Franchising
What is it?
How much does it cost?
Is it for you?
By Michael Amies
A franchise is a license to operate a business under a brand name, in a certain
location or territory, under certain conditions in return for a financial consideration,
comprising a fee, royalties and sometimes marketing costs.
For more information about franchises, which ‘high street’ names are franchises and
how much each is likely to cost visit the British Franchise Association website at
www.thebfa.org
Frequently Asked Questions
1. Who receives the fee? The Franchisee pays the Franchisor
2. What is a joining fee?
This is the first payment, which ranges from
£5,000 to £50,000 and covers the Franchisor’s costs in attracting, recruiting,
training and assisting the start-up Franchisee. Part of this fee will also be
used to cover costs in establishing the brand.
3. What is a royalty or management fee?
This is an on-going fee that is
paid to the Franchisor by the Franchisee. You can expect to pay between 5
and 10 percent of your annual turnover in royalty or management fee.
4. What is a marketing fee? Some franchises require the Franchisee to
contribute to the Franchisor’s marketing programme to promote the whole
network. The figure is not huge, typically 2 percent or less.
5. How much will a franchise cost?
This will vary greatly depending on
the type of franchise. It can be as little as £1,000 for a ‘from home’
consultancy to in excess of £50,000 for a restaurant or high-ticket retail outlet.
6. What is working capital and how much will I need?
Working capital
is the amount of cash or credit that a Franchisee needs to cover the period of
development between starting the franchise and it making enough money to
generate sufficient cash flow to meet business needs. Working capital is
often underestimated and is the single most common cause of a franchisee
failing. The Franchisor will indicate the amount of working capital needed to
help the Franchisee understand this aspect of the business start-up.
7. What support can I expect from the Franchisor? The Franchisee is
paying money, often a considerable sum, to operate under the brand and in
doing so will receive a package of support measures which a totally
independent business owner does not have. The Franchisor should support
full training before you start up the business and top up your training as you,
our product and service develop over time. The Franchisor will also provide
assistance with acquiring capital equipment, including vehicles, signage,
premises where needed, and supplier networks. The Franchisor should also
provide marketing support plus support the Franchisee with product or service
development.
8. What’s the difference between a franchise and a fully independent
business? Franchising is ‘being in business for yourself, but not by yourself’.
Franchisees are independently registered businesses which have undertaken
to develop a defined territory. There are no guarantees provided or given
between Franchisor and Franchisee beyond those defined in the Franchise
Agreement, signed by both parties. However, unlike a fully independent
business the Franchisee has someone to turn to who already knows the
business very well and these non-competitive associates, other Franchisees,
make an excellent support network.
9. What are the benefits of a franchise? These include: the advantage of
going into a business which already has a well established and successful
track record. Provides guidelines, support and rules to help the Franchisee
get it right first time. Provides ongoing support in all of the important aspects
of the business. Provides new business owners with an already recognised
brand.
10. What are the pitfalls of a franchise? Not every franchise is a good one –
do your homework before you invest! Under-estimating the working capital to
take a brand new franchise into its first profit making quarter and beyond. Not
following the Franchisor’s formula; which can lead to contractual issues.
11. Where can I get the finance from?
Some high street banks offer
departments specialising in franchises. Banks often like franchises, as similar
outlets provide tangible evidence of the success and failure rate of any
specific franchise; the UK success rate for franchises is statistically higher
than totally independent businesses.
12. What are the main types of franchise?
‘Blue’ or ‘White Collar’ –
typically one person and a van or office where the franchisee does the hands
on work – this type of franchise is often referred to as ‘buying a job’. A
‘Business Format’ franchise usually operates from business premises,
employs people and the franchisee manages the business, whilst often going
‘hands on’ where needed. Some Business Format franchisees go on to buy
more than one outlet under the same franchise banner. The ‘Franchised
Distributor’ operates almost as a branch of the parent company. Car
dealerships and filling stations are examples of the most common Franchised
Distributors in the UK.
13. Name some franchises I may have heard of?
Green Thumb (lawn
services), Liverpool Institute of Performing Arts (teaching performance skills),
Auditel (cost and purchasing management), Molly Maids (domestic cleaning),
Lighterlife (weight management), OPC (greeting card suppliers to retailers),
Tatty Bumpkin (yoga inspired courses for children), Snack-in-a-box (vending
machine service), Mr Electric (electrical installation and repair),
AlphaGraphics (consultants and providers of market, visual and
communications) and MacDonalds (one of the biggest chains of eateries in
the world!)
14. What do all franchises have in common?
They all provide exactly the
same level of service, irrespective of where in the world their customers are.