Thinking Of Turning Your Business Into A Franchise

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Yellow Belt
About franchising

Franchising often enables companies with just a small number of locations to quickly establish a national presence within a relatively short time frame, perhaps two or three years. This is something much less likely to happen through company-funded development. The more you grow, the more capital you need, for example, to finance new outlets.

When you decide to franchise your business you don't make much profit on the franchisee's initial investment to you. Most of that money covers the costs involved in franchisee recruitment, training and launch support. The real money is to be made from the ongoing Management Service Fee, which is a percentage of the franchisee's turnover paid to cover the costs of ongoing support, product research and development, national marketing campaigns, plus to provide a fair reward for the use of your intellectual property and ongoing efforts. You employ less capital, therefore your profits are generated on a much lower capital investment.

They kind of franchising being discussed here in the main is Business Format Franchising.

Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.
- The British Franchise Association

If you have a successful business, franchising can be a very effective way of growing. You use your existing business as a blueprint for expansion. But instead of setting up and running new outlets yourself, you find independent franchisees who set up their own businesses using your blueprint.

Suppose, for example, that you'd built up a number of stores over a period of time. You started out with local outlets, but have progressed to the point you have outlets hundreds of miles away from your base.

Managing these stores from a central base can prove difficult. But, if you franchise your stores that means your local managers will have a stake in the business, which provides extra incentive to run the business properly, and profitably. Geographical areas differ so much, the customers may come from very different types of backgrounds, age groups etc, so is it better to have someone with a stake in the business who can tailor the business to his or her area?

The franchisees finance and manage their businesses themselves, but pay you fees for the right to use your blueprint. This may allow your business to grow faster, and be more profitable, than if you own all the outlets yourself. Some of the best known companies in the country have become household names by franchising their businesses. Over 1,000 businesses are now franchised in the UK.

Other benefits

The franchisees also run their businesses themselves, reducing the management demands placed on you. Rather than managing their business, your role involves supporting the franchisee. The best franchisees will be highly motivated and have local expertise, making your life much easier.

As your business grows through franchising, there can be additional benefits. The more franchisees you have, the better known your brand becomes. Your purchasing power may also increase as you buy more, allowing you to negotiate discounts.

Potential drawbacks

Don't run away with the idea that franchising your business has no downsides. You will have to invest in developing and marketing the franchise. You also need to make sure that you get the right franchisees and control what they do. If you have a poor franchisee that can do a lot of damage to your reputation, hurting all your franchisees and your overall brand.

Is franchising right for your business?

Well-known names like McDonalds and Prontaprint are very successful franchises. However, franchising doesn't suit every business.

The first thing is that your business must be successful. If it isn't you won't get anyone willing to buy into a franchise. It needs to be profitable enough to make money for both the franchisee and you.

Can your business easily be replicated in different locations by your franchisees. McDonalds can be found in high streets up and down the country, and of course even in other countries.

Your business has to have something to entice franchisees to be willing to pay you, rather than simply setting up their business independently. To go down the franchising route you need a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.

Do you have the resources, both in time and finances, to start up new franchises?

Can you sell your concept to potential franchisees, and to work with and control them? You won't be dealing directly with customers, so it will be vital to ensure your franchisees are successful.

Franchise fees and royalties

When you franchise your business, you make money from fees the franchisee pays you.

Franchisees pay to you an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.

The initial fee is often quite low, perhaps only £1,000 or so. The bigger names can demand a much higher fee of £25,000 and upwards. You don't want to put off franchisees by asking for too much up front, leaving them with little to expand your business.

Charging a low initial fee should help build your franchise network and your profits in the long term, but in the short term can put a strain on your finances.

Ongoing fees

These are where you can really make your profits. Normally a franchisee pays a royalty based on turnover. You will also profit from the mark-up on the prices at which you sell products to them. Therefore, the more the franchisee sells, the more profits you both make.

You need to give careful thought to your fees. You could be needlessly giving up profits if too low. Too high, and you remove the incentive for people to become a franchisee with you.

Use the professionals. Some banks have their own specialist franchising advisers. Certainly consult with your accountant.

Don't run before you can walk

Be realistic about how quickly you can grow. You have to be involved in helping your franchisee right from the start. That means training, even hands-on support when they first start trading.

At the beginning you are likely to only be able to take on one or two new franchisees at a time. If they are close to you that's good, and as time goes on roll out to places further afield.

Prospective franchisees will want to see a prospectus. As a minimum it should include such points as:

An explanation of your product or service

What franchise territories you are offering

What the franchise fees are

What financial returns the franchisee might expect

Potential franchisees won't just be looking at your business. You will probably be competing with other businesses to attract potential franchisees. Have a clear idea about what kinds of people you want to apply. They need the finances and management skills you require to run your business.

Ongoing support

You must have a continuing relationship with your franchisees if he, and therefore you, are to be successful..

The franchise agreement will provide for you-

Giving help to set up their franchise initially

Providing training in how to run the business

Running national promotional campaigns to increase sales

Advice on managing their business effectively

Don't view this a just a chore. The more effort you put in to supporting your franchisees the more you both succeed.

Motivating new franchisees is also important, as sometimes new ones can find the early months difficult and may become discouraged. Motivate them to increase sales which you both benefit from.

Your operations manual should make it clear about the basics for running their business, otherwise if they aren't consistent your brand name could suffer. Although different areas of the country will call for some differences, you want customers to be clear that you have a well-defined brand that can easily be recognised whether the business is in North Scotland, Wales, or the South coast of England.

So, franchising your business could be right for you, but only if it's the right kind of business, it's profitable, you are looking for expansion, and you have the time and finances to put in to it to get it off the ground.
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