Considering Buying a Franchise

What is Franchising?

Why do companies franchise?

Should I consider Franchising?

What are the benefits?

What should I look for in a franchise?

Legal Advice

The Franchise meeting

Financial considerations

What Is Franchising?

Franchising offers an excellent opportunity for you to be in business for yourself. When you hear the word " Franchise" you probably think of fast food restaurants such as Burger King, McDonald's or Wimpy. But the truth is Franchising is so much wider than that.

In simple terms, franchising is where a successful business format is replicated. This will involve the setting down into an operations manual all the systems and procedures that the business owner has found gives them the best chance of success. Anyone joining the franchise will be expected to operate the business exactly as set out in the manual.

There are franchises available in almost every business area that you can think of in all price ranges. In addition, because franchising has such a low failure rate, your chances of success are extremely good.

Compared to starting your own business from scratch franchising can provide a relatively safer route into self employment. The franchisor has established a tried and tested path through the maze, and will have eliminated many of the mistakes that are often made when starting a business. It is this experience and system that you are paying for when you buy a franchise.

Whilst franchising is a safer route into self employment, it is not just a question of turning up, paying your money and being successful. The franchisor will not do your work for you and cannot be expected to. What is supplied is a proven format, name awareness, support and guidance. It will be still be your hard work and skills that make the business work in your area.

As a franchisee you will have access to market knowledge, established name awareness in the business sector that you will be operating in, training and marketing help. You will often take part in and contribute to national advertising campaigns which would otherwise be outside your reach.

Financially, you will pay the franchisor an initial franchise fee and the costs of shop fitting (where necessary) together with the costs of equipment required to run the business. Once established, you will normally pay the Franchisor a further monthly payment based on your turnover. This is known as royalties or monthly management fees. Effectively this is where you are paying for the ongoing support of the franchisor and his team. As the royalties are based on your turnover, it can be clearly seen that it is in the Franchisor's interest to help you succeed.

A successful franchise relationship is like a partnership. It combines your talents with the experience and knowledge of the franchisor.

With franchising, you are in business for yourself not by yourself

Franchisors not only have sound training programs, but also knowledge of financial requirements, marketing, competition & buying contracts - knowledge that might take you years to collect on your own.

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Why do companies Franchise?

For a company with a product or service to sell, franchising provides an excellent opportunity for rapid expansion without an enormous outlay of capital. It is a distribution system that allows a business to conserve capital, and at the same time achieve fast market penetration making it a very attractive proposition to most business owners.

One of the greatest advantages to them is that they get 100% commitment from their franchisees who have a stake in the business rather than staff or managers who simply work for a salary and may be less motivated. Franchising enables them to utilise the entrepreneurial skills of the franchisee network to achieve better results than might otherwise be achieved.

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Why should I consider franchising?

There are many individuals who like yourself, who want to be their own boss. They see no long range security in working for someone else, and feel that their potential income will always be limited as an employee

Franchising offers these individuals an opportunity to break free & own their own business whilst at the same time minimising the risk that is inherent in opening an entirely new business from scratch.

Franchising allows you to follow a tried and tested business system which will greatly improve your chances of success, as the statistics prove.

Franchising enables you to become involved as part of a company that has established a tried and tested system and has achieved some market share and name awareness. When starting a business as a self employed person you will make mistakes which can be costly if not catastrophic. An established franchise will have ironed out those problems. They will have a written system contained within the franchise manuals as to how operate the business so as to achieve maximum sales and profitability from day one. It is effectively the name awareness and the system that you are paying for.

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What are the benefits?

Franchising first became a recognised force in the UK during the 1970's

According to a survey carried out by the National Westminster bank and the British Franchise Association, the overall turnover of the franchising industry last year estimated at £6.4 billion, with the number of business format franchising systems growing to 541, up by 30 per cent since 1994.

The 27,000 individual franchised units in the UK are growing to give total employment in the sector of more than 250,000. This makes franchising larger than the whole energy sector and almost as big as the whole of the armed forces.

So lets have a look at the benefits of franchising:

Better chance of success

Research has shown that of all businesses starting today, only 20% will still be trading in 5 years time. With franchising these figures are reversed. The reason for this represents the other benefits of franchising.

A Proven Business

With franchising you are buying into a business that is already operating. The Franchisor will have made mistakes along the way and will have learnt from them. This knowledge is passed on as part of the franchise system. It enables you to start your business at a much higher point on the learning curve.

Support

Within a franchise there is or should be a great deal of help and support available. The support that you will need will change as your business grows. From day one you will need training and will be reliant on the Franchisor. As you become established, you will benefit from different types of support such as staff training and National account business. It may well be possible to collaborate with other franchisees on larger projects and just being part of a larger organisation can help.

Problem solving

From time to time you are going to hit problems. Your franchisor should be able to provide you with the necessary technical support. However it is invaluable to be able to talk things through with other franchisees, or the support team who may well have dealt with the same problem recently.

Management support

Many Franchisor's will hold review meetings with you to discuss all aspects of the business. You will be able to check your progress, celebrate your successes and plan for the future. Many businesses have failed in the past due to lack of good business advice.

Product Research and Buying Power

As part of a franchise network much of the product research and testing process will be carried out for you. It is also possible to take advantage of group buying discounts

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What should I look for in a Franchise?

When you take up a franchise you are entering in to a long term partnership with the Franchisor It is therefore vitally important to check the background & business performance of your prospective partner.

What areas should you look for ?

Firstly, establish what you want to do. Do you want to work in an office, from home or from a van ? What did you enjoy most about previous jobs? Try to establish what business types really interest you. If you are doing something that you enjoy you will stand a far better chance of success.

At this stage, when you are just commencing your search, it is perhaps more important to establish the basics. The key to a successful franchise relationship are:

Does the product or service interest you and fire you with enthusiasm?

Does the company have name awareness?

Has sufficient market research been carried out?

Does it have a successful operation and marketing system?

Is it a viable proposition?

Do you understand the role you will play?

Can you work with the Franchisor and their team

The above represents the initial starting point. A great deal of further research will be required before you finally satisfy yourself that you stand a good chance of being successful by purchasing a particular franchise.

Above all make sure you talk to franchisees who are already operating the business. They will normally be only too pleased to help as they were in your situation once.

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Legal Advice

Purchasing a Franchise is an important decision, as such it is important that you take advice from a Solicitor. Whilst many people consider that any Solicitor will do, we believe that it is important that you consult a Solicitor that specialises in commercial and Franchising Law. A specialist Franchise Lawyer will have all the up to date legislation at his fingertips and his experience will guide you through the process.

A specialist Franchise lawyer will check out many aspects on your behalf from studying the Franchise agreement to checking through tenancy agreements. Whilst most Franchise Agreements are, and should be set in stone it is important that you understand fully the Agreement that you are going to sign and the obligations and restrictions that are contained therein.

This section provides details of Franchise specialist Lawyers many of whom have fixed price charges for those people considering the purchase of a franchise.

Most Agreements and most Franchisors suggest that you take legal advice. Don’t cut corners seek advice from the professionals.

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The Franchise Meeting

The franchise meeting is a strange meeting in some respects. Many potential Franchisees make the mistake of believing that the Franchisor is only after their money and that they are interviewing the Franchisor.

The Franchisor has to be satisfied that the potential franchisee is capable of running a franchise. They have to be satisfied that he will follow the system and will be a good representative of the company. No franchisor will want to take on a franchisee if they are not absolutely satisfied will meet their criteria both in terms of skill and aptitude.

Equally, you have to be absolutely satisfied that the opportunity is right for you. That process starts with self assessment. Some of the areas that you carefully need to examine are as follows:

Do I understand franchising?

Am I prepared to follow the franchise system even when the going gets tough. Research has shown that a high proportion of franchise failures are caused by the franchisee just not following the system?

Do I have the financial resources to allow the business to grow?

Am I prepared for long hours and sometimes unsocial hours?

Are my family prepared for my self employment and how will it affect them?

Do my family support the business venture and can they help?

What transferable skills do I have?

What aspects of your current or previous jobs give you most job satisfaction and why?

Am I single minded enough to keep going?

There are many questions that you could ask and we have seen lists amounting to over 100 questions that are recommended. In reality you need to break your questions down into sections and ensure that you get answers to the questions that are important to you..

The Franchisee role

Support and training

Financial considerations

Development of the Franchise

The management team experience

The Franchisee Role

What is exactly the role of the franchisee on a day to day basis ? What skills are needed and do you possess them? If you do not have the skills are they covered as part of the training programme. Is the role one that you feel confident that you can be successful in ?

Support and Training

What level of support can you expert from the Franchisor? What areas does the training programme cover and how well does it address skill areas that you may be concerned about. What happens about staff training?

Perhaps equally important on a personal level do you feel comfortable with the Franchisor and his team. Remember you will be working closely together and you need to feel that you can work with them and that there is support available when you have problems.

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Financial Considerations

How much of your capital will you need to invest in the business, both when you start and in cashflow terms during the first years. Are you prepared to borrow the shortfall ? Do you have a reasonable credit history if you need to borrow ?

Establish exactly what you get for your money especially if equipment is included. If training is residential or at head office do you have to pay separately for accommodation etc. ? Is a deposit required? If so are there any circumstances in which if you don't proceed you will lose your deposit or part of it ?

How much will  you have to pay on an ongoing basis for management fees and marketing allowances ? What do you get for your money ?

What level of income can you expect ? When will money start to come in? What level of gross profit can you expect to achieve? Will the Franchisor provide financial projections (recent legislation means that many Franchisors are not prepared to give actual projections and will rely on a series of projections at various turnover levels)

Many Franchisors especially BFA members have negotiated lending facilities from the banks, establish if these are in place.

Development of the Franchise

Find out about the history of the franchise, in particular when was it established ? Was a pilot operation carried out and are there accounts available?

What is the business background of the Directors? Do any of them have failed businesses or businesses that have been put into liquidation?

Has the business been adequately researched and market tested?

How many franchisees do you have, how many have failed  or sold their business? If they failed why did they fail ?

You should also ensure that you have established the franchisors plans to develop the network. Normally growth should be at a rate that can be supported by the management team.

Ask for a list of existing franchisees and try to talk to a cross section of your choice .

The Management Team Experience

How experienced are the management team in both the business area and in franchising. Remember you need to feel comfortable and confident in their ability.

You should also seek the advice of a Solicitor and Accountant who will help you to make sense of the various replies to these questions. The Lawyer will also help you deal with the franchise contract. a list of recommended lawyers can be found in our professional help section.

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