A basic guide to franchising
Thinking of investing in a franchise but don’t know a franchise model from a franchise contract? Before you start researching available franchises, it might be wise to get a quick rundown of the basics first. From understanding the pros and cons of franchising to knowing what to expect once you’ve signed up, here are the franchising basics you need to know.
The franchise definition
If creating a business completely from scratch isn’t for you and buying an existing business doesn’t sound right either, franchising could be the answer. But what are franchises?
A franchise is structured so a third party (the franchisee) is licensed to operate a business and sell goods or services through an already established business model (developed by the franchisor). The franchisee pays a one-off fee to use the franchisor’s brand name, systems, signage and software for an agreed term, and then pays a percentage of their revenue or profit as an ongoing royalty fee. Franchisees must run their business in accordance to the franchise contract and operations manual.
Franchising essentially means taking a tried and tested business model and replicating it elsewhere to achieve the same level of success. There are many advantages to investing in a franchise but is generally regarded as a less risky way of starting your own business than opening an independent start-up. This is because a franchise provides a business blueprint that lays out specific steps and rules that, when followed, should bring profitability.
>> Read more:
- How Investing in a Franchise is Worth it
- Franchise Investment: The Good, The Bad and The Ugly
- Total Franchise Investment: What Is It?
- Invest in a franchise or go it alone?
- Is investing in an established franchise best?
- Investment Opportunities in The UK – Considered Franchising?
The franchise contract
A franchise contract – or franchise agreement, as it’s also known – governs the legal relationship between the franchisor and franchisee. The franchise contract sets out everything from what support you can expect to receive from the franchisor to the fees you’ll need to pay. It also acts as an insurance policy if the union doesn’t work out.
It’s important to understand many of the key points of the franchise contract before you sign it. Here’s what you should expect it to include:
- Which parts of the franchisor’s intellectual property the franchisee can use. This may include trademarks, copyright material, the franchisor’s business system and more. The agreement should also specify exactly how the franchisee can use them and incorporate them into their business.
- The period of the contract. Franchises usually come with a fixed term of around five years and grant a right of renewal to the franchisee. It may explain that you will incur a fee if you choose to exit before the end of the contract period. Keep an eye out for relocation clauses, which could require you to close down and move to different premises.
- The services that are provided by the franchisor, both on an initial and continued basis. This section should detail the training and equipment provided to the franchisee by the franchisor. It should also clearly specify the extent of training and support that will be offered during the contract term. This could take the form of regular site visits and reviews, supplementary training courses, a 24/7 telephone helpline or franchise conventions with networking opportunities.
- The obligations of the franchisee and the operational obligations imposed on them. These should explain how you are responsible for complying with the systems laid out in the operations manual and ensuring operational standards are maintained. This is vital for the success of the entire franchise network, as inconsistency can diminish the reputation of the brand as a whole and put customers off.
- Conditions for franchise resales. There are many reasons why a franchisee may want to sell their franchise, and the agreement should allow for this to happen. However, the majority of franchisors put controls in place to ensure the business maintains profitability into the future. Some franchisors state in the contract that they must be given the right of first refusal if the franchisee wishes to sell. This gives them the chance to buy it themselves by matching the price the franchisee would receive from an outside purchaser. They cannot buy it for less than the franchisee would otherwise get. Also, the franchisor usually has the final say on the suitability of the buyer. If they conclude that they lack the experience, personality or capital to take the business on, they can turn them down and ask the franchisee to continue their search.
- The consequences of a breach or termination of contract. Usually, if the franchisee breaches the contract in a minor way, they are given the chance to remedy their actions according to BFA regulations. If a contract termination is necessary, the agreement typically states that the franchisor can no longer use the business’ trademarks, systems or other intellectual property.
Understanding the franchise model
The franchise model is one of the most innovative ways of running a business, and has a proven track record of success. There are benefits for both the franchisee and franchisor when it comes to using this business model. The franchisor benefits from franchise fees and ongoing royalties, which allows them to expand the brand rapidly without having to rely on lenders or investors. They don’t even have to manage their regional franchise units, as this is taken care of by their team of franchisees.
What’s in it for franchisees?
Some may question why prospective business owners would choose the franchise model over simply starting their own business, especially when there’s the initial payment and ongoing royalty fees to consider.
However, the franchise model usually enables franchisees to make a return on their investment more rapidly than they would if they had started their own business. This is because you can use the expertise of the franchisor to replicate the successful units that are already up and running. Also, you can avoid making costly mistakes, like independent business owners might. The franchisor should have developed their business over several years and perfected their business strategies, making any expensive errors before rolling the model out to franchisees.
As you might expect, the franchise model brings higher chances of success than independent businesses, as 97 percent report profitability. Part of this is down to the support and training provided by the franchisor. When you first become a franchisee, you’ll probably be enrolled onto a course with other entrepreneurs, which will teach you all you need to know to run a productive unit. Often, the training is so thorough that you don’t even need to have business ownership experience in the industry – or business ownership experience at all.
Plus, franchisees will gain from economics of scale when it comes to advertising and buying materials, supplies and services, as well as in negotiating for property and lease terms. In comparison, a start-up entrepreneur would have to negotiate their own, and it would usually be on favourable terms. They may also be faced with suppliers who refuse to deal with them because they’re a new business or because their account is too small. All of this is avoided with the franchise model.
Also, there’s an opportunity for high long-term profits. Once franchisees have mastered running the unit, they can harness their experience and know-how to start up another one in a different location. Of course, an independent business owner could do this too, but being part of a franchise model makes it easier for franchisees to pick up new sites and use their existing business strategies to build them up quickly.
So, with all the basics understood, you’ve decided investing in a franchise is the right route to business ownership for you. Where do you go from here?
You’ll need to research which franchise system suits your needs, budget and interests before you commit. You should also take the time to speak to current franchisees and franchisors about growth potential. As a potential franchisee, you must try to verify everything your would-be franchisor promises you – whether that’s in person or in a brochure. Find out whether the franchise is profitable and how committed the franchisor is to providing support to their franchisees.
Here are two ways you can find out more about a franchise and whether it’s right for you:
- Attend franchise exhibitions. Find out which exhibitions your chosen franchise(s) are attending and book yourself a ticket. Not only will you be able to chat to the franchisor, but you can also find out valuable information by talking to existing franchisees. They’ll be able to tell you about their experiences and whether the franchisor’s claims turned out to be true.
- Book onto a discovery day. Many franchises run ‘discovery days’, which give prospective franchisees the chance to visit the business’ headquarters and experience the day-to-day operations.
Only once you’ve done your due diligence can you determine whether it's worth buying into the franchise.
Alice Tuffery, Point Franchise ©
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