Franchising can be a great way into business. There are lots of advantages to taking on a business model that is proven and established, but there are downsides too. Read on to find out if franchising is for you.
Some of the biggest high street names are franchises – McDonalds, Subway, Pizza Hut. There are other companies that you’ve probably heard of but not realised they are run by franchisees – Pirtek, Snap-on, Europcar and Mister Minit for example. Research has shown that franchise start ups are much more likely to succeed than a go it alone.
This probably points the way to the biggest advantage to buying a franchise – you’ll be working with an existing well known name.
So what is a franchise?
A franchisor takes an existing successful business model and allows you to use it. So as an example they allow you to open up another branch of a well known restaurant chain. They give you all the information you need, show you how to train your staff, how to brand your premises, what fryers to buy, which fridges and how long to cook your chips for. Pardon the pun but everything is handed to you on a plate!
In return you pay them an initial licence fee together with an ongoing fee based on how much you sell. You’ll probably be expected to comply with all of their regulations, buy your stock from them and your uniforms, stationery etc.
Franchises – the good bit
Who would think that the new branch of KFC that opens up is your first foray into the world of business? But of course by the time you are up and running you’ll have been completely trained in the ways of the business you have become part of and may even have spent some time working for another franchisee to get your feet under the table.
When you take on a franchise there’s little to think about, the branding, colours, stationery, uniform is all taken care of. Stock levels and mix will be organised and your selling prices will be set. All of your products will be market tested already and you should have a market full of customers that know your name.
By banding together with a large number of other businesses you can buy in bulk and get access to service levels that small firms can’t compete with. National advertising is possible as with so many people in one group it becomes cost effective.
All of your business methods have been worked out in advance and are proven to work. You’ll have a business plan in place and suppliers and backup will be on hand. So much is done for you that it reduces the risk of business failure and franchises tend to do better and last longer than blank page startups and if you do have problems then there is always the franchisor to help or other franchisees to talk to.
So much is laid on that people with little or no experience can take on a complex business and run it like a pro.
There is so much to be said for franchising you almost wonder why people don’t all do it. Almost…
What could possibly go wrong?
When you read a list of advantages like that above it’s easy to get carried away with the idea.
In fact the list could have been produced by a franchisor, but you have to remember that there’s no such thing as a free lunch – even if you do own a branch of a well known burger chain!
The major drawback cited by non franchisees is a lack of independence. Business owners tend to want to own their own business and not run a branch of a big one. Some of the bigger franchises are so regimented that they almost ‘run on rails’ and the experience can be more like being a machine operator than a business owner. The fact is that you are representing the brand in everything you do so naturally the master franchisor is going to want to control that. There may be obligatory monitoring visits, legally enforced discipline and you may feel more managed than manager.
When you start your own business what you make is yours. When you take on a franchise you’ll definitely pay an upfront fee, you’ll pay to fit out premises or buy equipment and you’ll probably have to pay a licence fee paid as a percentage of your sales or profit and on top of that you’ll be required to buy your supplies from head office. It can almost feel like you’ve paid for the privilege of making money for someone else.
When we think of franchises, we think of the top brands such as McDonalds etc. But the majority of franchises aren’t so well known so you may well face the same issues as starting your own business. If the franchisors advertising and marketing is lacklustre then there’s nothing you can do about it. if they charge too much for their products then it’s tough, you’ll just have to pay up.
Many franchisees report feeling as though they never really own their business. After all they really only pay a licence fee to use the name. They may own the shop that they work from but if they allow the agreement to run out then they’ll be legally prevented from trading under the name they’ve worked so hard to build up.
Whilst being part of a group might be good initially, if something bad happens elsewhere then every franchisee suffers. Starbucks recently began selling its coffee through franchises at around the same time it suffered from bad press due to its tax policies.
Liars cheats and vagabonds. Most franchisors are honest trustworthy individuals but there are a few bad apples. They may embellish expected performance, give a dishonest view of the backup available or otherwise gild the lily in terms of the franchise offering. Remember you’re probably going to be asked to pay over a lot of money to join their club and your first contact with the company is probably going to be with a ‘business development manager’ or as we accountants call them ‘salesmen’. Of course there’s nothing illegal in presenting your best side. But sometimes it goes a little too far
If it sounds too good to be true then it probably is
Beware. Out in the ocean full of Nemos is the occasional shark. They’ll present opportunities as franchises when at best they can be described as Multi Level Marketing and at worst a Ponzi scheme.
Think about quality. A Subway franchise will cost you £101500 but franchises are available for as little as £100. What exactly are you going to get for that?
Above all take advice
- Get someone to look over your plans – ideally a consultant, maybe an accountant but not your mum or the bloke down the pub.
- Don’t sign anything without talking to a lawyer – get someone who is experienced in franchising and not the person recommended by the people trying to part you from your money, Don’t be swayed by claims of a special cheap rate
- Speak to existing franchisees that you choose – not ones that are chosen for you by the seller.
- Visit franchises if possible and assess whether that is the sort of job you want for the next 5 years
- Check them out online. Do a Google search at the very minimum, try Duedil, companies house or any number of different sites that will give you some background.
- Don’t believe anything – it’s not a nice place to be but don’t trust anything you’re told especially if they won’t put it in writing.
- Give yourself time -the more pressure that is put on you the more time you should take. give yourself a cooling off period whilst you think about it. Genuine franchises won’t need to do the old ‘I’ve got someone else interested in that area’ trick.
- Check out the British Franchise Association website – you’ll find lots of useful advice here http://www.thebfa.org
- Consider buying an established area – often there will be already running areas that have full sets of books and a trading history. It may be an idea to look for these rather than buying a fresh start.
Franchises can be a great way to get into a business of your own. Like any business though, decide what you want before you start looking and take advice. Don’t accept anything you’re told verbally and get it in writing. Then take your time over the decision. If it doesn’t happen then it wasn’t meant to be. After all your ideal business could be the next one along!