Franchsing
28th Jul 2009
Recessions do not deaden the spirit of enterprise but they may make would-be business owners and successful entrepreneurs alike more cautious. SARAH FRENCH reports on a business opportunity that can help both those who want to grow a network and those jus
FOR the successful entrepreneur who wants to grow these are difficult times. The tightening up of access to finance and worries about supply chains and customers mean expansion plans may have to be put on hold.
Likewise, the new entrepreneur who is keen to start up may fear venturing alone into a highly competitive market place.
Franchising can provide the perfect solution both for businesses ripe for growth and would-be business owners.
Franchises in the UK currently turnover around £10bn annually, and the sector is growing.
Among the famous names that operate wholly or in part as franchised operations are McDonalds, Benetton, Prontaprint, Body Shop, Snap On Tools and the Dyno Group.
Less well known franchises include Ramsdens pawnbrokers, Rangers Football Club retail outlets and Kumon maths and English coaching, reflecting the diverse range of sectors that can succeed as franchises.
As Julie Waites, of The Franchise Company based in Darlington, says: “You should not be able to look at a business and say that it’s a franchise. It should have a good corporate identity, provide a good service and be a successful business regardless of whether or not it’s a franchise.”
Although the range of franchises is wide and varied, the model is not suitable for all businesses.
The advice at a recent seminar held at BHP Law in Stockton was that any business owner considering franchising their organisation must do the groundwork to determine, firstly, that their enterprise could work as a franchised network.
Julie says: “In simple terms franchising is a proven business system or format that grants the rights to a third party or parties to operate that business in other areas. A company must have a proven, successful business format in order to franchise successfully. Franchising can be used for UK and international expansion.
“To be suitable for franchising, a business should be tried and tested, have a strong business format and be generating good operating profits. Market research should also show similar demand for the product or service in other areas.”
Typically, the formats fall into one of five categories:
Job format – where the franchisee provides a service direct to their customers, usually a sole trader who has invested a few thousand pounds into setting up their franchise;
Retail;
Sales and distribution – where the franchisee is selling a product;
Business and managerial – where the franchisee manages or oversees the business, for example Prontaprint, where the investment might be £150,000;
Investment – where the franchisee makes the investment, typically from £500,000, and the business is run by a management team, for example Holiday Inn.
Once it is confirmed that the business is ‘franchisable’, the next step is to develop the franchise infrastructure, including key legal and financial polices where professional advice from solicitors and accountants is considered vital.
The key features of any franchised system are: the franchise agreement, the operators’ manual, pre-start up support; training and ongoing business support and policies on the use of the brand and intellectual property.
Julie explains: “Research has shown that there is a direct correlation between the success of a franchised network and the quality of the start up support and induction training.
“There is a much greater chance of the network being successful and more profitable if these things are in place. If you don’t put the groundwork in place it will fail.”
Financial policies will explain the payment of initial and ongoing fees. Ongoing income for the franchisor is generated through a management fee of typically five-12 per cent; sales of products or services to franchisees; or fixed monthly fees.
Once all the necessary documentation is in place the next step is to pilot the franchise system, with the first franchisee sometimes coming in on preferential terms.
A successful pilot can then lead to a full scale launch and recruitment of franchisees.
David Lucas, a specialist franchise lawyer and a Partner at BHP Law, which is accredited by the British Franchise Association, says one of the benefits, in addition to ongoing income for the franchisor, is that the franchisee has invested their own money so will be driven to ensure their business succeeds.
He adds: “Your brand will reach further and even after allowing for the costs you have in supporting and maintaining your franchisee network, your overheads should be lower than running your own branches.”
However, there are some downsides.
Mr Lucas explains: “There is the loss of flexibility and control a business owner has running their own branches, and there is the issue of giving franchisees confidential information about the business. Even with the finest legal wording restricting their use of that information, owners may find it difficult to enforce things, if the franchisee hasn’t complied with restrictions.
“Obviously, with franchising, the reputation of the brand is also at stake so there need to be tight controls on how the franchisee operates by using a detailed legal agreement and by weeding out inappropriate franchisees through a thorough recruitment procedure.”
He says the first steps to protecting the ‘parent’ business are to register the brand and logo trademarks and all website addresses, clarify copyright ownership of any designed material, and to establish confidentiality agreements.
The franchise agreement – the main legal document of the franchise system – is typically 35-40 pages long.
“Anything shorter and it won’t really contain everything it needs to. This is a document where you really mustn’t cut corners,” says Mr Lucas.
“In simple terms, the agreement lets the franchisee carry on the business for a time period – typically five years – for initial and ongoing fees and protects the franchisor’s brand and reputation.
“The same protections that cover the franchisor also protect each franchisee who may come along because they guarantee consistency as the brand is replicated.”
Franchisors are recommended not to enter into negotiations with franchisees over the agreement, although the pilot stage may lead to some adjustments.
The agreement will also cover issues such as the franchisees’ obligations, renewal, the sale of the business at any time in the future and early termination. Franchisees do not normally have the right to terminate but the franchisor’s rights are likely to be lengthy.
CASE STUDY
Established in 1984, CHIPS is the UK’s biggest independent video games retailer and has 31 outlets nationwide, some franchised and some company owned.
Prior to opening its first franchise in Bishop Auckland, County Durham, in 1999 the company was advised to set up a separate business, CHIPS Franchise Ltd, from the original business, Chipsworld Ltd.
Joint managing director Don McCabe explains: “We knew we wanted to grow the business. We were good and well recognised for being good by our industry, but we didn’t know how to grow.
“We went to lots of seminars, spoke to Business Link, accountants and generally gathered lots of information. We didn’t want to jump straight into it without spending a lot of time getting the information. It took 18-24 months from the initial decision to franchise to the launch.
“My advice to anyone else thinking of franchising is to take on a franchise consultant and a good franchise lawyer. Listen to them and learn.
“Your franchise agreement must be very, very robust. We were always an ethical business, we were the good guys but we were still advised very strongly to make sure we got it right.
“At first it seemed onerous but the way you put it forward to potential franchisees is that it’s protecting them from any rogue franchisees.”
Mr McCabe says deciding to go down the franchising route meant a full scale reassessment and analysis of the company.
“We thought we knew everything about our business; we had lived and breathed it since 1984. But we had to go right back to basics and almost set it up all over again. We actually only knew 70 per cent of what it took to put our business together.”
Mr McCabe says franchisors must be prepared for challenging issues during the life cycle of their franchised operation.
“People’s attitudes will change, for instance. Over time, a franchisee may decide they don’t want to pay for certain information from you any more, so as a franchisor you must make sure your income stream is protected all the way through.
“It also doesn’t matter how good your selection process is, people’s personal circumstances change and that can affect how they run their business.
“You have to learn how to be a franchisor; it’s very different from running the business you started. You have to be able to persuade, but you must also be able to listen.
“The best bit is seeing your business grow and being run by very happy franchisees. We have a conference each year. It’s fantastic seeing everyone together and seeing what we have built.”
Contacts:
David Lucas (01642) 660594, www.bhplaw.co.uk;
Julie Waites (01325) 251455, www.franchisecompany.co.uk
Related Articles
| Looking to convert to an Academy ? | 31st Jan 2012 |
|---|---|
| New Partner for BHP Law | 23rd Jan 2012 |
| Office Services | 25th Oct 2011 |
| New Associates Appointment | 24th Oct 2011 |
| Shareholder Disputes | 4th Oct 2011 |
| BRandH | 21st Sep 2011 |
| Great Smeaton Academy Conversion | 12th Sep 2011 |
| BHP Law Awards First County Durham Community Foundation Grant | 8th Aug 2011 |
| King James I Academy Appoints Commercial Lawyer as Director | 28th Jul 2011 |
| BHP Law completes King James I Academy Conversion | 5th Jul 2011 |