How To Identify A True Business Format Franchise

With so many franchise opportunities to choose from, selecting the serious wheat from the opportunist chaff can be a daunting task. Here, we provide a guide to the types of opportunities that come under the franchise umbrella.

Franchise Formats – Knowing The Differences

The motivation to franchise arises from a desire to accelerate growth with minimal expansion capital and get away from under-motivated line management. It is a simple partnership for growth: the franchisor provides the business system, brand, expertise and experience – the franchise owners invest money and effort in replicating the business locally.

Almost any type of business can be franchised – business services, commercial and residential cleaning, domiciliary care, restaurants, health and beauty, retail shops, fast printing, computer accessories, leisure and travel, legal and accounting services, home improvements, vehicle rental, car repairs, property services and maintenance... you name it, it’s probably been franchised!

Bear in mind, however, that a genuine franchise opportunity is one where the franchisor has clearly invested the necessary time, financial and management resources to test-drive the concept with a pilot operation before awarding the first franchises.

The greatest attraction for franchise owners is the limited risk. The proven nature of the business ensures that franchise owners are tapping into proven demand and profitability, and bypassing the often expensive development stage of the business. The systems and procedures will be professionally constructed, supported by experienced management staff and the franchise owner will benefit from realistic financial forecasts.

The NatWest/bfa Survey 2011 reports that almost one in five (18 per cent) of new franchise owners come from inside the industry, either having worked directly for a franchisor or having been an employee of another franchise owner. Of the remainder, the majority move to franchising from salaried employment.

To ensure uniformity across their networks, franchisors design their training programmes to cover everything the individual franchise owner will need to know to operate the business.

Comprehensive training opens up the availability of a franchise opportunity to a much wider population of potential franchise owners, enabling the franchisor to select the best candidates in terms of commitment, drive and enthusiasm for the business rather than searching for relevant experience.

In return for delivering their franchise package, the franchisor receives an initial investment from the franchise owner to cover the value of the intellectual property being transferred and the costs involved, plus the payment of an ongoing management service fee (a percentage of the franchise owner’s turnover) to fund its continuing involvement.

Not surprisingly this win/win approach has meant that franchising has continued to grow in popularity as a means for businesses to expand their operations and for people wishing to secure their job prospects or become their own boss.

This has helped increase the annual turnover of franchised businesses in the UK from £900 million in 1984 to £12.4 billion, according to the NatWest/British Franchise Association Franchise (bfa) Survey 2011, and over 1,000 business systems or franchisors offering recognised franchise opportunities to the UK investor-entrepreneur.

The success of franchised businesses compared to new start-ups has also generated interest from many of the banks, including NatWest/RBS, Lloyds TSB, and HSBC, which have specialist franchise departments to advise clients wishing to invest in a franchise.

The term franchise has been attached to all kinds of business opportunities, however the four main types of franchises are: Business Format Franchise, Business Opportunity Franchise, Manufacturing Franchise and Product Franchise.

Business Format Franchise

This type of franchise acknowledges the franchise system as a distinct method of doing business from the outset, with the franchisor benefiting from swift expansion with limited risk and the franchise owner buying into a proven business system. This form of franchise is characterised by franchises that are members of the British Franchise Association.

Business Opportunity Franchise

Typically these involve an exclusivity agreement for the franchise owner, whereby the franchisor supplies the brand, products and customers or accounts in return for a fee. Vending machine routes and distributorships are typical business opportunity franchises.

Manufacturing Franchise

The franchisor provides the franchise owner with the specifications to manufacture and sell its product in the franchise owner’s local market. An example of this is a soft drink franchise, where the franchise owner uses the company's ingredients to produce, bottle and distribute its products.

Product Franchise

The manufacturer grants a storeowner a distribution agreement and the right to trade under its brand in exchange for a fee or the purchase of a minimum inventory of stock. Many tyre shops and car dealerships use this approach.