What is a franchise? Advice for small businesses

In this article, Pip Wilkins of the British Franchise Association reveals how franchises work and how would-be business owners can be a franchisee themselves.

What is a franchise? A franchise could be the most viable option for your business

What is a franchise? A franchise could be the most viable option for your business

What is a franchise? For would-be entrepreneurs, a franchise is a self-employment business opportunity. You start your own company trading under an established brand with guidance and support on everything from marketing to financial planning to HR.

For small business owners, franchising is a way to expand more quickly and cost-effectively than opening further company outlets, by granting people (franchisees) the right to run their own business under your brand and systems. Legal safeguards are in place to maintain brand control, consistency and protection.

How does it work?

Franchising is like having a business blueprint. The idea is that the franchisor (original business) has gone through the process of establishing the brand, gained customer loyalty and, through experience, learned how to scale up the business. Franchising shows someone else how to replicate that success.
What is a franchise that works? Domino’s or Subway have a proven track record, and if you’ve ever ordered food at these places in the UK, then the store you used was run by a franchisee, not a corporate brand. They’re responsible for the staff and the products, but they operate using a bigger brand.

Many other well-known brands are wholly or partly franchised, such as Clarks Shoes, Thorntons, O2, Water Babies, Marston’s, Toni & Guy, McDonald’s…alongside a huge array of growing companies in just about every sector, from gyms to sports tuition and pet care to hair care, car care and health care.

Franchisees pay a fee to start their business, and monthly royalties thereafter (most commonly a percentage of turnover but a mark-up on goods supplied or flat fee are other options).

In return for that, they receive comprehensive initial training and ongoing support whenever needed from the franchisor. Whatever situation a franchisee faces, they can turn to head office – as well as any other franchisees also in the network – for real-life advice and help on how to overcome a challenge.

When ready, the franchisee can sell their business to a buyer approved by the franchisor, so they are building an asset for the future as well as being self-employed.

What are the criteria for franchising a business?

At a fundamental level, to be franchised your company needs to be:

  • Proven – not an idea, but demonstrable evidence of success
  • Profitable – at a sufficient level for both franchisor and franchisee
  • Teachable – there’s no point in franchising a business that only three people could operate
  • Transferrable – suitable for different geographies (a surf shop in Leicester isn’t a great plan)

You’ll also need a great brand and differentiation of some kind in your market. And it’s important that your business has a long-term appeal, rather than being a temporary fad.

Why do businesses franchise?

Broad advantages include:

  • Faster expansion: If care is taken to set the franchise up properly from the beginning then growth can be as quick as the time taken to find, on-board and properly support franchisees to grow
  • Lower capital outlay: Once the model is established, expansion comes mainly through the investment of franchisees, meaning it costs much less to grow
  • Leaner ongoing costs: A franchise head office supports its network of business owners through a team of staff, but franchisees employ each outlet’s staff, maintain accounts and so on
  • Better performance: Because they have a vested interest in the business, franchisees will do what it takes to succeed, as opposed to a manager who is largely rewarded the same regardless. Retailers have reported as much as 30 per cent turnover growth after converting a company-owned store to a franchise
  • Strength in numbers: The best franchise brands are those that successfully integrate franchisees as a collaborative network of business owners, harnessing the considerable power of shared know-how, experience and ideas from a group pulling in the same direction.

How does the relationship work legally?

What is a franchise agreement? An agreement is signed between franchisor and franchisee once both parties are satisfied it’s the right match. That’s very important – joining a franchise should be a two-way due diligence process, with time taken and clear heads. Selectivity is crucial on both sides for success.

The agreement is a legally-binding contract that sets out the rights and obligations of both parties. It is essential for franchisees to have it reviewed by a franchise solicitor before signing.

Most are for a five-year period with the right to renew, but some premises-based franchises offer ten-year agreements or even longer. The documents can be lengthy, with clauses covering just about every aspect of the relationship from start-up to eventual sale.

For franchisors, this document protects their IP, business model and brand from misuse, alongside an operations manual which outlines the day-to-day running of the business by the franchisee.

What are the advantages of becoming a franchisee?

  • Someone else has gone through the trial and error period (and associated costs) of establishing and growing the business; you should be left with what’s proven to work
  • Statistically better chance of self-employment success: annual franchisee commercial failures rates are under 5 per cent and around 90 per cent report profitability
  • Back-up on any aspect of running the business from experienced people
  • Access to technology that an independent wouldn’t thanks to economies of scale
  • Being part of a bigger brand, generating recognition, loyalty and expectations
  • Shared experience and knowhow, from both the franchisor and other franchisees.

What about the disadvantages?

  • There are systems that must be followed; if you’re looking for complete independence, franchising isn’t for you
  • Policies and procedures are set by the franchisor and must be adhered to
  • You’ll pay ongoing fees to the franchisor
  • Your business operates under the same brand as others, which means they could tarnish it.

What’s involved in franchising a business?

Franchising doesn’t happen overnight; it requires an investment of time and capital to get it right from the outset.

What is a franchise model? A good franchise model is bespoke to each business; templates or boilerplates could seriously harm your brand and should be avoided at all costs. This is particularly true of the franchise agreement, which is the heart of the protection for the brand you’ve given blood, sweat and tears to grow. Do not try to cut corners with it.

That said, there are common steps involved in franchising. They include a detailed business plan; ensuring IP protection and trademarks are in place; instructing a franchise solicitor to draw up an agreement; creating an operations manual, which covers the day-to-day running of the business for franchisees; a comprehensive training programme for new franchisees; a marketing strategy to find and recruit franchisees; and eventually setting up a pilot franchise, with an outlet run ‘at arm’s length’ as a franchisee will, to hone the model before you go to market with it.

Franchise development consultants can help with some or all of the process, and will often offer a free initial meeting to discuss viability. Taking the right advice from a British Franchise Association (BFA) accredited consultant is important, they have proven their understanding of best practice and have a track record of helping businesses franchise.

What is a franchise? It’s a business opportunity that is tried and tested and could well be the right fit for you. To find out more on becoming a franchisee or franchisor, visit the BFA website for impartial advice.

Pip Wilkins is CEO of the BFA. 

Further reading on what is a franchise

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