Franchising a business
Is franchising a business always possible?
There are a good many different business sectors that have benefited from franchising a business which has been successful and have done exceptionally well at it both for the benefit of their own business and those of their franchisees. Take, for example, a few of the more established, well-known and substantial franchised businesses:
- Take-away food: Subway, McDonalds, Angelberry, Harry Ramsdens, Domino’s pizzas;
- Property: Belvoir Lettings, Northwood, Agency Express;
- Care: Surecare, Kare Plus, Caremark, Bluebird Care;
- Vehicles: Autoglym, Autosmart, Autovalet Direct, Chipsaway;
- Printing: Cartridge world, Smart Cartridge, Kall Kwik, Minuteman Press; and
- Couriers: XDP, DPD, Fresh Logistics.
Franchising a business depends on it being successful and capable of replication with appropriate support. Most businesses are capable of flourishing in a franchise model, although some may not be suitable. If, for example, the business has some of the following features, then franchising might not work:
- A failing business (prospective franchisees want to know that the business model they are buying is capable of generating appropriate returns and will want to see evidence of this from past trading);
- Services based businesses dependent upon the specific individuals for work (the ability to replicate and enable others to undertake the business is essential to a successful franchise model, and those franchises which rely on specific individuals for certain skills may not be possible to translate into a brand easily);
- Geographical dependencies (businesses which require a specific location cannot be replicated such as Warwick Castle or the Blackpool Tower).
What must the franchisor provide?
Fundamental to the franchise model is the ability of the prospective franchisee to take the benefit of an established brand owned by, or licensed to, the franchisor. Therefore, the license that the franchisor grants will enable the franchisee to carry out the business using the franchisors name and benefit from the goodwill that it has developed over a period of time. Any franchisee will, therefore, need to know that the franchisor owns that thing that it is proposing the license and which, over the years to come, the franchisee will build up, often with the expectation of selling on the business and making a profit. Before franchising a business, franchisors will almost always take steps to register their brand logos as trademarks and patent important inventions relevant to its operation.
Support is critical to franchising. The ideal franchise is one that can be started up with limited initial training and developed with the assistance of specialist support from the franchisor, whom in turn, will have considerable industry experience and knowledge. The most successful franchises encourage a sharing of knowledge between members of the franchise network: after all, franchises are usually granted within exclusive territories and sharing knowledge and experience is often beneficial to everybody concerned without the fear of avoidable competition or loss of trade secrets.
What does a franchisor have to give to a prospective franchisee?
When looking into a franchise opportunity, it is important for franchisees to be able to identify at least the following:
- the background business experience of the franchisor’s team;
- the history and past-performance of the franchise business;
- any restrictions in the franchise agreement that restrict the way in which the business can be operated or sold; and
- any obligations on the part of the franchisee to purchase products and equipment from the franchisor, or to deal only with nominated suppliers approved by the franchisor (these may be at additional cost to what is available in the marketplace, although often justified on the basis of quality control and consistency in the brand).
Those franchising a business must consider that prospective franchisees are likely to wish to speak to such members of the existing franchise network to get a true feel for the brand, the interaction between franchisor and franchisee, the profitability and sustainability of the business. Very little often tells more than a proper analysis of accounts, and trading patterns, and prospective franchisees ought to insist upon such disclosure wherever possible from other franchisees. It is common for franchisors to operate “branches”, which are their own versions of a franchised business, or more simply, outlets of their own brand directly under their control in a certain territory. Franchisors should be willing to provide details of these branch operations, including profit levels, although it should always be remembered that no allowance is made in these figures for royalty and other payments that would otherwise have to be made by a franchisee.
The decision to franchise a business can often be a daunting one, with the logistical side of matters sometimes seeming insurmountable. The following key steps would have to be addressed before a final decision on franchising the business can sensibly be taken:
- identification of the viability of the business in a franchised model;
- what are the likely sources of funding for prospective franchisees;
- is the franchisor’s intellectual property from from third party interests or challenges and can this be satisfactorily evidenced to prospective franchisees;
- can the franchisor demonstrate a successful model, associated profitability and potential for development;
- can the franchisor properly protect its business by legal documentation, and what structure would this take;
- how will the business be marketed, both in terms of the franchised business and the sale of franchises more generally;
- is there an Operations Manual that can be created containing all of the policies and procedures of the franchise business which demonstrates the know-how and which will guide franchisee in the operation of the business.
Franchising a business can be an exciting and rewarding way of developing a business – and often is! We are able to guide franchisors on the steps they need to take to ensure that franchising is successful for them and the pitfalls that need to be avoided.
For further information, please contact Craig Kelly or Samantha Pountney on 0121 306 0170.