Why Franchise Your Business?

Franchising is facilitating the expansion of an estimated 718 (Source: bfa/NatWest UK Franchise Survey) businesses in the UK - that's up by over 300 from the estimate 10 years ago. Stuart Anderson explains why if you're a business-owner you should be considering the benefits of joining their ranks.

Historically, there has been a variety of situations in which business-owners have instigated the development of a franchise network that has ultimately failed. Some have been motivated by a need to rectify poor cashflow by earning an income from the signing fees, others a desire to enjoy a position of leadership within a network of business people. For some, franchise development has represented an attempt to achieve growth without the bother of supervising other locations, while others have seen it as an opportunity to tie other operations into single-supplier own-brand product deals.

To these operators an increasingly franchise-wise marketplace is saying 'no thanks' as it embraces a methodology that is designed to ensure a fair and incentivising relationship between the franchisor and franchisee...a methodology that has garnered the term 'Business Format Franchising'. Done right, this mode of franchising will provide the vehicle for an already established and successful business to expand into a multi-unit national network within a shortened time frame and without a large scale investment on the part of the franchisor. The key here is that the business must have a proven track record of success, as this more than any other aspect is what franchisees are investing in. Simply put, a franchise is a cloned business - and for the clone to be successful the original business's DNA must be high grade.

Has the original business charted out a launch strategy, tackled the teething problems and set out its systems and procedures? Is it performing to growth standards that a new business would want to emulate? Has it built a professional, national-standard brand identity and corporate image? Is it generating a positive cash flow? Effective and successful franchise expansion can only commence once these questions are answered because only franchise opportunities offered by businesses in this position are going to be of interest to the best quality prospective franchisees scouring the market.

Rapid growth, reduced investment

With these strong foundations built, a business may be tempted to embark upon company-funded expansion, allowing the business owners to retain 100 per cent equity in the operation and prevent income streams from being diverted to franchise owners, but this is missing the point. Instead of pulling together the capital investment required to open a second company-owned outlet or office through business loans or from the business's own cash flow, the franchisor is allowing the franchisee to provide this capital and take on the risk, while still receiving a fair reward for the value of the intellectual property and concept that has been developed.

Company-owned expansion from the pilot through to national coverage will rarely achieve completion as quickly as franchising. This is because a franchisor will not need to build up huge staff and premises costs - rather the franchisor's capital can be committed to developing a small central organisation with a few highly skilled staff.

By doing this the franchisor cuts overheads and, unencumbered by staffing and administration issues, can focus more time on developing the business. By speeding up expansion the business network achieves higher economies of scale earlier, stronger brand awareness, is much sooner able to challenge for national contracts and, in the case of a fledgling market, is in a much better position to capture early market leadership and establish a dominant position over its non-franchising competitors.

Quality of service

Unlike licensing or other distribution agreements, the franchisor retains control over the quality of the products and services and the way they are marketed and distributed. Under the franchise agreement the franchisee will be required to maintain a specified standard of service, which can be monitored through mystery shoppers, client feedback and field visits. Beyond the obvious incentives, franchisees will have to maintain these standards if they want to ensure the franchisor will renew the franchise contract upon expiry or that it isn't - as a last resort - terminated early.

The franchisee's investment

The initial investment made by the franchisee in buying the franchise must fund all of the franchisor's activities in assisting the launch of the business. These include training, location and premises selection, store fit-out, local marketing and initial support such as 'hand-holding' (where the franchisor may maintain a staff presence in the outlet for the first week or two to assist the franchisee in managing the business). The initial investment must also take into account the value of the intellectual property being transferred to the franchisee, including the ability to operate under the franchisor's brand, use its business systems and procedures and access its knowledge and experience. Finally, the initial investment must also cover the value of the concession the franchisee is securing - the sole right to operate under the brand within the franchise territory and the sole distribution rights to the franchisor's goods and services. This territory may be set out through postcodes, or by calculating a radius from the location of the outlet. However it is calculated, it must be clearly set out within the franchise agreement.

In addition to the initial investment, the franchisee could have to make an ongoing payment to the franchisor in the form of a percentage of the franchisee's turnover or profits. This is called the 'royalty' in some quarters, but Business Format Franchisors have termed it the 'management service fee' in recognition of the commitment it requires from the franchisor. The management service fee is provided to the franchisor in payment for continued and ongoing support, including the operation of helplines and intranets, the securing of national contracts, website marketing, continued visits by field support managers and many other ongoing initiatives. A fair financial arrangement between franchisor and franchisee is one which has been constructed to ensure that both are working toward a common goal of maximising the profits of the business.

Important points to be aware of here are that the franchisor must put proper revenue reporting systems in place to ensure that the correct payments are made, and that this fee will usually not cover national marketing activities. Most franchisors require an equal investment from every franchisee to ensure fairness in this regard, as each receives an equal benefit. This capital will go into a marketing 'pot' which increases as the franchise network grows, allowing the franchisor to step up its national marketing campaigns.

Franchisees vs managers

It is their initial and ongoing personal and financial investments in the business that makes franchisees superior to managers - the motivation of working for their own rewards engenders a greater commitment to working beyond hours when required, minimising costs and ensuring the best practice and presentation of the business and its staff. Also, the manager is not committed to the business in the long-term - by training a manager many businesses may be training a future competitor. Franchisees are required to sign non-competition clauses, in effect agreeing not to become involved in the franchisor's industry for a significant term after the end of the franchise agreement.

Franchisors will set out the qualities and abilities sought in prospective franchisees during recruitment, which could include management-level experience, sales ability or communication skills, and will definitely include local knowledge and possibly even community involvement. They will rarely include relevant industry experience, preferring to install their systems and methodologies into a fresh and receptive mind rather than trying to combat those ingrained into someone that has previously operated in the sector.

Of course the advantage of franchising to the franchisee is that it provides a proven road map to business success. However, some franchisors encounter headstrong franchisees that wish to try alternative routes. While the franchisor is best advised to maintain homogeneity of practises across the network, a small number of these innovators within the system can actually assist the franchisor in making organic improvements to the concept which, once piloted, can then be passed on to the benefit of the entire network.

Going nationwide

In conclusion, instigating a franchise expansion programme will require an initial investment of capital to install the proper support structures, and the franchise investment fees received are not pure profit for the franchisor but rather recompense for the management time and capital outlay required to properly support the launches of the franchisees' businesses. However, while it won't transform a weak business into a successful one, with a committed franchisor head office team in place and a fair agreement that incentivises both parties, franchising will take a thriving business nationwide - and even into the international market.

*Source United Kingdom Franchise Survey 2005 BFA/NatWest