FAQ
Answers to the most common questions about franchising.
Franchising growth continues to accelerate
Franchising is a marketing tool that can be used to sell any products and services - from home services to footwear. From educational products to donuts. From car detailing to coffee. Nevertheless there is still some mystique about franchising.
We find we are asked the same questions, which we have condensed into the most commonly asked questions about franchising.
Here are the main things you need to know before starting your enquiry into the sector.1. What is franchising?
Franchising is a method of distributing products or services.
At least two levels of people are involved in the franchise system, (1) the franchisor, who lends the trademark or trade name and the business system to (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchiser’s name and system.
Technically, the contract binding the two parties is the franchise, but that term is often used to mean the actual business that the franchisee buys from the franchisor.
2. How does a franchised chain start?
Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operation.
At that point, if the entrepreneur still wants to expand but prefers not to own and operate additional stores, he/she may decide to 'franchise' the store name and business system to an independent business person - the franchisee.
In retu, the franchisor may ask for an initial fee and/or continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.
3. When I visit a store in my area, how can I tell whether the franchisor or a franchisee owns that store?
It's difficult to tell just by visiting the shop. Many companies have stores that are owned and operated by franchisees but also have stores that are company-operated. So it's entirely possible that of two stores with the same name, one may be owned by a franchisee and the other owned by the company. In either case, the products, services and quality should be identical.
4. How widespread is franchising?
The answer may surprise you. There are more than 8000 franchised companies Worldwide.
The tuover of the Franchise industry in the UK has grown in 2007 to a record £12.4billion, which represents a 15 per cent increase on last year's figure of £10.8billion and means that the growth of the franchising industry in 2007 outstripped that of the
This shows an increase of 17% year on year, over the past twenty years.
In 2007 the total number of franchise units in the
An impressive 91 per cent of franchised units made a profit in 2007 - down from 93 per cent in 2006. The average turnover of these units is £360,000, an 11 per cent increase on the average turnover figures reported for 2006. In addition, just over a quarter of franchises reported a turnover in excess of £500,000 last year, compared to a fifth the previous year.
Franchised businesses now contribute more than £1billion or more to the economies of Scotland and six out of the UK's 11 other regions, with the West Midlands also poised to break the £1billion level.
Brian Smart, director general of the BFA said recently "Existing systems are spreading into new regions and new systems are being generated in regions where franchising is underrepresented - with the support in some places of the Regional Development Agencies. Overall, we can look forward to further growth for franchising in 2008, despite a hardening climate for the economy generally.
"In demanding market conditions, it becomes more difficult for businesses to differentiate themselves on price, which means that customer service becomes more important than ever. It is therefore testimony to the enthusiasm and commitment of franchisors and franchisees that they continue to drive new business and retain it with such vigour."
The number of recognized business format franchising systems has grown in the past year to an increase of more than 40% in the past five years.
90% of Franchisees are profitable within 2 years.
82% of Franchisees claim their Franchisor relationship is Satisfactory
Personal Services Franchises were up 18% and Business to Business Franchises up 14%
When car dealerships, soft drink franchisees, franchised and tenanted licensed trade and petrol retailing are included annual sales are estimated at to be £57.9 Billion.
76% of franchisors and 75% of Franchisees expect their own Business prospects to improve.
23% of franchisers have interests elsewhere in Europe, an increase of 53% since 1993.
5. Where do franchise sales come from?
Most franchised sales are still by product and trade name franchise chains - food (fast food, convenience stores and retail), automobile and truck services, general retail, building services and improvements, and domestic, business and maintenance services.
Growth in the product and trademark sector of franchising has been slowing in recent years, while the number of outlets and total sales of 'business format franchises' are expected to grow and even increase their growth rate.
6. What is business format franchising?
In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment.
The plan provides step-by-step procedures for every aspect of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees.
The growth of the business format franchise system has been very strong in the past five years and the growth projections for the 21st Century for Franchisors and franchisees are very optimistic.
7. What are the major growth sectors in 'business format franchising'?
The two biggest sectors are Business & Commercial Services and Property Services, each accounting for 22 per cent of franchising systems. As we become a more service-oriented economy, as more women enter the workforce, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes.
While it is important to consider industry growth before investing in a franchise, it is more important to analyse an individual franchise company's track record, keeping in mind that quick growth does not always spell success. A franchise organisation that grows too quickly might not have a service team in place to support all of the units properly.
Overall, long range trends indicate a steady, solid growth in business format franchising. Some will fall by the wayside, as is natural with any business, but others may well be the 'household name' franchise success stories of tomorrow.
8. What kinds of business lend themselves to franchising?
Virtually every business form you can imagine lends itself to franchising. The Inteational Franchise Association (IFA) in the US lists more than 60 categories to describe its members.
Printing and copying services and real estate are excellent examples of successfully applying franchising to established industries.
9. Is the look-alike characteristic of franchises a disadvantage? Don't consumers want variety?
The increasingly mobile consumer has come to depend on, and appreciate, the consistent quality of franchised products and services.
Today, no matter where they go, people expect and want the same quality, which is why consumers so often shop at franchised establishments. The ability to easily recognise a franchised store, restaurant or hotel from the outside guarantees there will be no surprises or disappointments on the inside.
Quite simply, the public knows what to expect and like it that way.
10. What should I consider before buying a franchise?
- The type of experience required in the franchised business,
- A complete description of the business,
- The hours and personnel commitment necessary to run the business,
- Who the franchisor is, what his/her track record has been, and the business experience of officers and directors of the company,
- How other franchisees in the same system are doing,
- How much it's going to cost to get into the franchise,
- How much you're going to pay for the continuing right to operate the business,
- If there are any products or services you must buy from the franchisor and how and by whom they are supplied,
- The terms and conditions under which the franchise relationship can be terminated or renewed,
- How many have left the system in the past few years, and,
- The financial condition of the company and its system.
11. How can I be sure that the information provided in the disclosure documents is truthful and accurate?
Under the Trade Descriptions Act inaccuracy and misrepresentation carry civil and sometimes-severe criminal penalties; there is no way to be absolutely sure.
Fraud and deception are rare and less likely if you ask the franchisor a variety of very important questions that you can use to judge the offer. The history and reputation of the company and its officers are also extremely important in this regard. Carefully consider the information provided and evaluate the material with the assistance of your lawyer and accountant. Also, be absolutely sure you talk to a number of others who have already purchased franchises from the company you're considering, and ask them to verify any information you question. Find out if they are 'satisfied customers' of the franchise.
12. Are there any other laws, which protect me?
There are adequate laws in place to protect those in a business relationship. Particularly in relation to background of directors and public officers and disclosure of financial information as far back as 10 years. With the right research you will minimise your risks
13. If I want to buy a franchise what should I do to get started?
The first thing to do is to identify companies offering franchises for sale. General sources include, Franchising magazines, Franchising Directories, the 'Businesses For Sale" section in the major newspapers, franchise brokers and the Franchise Business Opportunities Exhibitions held in London, the NEC, GMEX Manchester and others.
14. What kind of investment is necessary to buy a franchise?
Investment requirements differ tremendously. It all depends on the industry and the type of business. Discuss this with the individual companies. Franchises may be purchased for as little a starting price of £5,000 and range right up to £200,000 and beyond! The average start-up cost of a British franchise in 2004 is £106K including £25,000 initial franchise fee and £5,000 for pre-opening training.
15. Would I make a successful franchisee?
A successful franchisee should be suited to the industry, which he or she intends to join, suited to the particular franchise company and suited to the franchise system generally.
Important questions to ask yourself include: am I suited to the industry physically and by experience, education, leaing capacity, temperament and financial ability?
What type of work is most appealing to me? For example, do I enjoy working with food? Mechanical things? People? Property? Books? Computers? Sporting goods? Etc.
Am I prepared to work hard and take a financial risk? Do my advisers, family and friends think I am adaptable and trainable? How do I react to controls?
Am I a loner, resisting authority and restraints, or can I accept guidance and direction happily?
How do I personally feel about the company's image, products and services?
The right answers to these questions help determine your potential success as a franchisee.
16. Do franchised businesses have a better chance of success?
Surveys conclusively show a very strong success rate for franchise owners. Whereas the failure rate for independent start-up businesses is approximately eight out of 10 (within five years of starting), franchising has the opposite ratio of success where more than nine out of 10 are still operating after five years. This is one reason why it is easier for would-be franchisees to borrow from banks, especially if the prospective franchise is listed on their 'safe' list.
17. How do you explain the success rate for franchised business?
The franchising system is designed to provide a pre-tested formula for success, plus ongoing advice and training.
The unavoidable business mistakes have been worked out of the system through experience.
Most independent businesses fail because of lack of management skills. With a franchised business, your franchisor should be eager to help you overcome problems. Your hard work and the Franchisors expertise spell a strong partnership.
No one can be 100% sure of success. Although the majority of franchise owners are satisfied, successful business people - some do suffer financial loss.
Regardless of eaings claims made by the franchisor, recognise that success or failure ultimately depends on you.
18. Can I franchise my small business?
Of course you can. That doesn't mean you should. It may be running quite well as it stands, and franchising would bring radical changes.
The decision to (or not to) franchise will take a lot of consideration. Here is the general guide:
- Don't franchise as a means of getting yourself out of trouble,
- Don't franchise unless you have the perfect prototype,
- Don't franchise unless you are in a potential 'mass' market,
- Don't franchise if your business is idiosyncratic,
- Don't franchise if you're doing it 'on the cheap',
- Don't franchise if your success rests largely on you,
- Don't franchise simply because you are successful and franchising offers a means of expansion. Franchising is not the only way to expand.
- Yes, franchise if 'every town needs one' can be said for your business,
- Yes, franchise if you can handle sharing your idea with many,
- Yes, franchise if you can handle your role becoming increasingly administrative,
- Yes, franchise if you can afford to weather a likely difficult start,
- Yes, franchise if your success rests largely on your product or service,
- Yes, franchise as a means of expansion if you can create an ongoing long-term relationship with a team of people.
19. What are some of the drawbacks of owning a franchise?
In exchange for the security, training and marketing power of the franchise trademark, you must be able and willing to give up some of your independence.
If you are a person who likes to make most decisions on your own or to chart the course of your business alone, a franchise may not be right for you.
As a franchisee you will be required to comply with the various controls and procedures established by the franchisor. Then too, all successful businesses require a lot of dedication and plain hard work. You must be prepared to make that commitment.
20. Should I be conceed whether a franchise is a member of the British Franchise Association (BFA)
Franchises who belong to the BFA and subscribers to the Code must meet certain membership requirements.
They must also have a satisfactory financial condition and abide by the Code of Ethics. By joining their industry association, they have demonstrated a commitment to the franchise concept. This does not say that Franchisors who are not members are not suitable; Macdonald’s for instance only recently became a member.
21. What is the annual growth rate of franchising in the United Kingdom?
Annual growth in the number of franchisee-operated outlets has averaged 17% compound between 1994 to 2001. Slower but steady growth since then of about 4%.
22. What are the main areas for consideration in negotiating the purchase of a franchise?
When investigating the purchase of a franchise there are six key areas up for negotiation. They are:
- What will the franchisor do that you can't?
- What territorial or other barriers protect your outlet from both the competition and other franchises?
- What guarantees, rebates and refunds can you have if things do not go totally as planned?
- How much of the marketing budget will be spent in your area?
- Terms and conditions, and,
- The Franchisors negotiations - on your behalf - with leasing agents, centre management, financial institutions, suppliers and others.
The majority of Franchisors use a fixed-term franchise agreement. The remaining franchise agreements are 'perpetual' - there is no nominal termination date.
The average length of time granted is five years, with 55 percent of Franchisors choosing a term of this length. The other common term is 10 years as adopted by 27 percent of Franchisors.
24. Are there specialist franchise advisers and consultants to assist?
Franchising is a mature sector, which over the years has developed quite a number of consultants who specialise in advising to the sector. Among them are franchise advisers - who assist in purchasing; legal advisers - who assist in transacting the purchase and in other matters; accountants - who assist in balancing the books and in business projections; and the franchisor - who is the 'fully paid up' adviser!
For a good understanding of what you're getting into, you need to make full use of a range of expertise. Otherwise it's do-it-yourself, which is cheap - in every sense of the word.
25. What is the best advantage that franchising has over independent small business?
Franchisees are never alone, which is one of the best benefits that one could hope for in this tough business world. On one hand they have the franchisor to support them and on the other they have franchisees that are having parallel business experiences.
Furthermore, as a franchise matures, the brand name and trademark becomes more valuable. So as franchisees consolidate in the marketplace they are actually adding value to the group as a whole.
Similarly, as a franchise grows in numbers, the multiplication of sites creates a stronger market presence, which benefits all franchisees.Signup to our Newsletter.
