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A franchise is a compromise between being a wage slave and setting up your own business. Could this be your route to success? Chris Tindall reports.
In an industry blighted by narrow margins and poor returns.investing in a franchise might offer you a path to profits that won't keep you awake at night.
In fact, judging by a recent survey that was conducted on behalf of the British Franchise Association (BFA), there has never been a better time to offer your own business expertise to a proven. Ilesuccessful enterprise. . Over a third of the UK's franchisors cite finding a good person to run a 4, franchised operation as the biggest ongoing -.problem facing them: more than a quarter admit that they find it difficult to attract new franchisees.Top reasons include finding potential franchisees with the right skills and adequate fundsand getting their message to potential franchisees through advertising.
According to the BFA, franchising describes many types of business relationship, but the best known use of the word has arisen from 'business format franchising'. This is the granting of a license by a franchisor to a franchisee, entitling the franchisee to trade under the name of the franchisor with ongoing assistance on a predetermined basis.
However, setting up as a franchised operation is not to everyone's taste. Catherine Jackson, accreditation manager at the BFA, says motivation and commitment are essential in this line of work.
But she adds:"You need to be someone who can work within someone else's blueprint. If you're someone who can work to someone else's system and apply your commitment and motivation, then it's probably a cracking opportunity for you."
This is an important point. Jackson explains that "real entrepreneurs" mightnot fit comfortably within an inflexible, albeit successful.system created by someone else.
The downside Sean Derrig, national franchise manager for Snap-on Tools, says:-The downside is that the franchisor exerts a lot of control on what you can and can't do. Imagine being a McDonalds franchisee and deciding you want to change the sauce in a Big Mac.They won't let you do it as they need to make sure their whole network operates in exactly the same way. But you have the backup of a major corporation which has proved that the 'system' works."
This aside, the benefits of working within a franchised operation can be extremely tempting to those who are driven and determined to make a company work.
Jackson describes the ethos as "by yourself, but not on your own". She adds:“It's a very safe and successful way of going into business. You know what you're buying into is a proven business model."
Within reason, a franchise is open and available to anyone, assuming that they have the money for initial investment in their business. Raising this capital, which often runs into thousands of pounds, is a daunting prospect, so the actual process can come as a pleasant surprise.
Dedicated teams
"What is interesting is 88% of franchises are profitable," Jackson explains. "That's one of the reasons banks love franchising — because of the proven business model.The majority are enthusiastic; some even have dedicated franchise teams.They lend more favourably to franchisees than someone setting up in business on their own."
HSBC and NatWest offer infonnation on financing a franchise on their websites. Most of the major banks will lend up to 70% of the start-up costs for an established franchise. compared with 50% for new businesses. HSBC offers a business plan on its website to help would-be franchisees obtain finance — it also gives tips on checking out franchising.
NatWest has a franchise section. National franchise manager Mark Scott says:''‘Ve have over 100 specialist area franchise managers who are on hand to help new and existing franchisees by discussing their plans and identifying solutions for all their financial needs."
But no matter how sympathetic your bank is, there is no hiding the fact that the initial investment in a franchise is not cheap.
According to Nat West's franchise survey, the average initial cost of setting up a franchise, including working capital, equipment, fittings, stock and materials, is £42,400.
Jackson admits this is a lot, but she adds: "Someone could spend an awful lot less than that Think of yourself as an investor— you're investing in someone else's business."
Some franchises will cost far more. Amtrak Express Parcels' franchise administrator Sarah Jobson says you need a working capital of f.1.20,000— in effect, six weeks' trading—to begin working font: this amount includes buying the business's goodwill franchise fees and a five-year franchise agreement. Amtrak already has 70 franchisees across the UK.but Jobson says it's interested in hearing from more due to "resales". She explains: "These are franchisees looking to sell. At Amtrak you have a regional sales manager who will help you close la deall.We give you support in the early days. If you were setting up on your own you wouldn't have that."
Positive attitude
lowever.Jobson adds a note of caution:"You have to know something about business. We can teach someone to move parcels, but we need someone who understands costs.
Concrete distributor franchise Readymix likes to use owner-drivers for its franchises, because they have a positive attitude to work", according to general manager Alex Turner. He says the company favours experience over business acumen, but adds: "We need a balance between the two.We want someone hard working, who can provide a service to the industry on a day to day basis — basically a diplomat."
Potential Readyinix franchisees need £6,(X)0 in working capital and 0,000 for the 'franchise fee'. "That covers them until they are paid by their customers," says Turner.
Mike Noad, franchise manager at Interlink Express Parcels, says potential franchisees must have a minimum of £75,000 in cash. Working capital varies, depending on the size of the depot. Noad says the amount is close to the national average at between £40-50,000. Interlink has 87 franchises in Great Britain; about 10% are currently available.
The start-up costs at Snap-on lie at the other side of the national average, with a minimum of £10,000. Derrig says:"Unlike other franchisors, Snap-on does not charge a franchise fee, management fee or ongoing rovalties.lt makes its money when its franchisees do."
But before you reach for your chequebook you need to do your research.The BFA suggests you need answers to the following questions: • How viable is your potential franchise — will it be easy to market in your region?
• Can the company provide evidence of a sound business with proof of at least one successful franchised outlet with no signilicant record of failures?
• How much time and money can you devote to a franchise?
• What are your expectations?
• Is the franchisor BFA accredited?
BFA members have volunteered to be vetted by the industry regulatory body and must abide by its codes and standards. Jackson says the BFA turns down 50% of applicants in the first instance."I make an assessment of whether their franchise agreement is ethical, legal and honest," she says.
She suggests asking a lawyer with an understanding of the franchise sector to check out the franchise agreement. "Typically it would be a five-year term that would have a built-in renewal clause.The last thing you want is to find you are tied into something for five years. You must be comfortable and fully understand the terms they are bound by. "Also, talk to your hanker, because they're so keen on franchising and have a real interest in its success."
Derrig also advises talking to current members of the franchise network."They give you the 'warts and all' version rather than a sales pitch. Beware any franchisor who tries to limit your access to their franchisees."
Useful exercise
According to Derrig, Snap-on Tools sends interested applicants an information pack before sending them on a series of days out with existing franchisees.
Snap-on franchisee Peter I larris found this a very useful exercise."I had my three van drives— it does give you more of an insight. My advice would be to go and speak to people that are actually doing it.They will tell you what you want to hear." he says.
Derrig concludes: "As a franchisee you achieve success by copying other successful people. The franchisor has already piloted the system, proved that it works and made the expensive mistakes, so you don't have to." •