Top 10 frequently asked questions about franchising.

16/05/2018 08:00 | Start a business

Franchise FAQ - top 10

1. What is franchising?

Franchising is the granting of certain rights by one party (the franchisor) to another (the franchisee), which enables the franchisee to own and operate their own business based on the franchisor's franchise business model. For the right to duplicate the franchisors business concept, the franchisee is charged a fee to use the business format for the term of the franchise agreement.

2. What are the advantages of franchising?

The franchise business model can be extremely beneficial for both the franchisor and franchisee. Here are just some of the advantages.

For the franchisee:

  • Investing in a franchise enables entrepreneurs to become their own boss with less of the risk than if they started an independent business from scratch. In fact, the British Franchise Association and NatWest 2015 survey found that just 1% of franchisees closed their businesses as a result of commercial failure.
  • It can take years for an independent business to build up a reputation and loyal customer base, but franchisees achieve this instantly by buying into a well-established and recognisable brand name. This saves the franchisee time, effort and money which tends to result in a quicker route to profitability.
  • Starting a business can be a daunting prospect, but franchisees benefit from comprehensive training programmes before they even start trading. As well as learning how to run their business using the franchisors business model, they also learn invaluable business-related skills.
  • As well as initial training, franchisees also receive ongoing support, advice and guidance from the franchisor and their team.

For the franchisor:

  • Franchising enables the franchisor to grow their business with minimum capital outlay. Rather than having to borrow funds from lenders franchisees invest their own funds in expanding the franchisors business.
  • The franchise cost of investment can be significant for most franchisees. However, from the franchisors viewpoint, this tends to make franchisees much more motivated and driven to be a success than employees would be.
  • Through the ongoing royalty payments that franchisees make, franchisors have continuing revenue streams.

3. What are the disadvantages of franchising?

Despite the many benefits, franchising isnt for everyone. Here are some of the disadvantages of the franchise business model.

For the franchisee:

  • The franchisee doesnt have full control over their business as they must adopt the franchisors system.
  • There may be a reduced risk of failing compared to an independent business, but it can also take longer to achieve profitability due to the fees that need to be paid to the franchisor.
  • The franchise agreement term is for a set period but there is no guarantee that it will be renewed when it expires.

For the franchisor:

  • The franchisor will have spent many years developing and improving their franchise system, and then they entrust their franchisees to represent their brand. Monitoring of standards by the franchisor is essential for the continued success of the franchise brand.
  • Without a robust recruitment process in place, franchisees can be hired who may not be the right fit for the business. This can result in personality clashes, tensions and conflicts within the network which need to be managed effectively.

4. What is the franchise cost for franchisees?

The franchise cost varies from one opportunity to another, but typically franchisees are required to pay the following fees.

  • Initial franchise fee an upfront charge to reimburse the franchisor for the cost of recruiting and training franchisees.
  • Royalty fee generally charged as a percentage of gross sales, franchisees make this regular payment to the franchisor for the development and upkeep of the franchise system, as well as the ongoing support thats provided.
  • Start-up costs these can include the refurbishment of franchise premises and the purchase price of stock, equipment and other items needed for the business to operate.
  • Marketing fee this is a contribution to nationwide marketing campaigns and like the royalty fee tends to be calculated as a percentage of gross sales.
  • Other fees costs of business-related expenses such as rental of business premises, insurance, and local marketing.

5. Do I need to prepare a franchise business plan?

The importance of a well-written franchise business plan should not be underestimated. The document can help franchisees to understand what they want to achieve and allows them to review their performance against their projections. It can highlight any issues as well as identifying potential opportunities within the franchise.

However, the primary objective of a franchise business plan is to secure funds from a lender. Banks will expect to review a business plan which demonstrates that the prospective franchisee has a full understanding of the business opportunity, the local market for the product or service, and potential projected earnings.

6. What makes a successful franchisee?

Franchisees come in all shapes and sizes. There is very rarely a need to have previous experience in the industry that franchisees have chosen as the franchisor provides all the necessary training. The essential characteristics of successful franchisees are passion, the willingness to learn and follow a proven system, a strong work ethic and a drive to succeed.

7. Can franchisees choose to work with a business partner?

This depends on the preference of the franchisor, but most concepts allow franchisees to have a financial partner who may also be an operating partner.

8. Can franchisees buy more than one franchise?

Again, this varies by franchise concept, but increasingly franchisors understand the benefits of multi-unit franchising. This enables existing, successful franchisees the chance to grow their business by purchasing one, or many, franchise outlets with the same brand.

9. Can franchisees sell their business?

There are circumstances when a franchisee can choose to sell their business before the end of the franchise agreement. However, the franchisor always has the final say about who can buy the franchise. The franchisor may suggest a buyer but will usually expect to receive payment for this service.

The franchisee may also be subject to numerous restrictions that are detailed in the franchise agreement which apply after they have sold the franchise. These post-termination restrictive covenants can include franchisees being prohibited from owning or operating a business that is in direct competition with the franchisor for a specific period.

10. Can the franchise contract be terminated?

If a franchisee breaches the franchise agreement, then the franchisor has the right to terminate the contract. According to the British Franchise Association Code of Ethics, franchisees must be given notice to fix any breach in order to prevent termination.

Breaches of the franchise agreement include non-payment of fees, failing to meet expected performance levels and failure to send the franchisor regular sales reports.

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