How to franchise successfully
Buying a franchise is one way to go into business, but is it really a safer bet? We take a look at how to franchise successfully.
Going into business is always a risk and never more so than during the current downturn. But could a franchise of an existing business be a safer bet?
Instead of having to build a reputation and customer base, you can buy into a trusted brand with existing loyal customers. But what kind of start-up costs are involved? Would you have to commit to further investment? How much freedom do you have to innovate?
An important note
From researching different franchise opportunities, one thing quickly became obvious – there are no hard and fast rules. While this article will take a look at the most common scenarios, don’t make any assumptions about a franchise you’re considering.
Some franchise opportunities lock you in and insist on further investment, while others simply sell you the branded signs and even leave you to source the product. Some businesses offer their franchisees endless support, others simply see you as a tied-in customer and provide the bare minimum advice.
If you’re considering a franchise opportunity then don’t just think about which sector is right for you, think seriously about the support you feel you’d need to launch a successful enterprise. Then you can take the time to research other franchisees’ experiences and find the right business match.
Why run a franchise?
If you’ve got the business brain required to set up your own company, why would you choose to run a franchise instead?
Well, for many people it’s a more secure way to start a business. A good franchise opportunity has a proven business format, so you can see how well it’s worked elsewhere. To an extent the market research has already been done, you just need to investigate the local demand and competition.
Banks can be more supportive of franchise businesses and so are more willing to lend money than they might be to an unknown company or brand new venture.
Perhaps the most important reason to choose a franchise is the support available. A good franchisor knows what works and what doesn’t, and they want their franchisees to replicate their success. That means dedicated, specialist advice and support is available, assuming you’ve chosen a reliable brand.
The downsides of a franchise business
Of course, it’s not all positive. A franchise doesn’t mean that you avoid the usual dangers of going into business; you’ll still need to make a huge personal and financial commitment to get the enterprise off the ground in the first few years. As with any business, your investment isn’t guaranteed and you could lose it all.
If you take on a well-known franchise, you’re also invested in that brand’s wider success. Imagine it’s a well-known fast food brand and something horrible happens in another restaurant – say a newspaper gets hold of a picture of a deep-fried mouse. No matter how clean your own business is, you’re likely to suffer if the brand takes a PR hit.
Finally, you don’t have the same freedom to innovate with a franchise. A McDonald’s franchisee can decide not to run a national promotion, but they can’t invent their own burger or change the milkshake flavours, even if there’s local demand.
Finding the right franchise for you
Last year, there were 929 franchise brands operating in the UK, according to the British Franchise Association.
In fact, it’s an industry worth an astonishing £13.4 billion annually. The really good news is that 91% of franchise units, including newly-established businesses, were profitable – showing that this can be a safer way to set up shop.
But finding the right brand is essential, and it’s not just a case of matching up with the right industry.
There are no guarantees of business success, even with established and well-known brands. So you need to carefully consider what you can afford to invest and what return you’d need to make – there’s no point simply falling in love with an idea only to discover it’s out of your price range or not sufficiently profitable.
Next, you should think about your own skills. That doesn’t mean sticking to the same industry you’ve previously worked in; after all, wanting a change might be what’s motivated you to look at franchises.
But think carefully about your talents and limitations. For example, it’s probably not a good idea to run a restaurant if you hate dealing with the public, no matter how talented a cook you might be. You also need something that works around your own commitments. Finding the right fit will be essential to your business success.
If you’re considering a franchise business opportunity, it’s a good idea to consider a member of the British Franchise Association, as they have passed a strict accreditation process.
There’s a handy list of members on the association’s website.
Of course, the most important thing is to pick a business that you’ll enjoy. There’s no point escaping from the drudge of working for someone else, only to trap yourself in a business that you hate.
What can a franchise cost?
Just as there are huge differences in business size and capacity, there are vast differences in price.
Some franchise opportunities simply commit the owner to buying a few hundred pounds worth of stock. Major chains can demand up to £250,000 investment, or even more.
Bear in mind that some of the bigger franchise brands may require you to commit to further investment at a later date. For example, one major pizza chain requires franchisees to stump up between £120,000 and £150,000 – but also requires them to invest in another restaurant a few years later.
Another pizza chain, Domino's, reports that the full approximate cost of a franchise store is £280,000, of which £150,000 must be in liquid funds.
How about an example?
Subway is a good example. This isn’t a business that’s scared of expansion; there seems to be one on every street in some cities. More than 70% of its new franchises are set up by existing owners, suggesting they are at least content with their investment decision.
The start-up costs vary depending on the outlet, but a branch can be opened for as little as £100,000, with a £10,000 franchise fee.
According to Subway, it’s a good idea to have 50% of the capital required to hand, to allow you to borrow the remainder at a decent rate.
Franchisees then pay a percentage of their gross sales (after sales tax is deducted). Royalties are 8%, while franchisees are expected to pay a 4.5% advertising fee as well.
If you’re interested in selling Subway-branded sarnies, it runs regular seminars for would-be investors.
But there are also many more small-scale business opportunities, such as oven-cleaning franchises – you don’t need to have hundreds of thousands of pounds behind you to consider this option.
Where to get franchising help
From franchising seminars to legal help to financial advice, you’ll want to consult professionals before making any big decisions.
And not every accountant or solicitor fully understands the franchise market; the lawyer who put your Will together may not have sufficient knowledge of the sector.
Fortunately, the British Franchise Association can recommend experienced experts and franchise-friendly banks so that you only speak to people who can really help.
There’s also a lot of advice available online. The British Franchise Association is the obvious place to start, but there are plenty of other online resources.
For example, the Startups website has plenty of advice on opening a franchise, including case studies and existing franchises that are up for sale. The networking website UK Business Labs has a forum dedicated to franchising, where lots of experienced business owners share advice.
The Government web resource Businesslink has been scrapped, but you can still access its useful guides on franchises by running an internet search for ‘Businesslink franchise’. Guides include buying a franchise and turning your own business into a franchise opportunity.
Have you ever run a franchise? Do you run one now? Do you regret restricting your business or was it a good decision? Share your experiences and opinions with other readers using the comments below.