Turning your business into a franchise offers a way to expand while someone else bears a good portion of the risk. Kate Horstead finds out what’s involved
You might associate franchising with pizza outlets and corner shops. But a very wide range of businesses have been successfully turned into franchises, from electronics retailers to financial advisers and theatre schools.
If a business can be packaged and replicated profitably, it can be franchised – and the growth possibilities for a successful operation are tremendous.
“The biggest advantage is being able to build your brand on a national basis using someone else’s money,” says Pip Wilkins, operations manager for the British Franchise Association. “Plus, your franchisees’ fees can help you develop your business into different areas.”
What is franchising?
Franchising involves allowing someone to set up and run their own business under your name. You provide practical support and oversee the way your offer is marketed; they pay you a fee – usually a percentage of turnover.
“Most franchisors will give training in sales and finance,” explains Wilkins. “They will also be responsible for research and development, sourcing the best suppliers and materials and ensuring the franchisee stays up to date.”
Unlike an ‘in-house’ expansion, you bear little of the financial risk and none of the day-to-day management responsibilities for each new outlet. In return, you take only a portion of the turnover generated by your offer.
“The fee depends completely on how much the franchisor does,” Wilkins continues. “The average is 10% of the franchisee’s turnover, but it can be as low as 7% or as high as 20%.”
To be suitable for franchising, your business must be profitable enough to make money for both you and your franchisee. Bear in mind also that you will need to make an up-front investment to create your franchising package and attract franchisees.
You will also need to be sure that your offer can be replicated consistently, as your customers will expect it to be the same everywhere. If your product has only short-term sales potential or a geographically restricted market, it is unlikely to be suitable for franchising.
“If you’re thinking of franchising, you should attend a seminar or talk to an accredited consultant,” Wilkins advises. “You’re going to spend a lot of money so it is worth doing some research.”
“There are several industry magazines and websites in which franchisors can advertise for franchisees,” he adds. “Another way to attract them is to attend trade shows or franchise exhibitions.”
The franchise agreement
A legal agreement will detail you and your franchisees’ obligations to each other, and what happens if either party decides to sell their business. “If you deal with a consultant, they will recommend a solicitor to whom they will explain what is needed in the agreement,” says Wilkins.
“A lot is standard, but some will be tied into your business and what you want to get out of it. Most franchisors put in minimum clauses to ensure that the franchisee does a certain amount of new business annually, for example.”