Franchising Explained
Franchising is a ‘joint venture’ between an independent person (the franchise owner) and a business owner (the franchisor) who want to expand their activities and franchise network. The venture is governed by a franchise legal agreement (or contract). This gives the franchise owner the right to operate using the franchisor’s trade name/trademark, in accordance with their business format for a specific period of time.
All aspects of the franchise owner’s business are strictly controlled including image, products or service, systems and administration. This method is usually known as ‘business format franchising’ and a well-established and proven business format franchise should provide:
- An established market for the franchisor’s products or services
- Proven sales, marketing and operational procedures
- The benefit of an established business name
- Franchise training (ongoing franchise support and help in running the franchise business)
- Where appropriate, help in finding, fitting out and furnishing premises.
In return, you pay the franchisor an initial franchise fee to ‘buy in’ to the franchise. You will also pay ongoing management service fees (standard procedure in franchising), or a mark-up on the goods and materials supplied by the franchisor. You may also be asked to contribute to national franchise advertising costs.
The Advantages:
Proven format – you enjoy many of the advantages of an established business, such as a tried and tested product or service, a set of established operational guidelines and in most cases, a pretty good idea of whether or not the format will work in a chosen area or location. You can also call on the experience and expertise of both the franchisor and other franchise owners.
Trade name – particularly where a franchise operation is well established, potential customers will be familiar and comfortable with the product or service you are offering and it should take less time to establish your business.
Training and support – you will be trained in all aspects of the operation including product knowledge, customer service standards, book-keeping, VAT returns and legal matters such as health and safety. It is these areas that often cause the newly self-employed the greatest difficulty and are often neglected because of the day to day pressures of running and expanding a business.
Advertising and promotional support – undertaken by the franchisor both locally and nationally. This means that your business can be promoted in a way not normally available to the small business proprietor, for example, TV and national press. Promotional support may include leaflets, ‘freebies’ and special offers. You may have to pay a small levy to the franchisor for these services.
Bulk purchasing and negotiating power – you may receive your supplies from the franchisor. Because all purchases for the operation are being made through a central point, significant discounts can often be negotiated.
Research and development – no business can afford to stand still. If it does not develop and change, it is likely, in the long run, to decline. A successful franchise operation will have the resources to devote to research and development.
Finance – because you have the benefit of a proven business format behind you and projections which are normally based on reality and experience, your bank is more likely to look favourably at your lending request to purchase a franchise. There are independant finance bodies set up to assist with the purchase of franchises too.
The disadvantages
Lack of independence – the franchisor will control many aspects of your business and receive a proportion of your sales income.
If the franchisor fails – this could have major implications for you and the other franchise owners, and if many of the other franchise owners fail, again this could damage your business.
Devaluation of trade name – if, for instance, a widespread outbreak of food poisoning is traced back to one of the outlets of a well known franchise and given national media coverage, you and all the other franchise owners may suffer accordingly.
Restrictions on sale of business – a franchisor should take great care to ensure that franchise owners are ‘right for the business’ and will not allow you to sell without approval. Nevertheless, the franchise contract normally allows you to sell your business, subject to the conditions of the agreement.
Restrictions on business activity – the franchisor will not normally allow you to become involved in activities outside the agreement. This may mean you are unable to exploit profitable business opportunities within your franchise operation.
How do I find the right franchise for me?
Look at your own skills, your background, training and qualifications and build these factors into your choice of franchise. The franchisor will in turn be looking at the qualities you possess to ensure that you are a suitable franchise owner for their network. Also take a look at different brands in different sectors, Franchise Supermarket will offer you the opportunity to view brands in varying investment levels
Ask the right questions!
When you take up a franchise, you are entering into a long term business relationship with the franchisor – so it’s extremely important that you check their background and business performance of your prospective franchisor.