Secondly, it gives competitors the opportunity to capture a greater share of the market.

This situation is not easy for the franchisor to overcome It can offer incentives, such as a reducing sliding scale of royalties for higher turnovers and persuading the franchisee to sell back part of his area to create an extra territory for a new franchisee.

Ultimately, however, the franchisor may have to try and entice the franchisee to sell by offering to buy him out at an inflated price

Q What are master and regional franchises?

A master franchise covers the whole of a country and a regional franchise, an individual region of the country Such franchisees act similarly to a franchisor in respect to recruitment and control

In return, they pay a percentage of their income from initial and ongoing service fees from their franchisees to the parent franchisor The latter usually imposes a development target on the number of franchisees recruited over specific periods to ensure the holder develops the system

Franchisors sell such franchises, rather than franchising directly, to avoid the cost and risk of piloting and developing their system in a country in which they have no experience of the market or culture

They usually hedge their bet by including in the agreement a buy-back option that they can exercise after a period of time if the franchise proves successful.

It is not unknown for a wealthy U S franchisee to take a master franchise for a foreign country in the system in which he has made his wealth This is an example of the more unusual entrepreneurial opportunities within franchising

Q Are there any franchise laws to protect franchisees?

No, there are no laws in the UK specifically addressed to franchising, as there are in many countries, but the system is, of course, subject to commercial law.

The relatively few cases that have reached the courts have usually been brought by franchisees for misrepresentation Has the franchisor misrepresented the profits the franchisee could expect? Has the forecast for the sales figures been exaggerated or the setting-up costs reduced?

Q If there are things in the franchise contract I don’t like, can I change them?

No, not in a well-run franchise The contract sets out the rules under which the business has to be operated and, like the rules of a game, they must be followed to the letter

The quality and reputation of the system will depend on its standardised business formula which is spelt out in the contract and the operating manuals you must follow.

If franchisees were allowed to make their own changes, standards would differ from outlet to outlet; the franchisor would lose control; and customers would not get the same service across the network

As a result, the quality of the franchise and its brand would decline, and along with them the resale value of your business, when it comes to the stage you want to sell and make a substantial capital gain

The franchisor ’s refusal to make changes is an indication of the strength of its system Conversely, if it allows changes to its formula it is a sign of weakness and often its desperation to recruit franchisees One of the most essential ‘jobs’ of the franchisor is to police its network effectively

Q If I can’t change the contract, do I need a solicitor?

Yes, the contract is complex and you need a solicitor specialising in franchising to explain it to you It should set out in detail what the franchisor is going to do for you and what you will have to do in return. All this needs to be spelt out in the contract and, as it will govern how you run your business, you will need to understand it to the letter

As the franchisor has to protect its interests and those of the network even beyond the point at which you may have left the franchise, the contract can still control the options available to you after the two of you have parted A franchisee can’t take the sign down and continue trading as before but under a different name

After all, it provided your training and its business system. It wouldn’t like you to become a competitor and will, therefore, want to resell your territory to a new franchisee n

If you have a question, email info@franchiseworld co uk