What is Franchising?

The BFA defines business format franchising (to distinguish it from other types of business relationships, such as licensing or agency agreements) as “…the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.”

Why Franchising?

You may have a business idea or maybe you’ve been running your own business for a while and believe the format is suitable for expansion. If you can prove the concept and be sure the business is capable of being replicated in different locations by following a set of instructions, you may be in a position to franchise your business. Franchising your business is a great way to expand because you can select franchisees who share your passion and determination to succeed in building your brand because they have a vested interest. Clearly there are financial advantages in that franchisees pay initial fees (which is great for cash flow) and ongoing royalties or management services fees (which is great for ongoing sustainable profitability.

If you’re an individual looking to become self-employed then buying a franchise is a great way to reduce the risk because you’re effectively paying to use someone else’s proven ideas and business concept, their brand strength and ongoing marketing.

How Safe is Franchising?

Let’s be realistic here, no business venture is without risk and you should make sure you’ve fully researched the franchise you’re considering, the local market conditions and your ability to meet any financing repayments. Very importantly (and often not given enough consideration) you also need to decide if you’re the right type of person to operate a franchise (there’s no point buying a franchise and then trying to operate outside the standards and methodology described in the operations manual) and that you have he full backing of your family.

But if you decide franchising is right for you, the fact is that, while no business is recession proof, franchised businesses are far more resilient to economic downturns. It is a matter of fact that well over 90% of franchisees report their business is profitable whereas successful business start ups outside of franchising generally amount to less than 10%.

Who’s in Charge?

It’s important to realise that the franchisor is firmly in control of the brand and the method of selling or delivering the products or services. It has to be because the strength of the brand is key to driving the profits of individual franchisees and the franchisor itself.

The franchisor has to ensure their brand is protected so you will find the provisions of the franchise agreement are 90% in favour of the franchisor – it has to be that way. It’s often been said that a brand is only as strong as its worst franchisee.

What about Franchise Fees?

Once a franchisee application has been received, vetted and approved and a location found, franchisees will typically pay and initial fee to the franchisor before they start to trade. This fee will typically include a capital investment in the form of a one-off franchise fee, training in the “know-how” and any shop fitting or equipment costs if appropriate. Remember you’ll also need to ensure you have enough working capital.

It’s worth noting here that a bank without a specialist franchise department will typically lend 50/50 to a new business start up (in other words, you’ll have to find half of the investment from your own funds and they’ll lend a similar amount. A bank who has a specialist franchise team will likely lend around 70/30 so you have to find less than a third from your own funds. This is because the bank understands franchising as a concept, understands that failure rates are much lower in franchising and is likely to lend more accordingly.

Once the business is up and running a franchisee will pay the franchisor an ongoing royalty usually called a management services fee (MSF). This is usually calculated by applying a percentage to monthly sales figures but could be a fixed amount or even a premium on goods supplied. There may also be a requirement for the franchisee to pay a separate ongoing percentage or fixed fee to a marketing fund. If this is the case the franchisor has to ensure these amounts are held in a separate bank account and used solely for marketing the brand.

In return for these ongoing fees the franchisor supports the entire estate with marketing and promotional strategies and individual franchisees with management services including training, business development advice and potentially accounting support.