What Exactly Is A Franchise & How Can They Help You Make Money?
If you’re looking for a business opportunity which allows you to jump on board with an established brand and work to a tried and tested formula, a franchise could be the perfect solution for you. There are all kinds of business opportunities out there online, most of which start with something along the lines of ‘”Make a Ton of Money an hour from your front room.” Guess what? If it looks to good to be true…it probably is.
But there are some genuine opportunities to become your own boss if you know what to look for.
Many of the well known shops and restaurants you see on your local high street are actually franchises. Despite the fact that they have a well known brand name above the door, like Domino’s or McDonald’s, they are actually businesses owned by private individuals. A franchise business is a simply a method of expanding a business and distributing the goods or services it produces more widely. The owners of the business, ‘the franchisors’, sell the rights to the business logo, name and business model to an independent, third party operator known as ‘the franchisee’. The franchisor not only specifies the products and services the franchisee is able to sell, but also provides them with an operating system, equipment, training and supplies. The result is a string of privately owned businesses that all operate in exactly the same way.
The franchisee will pay an initial upfront fee for the right to do business under the trade name of the franchisor. This sum will also include all the training and equipment the franchisee needs to be able to deliver exactly the same products and services as the parent business. That is why every Domino’s Pizza (this is not an advert by the way) will taste exactly the same wherever you go, despite the fact that each restaurant will be owned by an independent third party.
Once the franchisee begins to trade, it will also pay an ongoing royalty payment, which could be on a monthly, quarterly or annual basis. This payment will usually be a percentage of the franchisee’s revenue.
Most franchising deals will include:
- Site selection
- Assistance with development of the site
- Training for the franchisee and their management team
- Initial and ongoing marketing and advertising
- Research and development of new products and services
- Ongoing support and assistance from head office
The shop, restaurant, or alternative business, will always be an exact replica of the parent business to keep the brand consistent. This means that the franchisee will not have as much control over the business as they would if they set up on their own enterprise. However, they will have the added security of investing in an established brand and a formula that has been proven to be successful.
Control of a franchise is generally quite strict, and will include everything from the staff uniforms to the marketing literature that appears in the store. In most cases, the pricing will also be standardised across all franchises to keep the brand’s advertising and promotions streamlined and consistent. Once all the training has been completed, the franchisee will be responsible for the day-to-day running of the business and will make or lose money based on its individual performance.
As part of some franchising deals, the franchisee may also receive exclusive territory rights, which ensure that another franchise will not be sold within a certain distance of their business. The franchise deal will also include a term, typically 5-10 years, after which time the franchisee will usually have the right to renew the franchising deal if they’re willing to cough up more cash.
Believe it or not, the very first example of franchising dates all the way back to the Middle Ages, when local governments granted high church officials (and other important folk) a license to maintain order and collect taxes on their behalf. These important individuals could also hold markets, and perform business related activities, as long as they paid money, for protection among other things, to the lords. This ‘protection’ essentially ensured that no one else could set up a commercial venture in the same territory.
Next, we jump to colonial times, when what were known as ‘Franchise Kings’ would authorise individuals to run local markets and hold fairs on their behalf. These franchising rights were bestowed upon local citizens who agreed to take on the risk of moving to a new area and establishing a new colony. Their reward for taking on the risk of creating a new colony was a share of the spoils from their commercial ventures, while the crown would benefit from extra taxes and royalties.
The first example of the modern day franchising model came to light in the 1880s, and was created to boost the sales of the Singer sewing machine. Isaac Singer invented a sewing machine which was far superior to anything available at the time. To improve the distribution of a product American people were desperate to own, Mr Singer found businesspeople who were interested in owning the rights to sell his sewing machines in specific geographic areas. He then charged these individuals an upfront licensing fee for the right to sell the machines. Singer gave the licensees training so they could teach their customers how the sewing machines should be used. He then stepped up the production of his sewing machines on the back of the money coming in from licensees.
Probably the world’s most well known franchise came along in the 1960s, when Ray Kroc, a travelling milkshake salesman with a vision, heard about two brothers from California, Dick and Mac McDonald, who owned a restaurant which produced its food on an assembly line-like system. Mr Kroc saw the potential for similar restaurants to operate right across the country and started to sell the franchises.
Today there are 34,000 McDonald’s restaurants around the world, give or take the odd one, and that assembly line method of producing the food is the reason you’ll eat the same burger in a retail park in Hull, as you will in Leicester Square.
There are three basic franchise types in operation today:
- Distributorships – Agreements which give independent businesses the right to sell the parent company’s products. A common example is a car dealership such as Mazda, Land Rover or Maserati.
- Trademark or brand licensing – This gives licensees the right to use the brand name or trademark of the parent company while operating their own business. Drinks such as Coca Cola and sports franchises such as Manchester United and Liverpool are three extremely successful examples.
- Business format franchises – These are the most common type of franchise we see in the UK today and are the focus of this guide. Examples include McDonald’s, Subway and Domino’s.
The franchise business model is not for everyone. There are plenty of limitations as well as benefits associated with this approach. Undoubtedly the biggest drawback for many is the lack of control, while the main advantage is probably the reassurance of buying into a business that is proven to work. Let’s take a closer look…
- An established brand and customer base – Instead of starting a completely new business with no traction in the market, you are buying into a well known brand that already has a loyal band of customers.
- Marketing support – The hugely expensive and time consuming task of marketing your business is often done for you as part of a wider national campaign. Marketing materials can also be provided for local campaigns.
- Reputable and reliable suppliers – Rather than building your business from the ground up, you can benefit from established relationships with suppliers that provide all the raw materials your business needs.
- Business support –Business owners cannot expect to be experts in every area of running a business. As a franchisee, the support you need is on hand.
- Training – Many of the franchise opportunities out there provide the management and technical training you’ll need to run the business in the established and expected way.
- Financial assistance –Some franchisors provide funding or a credit facility to give franchisees the assistance they need.
- Ongoing research and product development –It is in the franchisor’s interests that your business is successful. As such, you’ll benefit from a regular stream of new products or improved processes to keep your customers happy.
- Be your own boss – For many franchisees, this business model provides the perfect compromise between reduced risk and being the master of their own destiny.
- Reduced risk – All these factors combined mean buying a franchise from an established brand is less risky than starting a business from nothing.
- Initial cost – The initial cost of some of the better known franchise operations can be large when the start-up costs and franchise fees are factored in. In many cases, it would be cheaper to start your own independent business.
- Royalty payments – You will have to pay a percentage of your turnover in royalty payments to the franchisor, thereby reducing your earning potential.
- Marketing and advertising fees – Some franchise agreements will ask for fees for the marketing and advertising support you receive.
- Limited management control – Your ability to make decisions and manage the business as you see fit will be limited by the exacting standards of the brand.
- Limited choice of suppliers – Franchise contracts will often stipulate that supplies can only be bought from an approved list of suppliers, sometimes at a higher cost.
- Locked into long term contracts – Fail to do your research thoroughly and you could find yourself locked into a contract with the wrong franchise.
- Reliant on franchisor success – Your business can only be as good as the reputation of your parent company. Any difficulties they experience could impact on you.
- No guarantees of success – While opening a franchise does reduce your risk somewhat, there are still no guarantees of success.
If you’ve weighed up the pros and cons of franchising and feel that this is the right business choice for you, it’s time to start doing your homework. With many franchisers out there clamouring for attention, identifying the franchise which will suit you and earn you the best returns can be difficult. After all, if you’re going to make a success of your franchise, it will be a long term investment. You need to choose a franchise with real ongoing potential, and a franchisor you can build a strong, productive relationship with.
Of course, there are no guarantees in the world of business. And, while franchises do have a high success rate compared to fledgling independent businesses, if you choose the wrong opportunity, you could find yourself with a flop on your hands – and nothing to show for it. That’s why it’s so essential that you take time to research your options, speak to lots of different franchises, talk to lots of successful franchisees and get a real feel for the franchise market in your chosen niche.
At the end of the day, there’s no foolproof way to select a winning franchise. The most promising opportunities can go awry, or seemingly hopeless franchises can turn to gold in the right hands. However, if you undertake rigorous research and careful assessment of the market and your shortlist of opportunities, you can heighten your chances of success. Here are a few essentials to consider when you make your assessment…
Accreditations are not the only mark of a well operated franchise, but they do provide prospective franchisees with a little more peace of mind before they make the leap. There are lots of different franchising bodies around the world who have strict membership criteria to ensure the businesses they approve subscribe to high ethical business standards.
Even more importantly, take plenty of time (and seek expert help from an accountant if necessary) to assess your finances and the financial burden of your potential franchise. How much can you realistically afford to invest? How much are you prepared to borrow to get on board?Once you have a good handle on what you’re financially capable of doing, really nail down your potential franchisor on the financials. Are historic returns based on verified, real life figures from sister franchises? Will there be working capital requirements during the early months?
Money matters may be extremely important from a practical standpoint but, above all, it’s how well you and your franchise are suited to each other which could make all the difference. Consider your interests, your skills, your sphere of knowledge, the previous industries you’ve worked in. Think carefully about how much of your personal time you’re prepared to devote to your new undertaking.When you have a firm idea of where you are personally, it’s essential that you ensue your franchisor is prepared to work with you on a basis you feel comfortable with. While they assess your suitability, you should be assessing theirs. Always speak with current and former franchisees, and spend time getting to know the management, their approaches and the company culture before you get on board.
- The Nitty Gritty
The money’s right, the culture is right, it’s a good fit for you and your lifestyle – but there is still a long list of questions and tasks you’ll need to work through before you’ve thoroughly assessed a potential franchise, including:
- Due diligence on the franchise in question
- Meeting the people you’ll be working most closely with
- Understanding daily operations
- Finding out about availability of training and support
- Understanding all ongoing fees
- Learning about the history of the franchise – and its future goals
- Has the franchise lost any franchisees?
- If yes, why? Can you contact them?
- Where does the franchisor see the franchise in ten years time?
- The Professionals
Finally it’s time to bring the professionals in. If you’re serious about conducting a thorough assessment of your prospective franchise before you sign on the dotted line, it’s a good idea to seek a professional opinion.From accountants who can look over the numbers, to solicitors who can look over legal agreements and even business consultants who can advise you – it’s worth investing a little time and money now to ensure you’re making the right decision over the long term.
The process that will take you from selecting a franchising opportunity to becoming a proud franchisee will vary widely from franchise to franchise. Often these processes can be long and complex, with lots of legal and financial hoops to jump through before your franchisor “hands over the keys”.
There are, however, a few steps which are common to most of these transactions (although not all). We’ll pick up the process at that crucial point after you’ve decided you want to go ahead…
- Interview & Confidentiality
After deciding you’re ready to get on board, many franchisors will invite you to attend an interview where you will be asked to sign a confidentiality agreement. This will make it possible for your prospective franchise to share more details with you in confidence, so you can have all the facts you need to continue.
- Financial Checks
Whether or not you’re using bank finance to fund your franchise, you bank and/or your prospective franchisor will most likely want to perform financial background checks to confirm your suitability for both loans and taking on a franchise.
- Deposit Agreement
At the next stage, some franchises will ask you to pay a deposit agreement to confirm your intention to purchase a franchise from them. This deposit will typically be repaid once your franchise is up and running. If you decide not to proceed you will likely lose your deposit.
- Locating & Purchasing a Premises
If your franchise will require a physical premises, during the preliminary stages this will be arranged. In some cases your franchisor will take control, in other instances they will offer support and guidance, in different situations you will be expected to locate an appropriate site for your franchisor to approve.
- Franchise Agreement
This is one of the most important documents in the franchise buying process. This essential document will include all of the obligations both yourself and your franchisor will be subject to. Before you sign this agreement it is strongly recommended you seek the advice of a specialist solicitor to ensure your needs are taken care of properly and that you fully understand your rights and responsibilities within the agreement. Once signed, congratulations! You are a franchise owner.
How to buy a franchise in the US and Canada
Just as in the UK, the process of acquiring a franchise will differ from franchise to franchise, state to state in both the US and Canada. As above, there are a few common steps you can expect to go through including financial checks, deposit agreements and franchise agreements. Make certain your prospective franchisor explains their particular process to you in the early interview stages to ensure you have a clear roadmap and time-scale before you get started.
There’s an arm’s length list of questions any responsible aspiring franchisee should ask their franchisor before investing and signing on the dotted line. These are the questions we will leave you with as they should be at the front of your mind before entering into any negotiations or discussions with a franchisor. Good luck!
- How many franchises are you currently operating?
- Would it be possible to interview these franchisees? And select who I interview?
- What is your head office set up?
- Can you give examples of your follow-up and support services in action?
- How many of your franchises have failed?
- What is the overall franchising cost, including additional capital costs?
- Can you provide an itemised list of all costs?
- How much working capital will be required?
- Can I see accounts to confirm your projections?
- What is the extent of your own cash investment?
- Are financing arrangements available?
- What repayment terms do you offer?
- Is this is a seasonal franchise?
- Do you take commission on supplies of goods?
- Am I obliged to purchase all items or purely scheduled items from you?
- Is there a minimum purchase of goods in place? What are the consequences if this is not met?
- What are the costs associated with advertising and marketing? Will my franchise be contracted to contribute to these costs?
- What initial services and training do you offer?
- What continuing services do you provide?
- How long will the franchise be granted for? And what is the procedure at the end of my term?
- Who is responsible for locating and purchasing/leasing premises?
- Who will be my main points of contact on a daily basis? May I meet with them?
- How soon will responsibility for redecoration and equipment purchasing fall to me?
We asked some of the franchise industry’s top experts what their ultimate tip for a new franchisee would be. Here are their answers:
Entrerpreneur Idol, EvanCarmichael.com
For me it all comes down to the passion. You could have a great company, great system, great training, but if you don’t have a passion for what you’re selling it’s never going to work. You can overcome obstacles if you really believe in what you’re selling.
Online Editor, The Franchise Magazine
Follow the model. You’ve bought into a system for a reason. And if you need any help don’t be afraid to call your franchise manager.
CEO, Franchise Direct UK
Perform comparative research of franchise opportunities. A prospective franchisee may already be mentally favouring a particular franchise. Just like with any other investment, you need to perform in-depth research, considering and comparing the different franchise opportunities on offer before making a decision. Don’t be afraid to ask the franchisor for additional information to complete your research.
Don’t put too much of your energy into studying the legal documents you get as part of your franchise introduction package. Let an experienced franchise attorney go through them with you. Put your energy towards talking with existing franchisees, instead. You’ll get the real scoop on the franchise opportunity you’re thinking of purchasing.
Sales Director, Tubz Brands
Check the company out at Companies House – it is well worth a small fee to find out the current status of the company. Anyone can create a flash web site so they look big but registered company accounts will tell you the condition of the company and what shape it is in.