When you franchise your business, you, as franchisor, grant a licence to your franchisees to operate a business under your name. You also give them a system to market your products or services for a specified period, and often in a specified geographical area.
In return, you receive:
- Franchise fees – franchisees normally pay you an initial franchise or licence fee to cover training the franchisee and assisting in the launch of the business.
- Ongoing earnings potential – through a share in the success of the business. This normally involves a management services fee in the form of a percentage of each franchisee's turnover, and/or through a mark-up on the goods you supply or a fixed sum each month.
- Attractive entry criteria – potential franchisees don't generally need any previous experience of your type of business, as you train them and provide ongoing support.
- An interdependent relationship – the franchisee also has the benefit of your full commitment to the continuing success of their business, since your income is dependent on theirs. If they are successful, so are you. This close inter-dependence is unique to franchising.
- Business expansion – you can use the capital of your franchisees, so reducing your own financial commitment and avoiding exposure to high interest rates.
- Continuous growth momentum – you don't need to generate capital to open new branches, your franchisee recruitment programme should maintain your growth schedule with less capital outlay.
- Highly motivated business owners – since franchisees have invested their own money, they should be more self-motivated.
- Benefit of local market knowledge – and the business contacts of your franchisees.
- Lower staff needs – franchises often need less staff at head office level than conventional business models.
- Less management worries – and reduced exposure to the normal day-to-day problems of conventional companies, such as recruiting and retaining staff and the security of stock and cash.
- Global growth – franchising is growing globally, making it easier for companies to expand internationally – some franchising companies are now among the largest multinational operations in the world, such as McDonald's and Subway.
Most types of businesses do lend themselves to franchising, but there are some for which franchising would be difficult and some where it would not be practical. This is a not a definitive guide, just a brief look at some of the areas you should consider.
- Gross profit – businesses with small gross profit margins usually make poor candidates. There have to be sufficient margins in the business, in terms of the money and time invested, to make it worthwhile for both franchisor and franchisee. A good rule of thumb would be to add an additional 15% of costs to your business and assess whether it would remain profitable.
- Regular income potential – the franchisor has to have sufficient regular income from franchisees to pay for the services they have to provide, and to make a profit.
- Easy to enter – the business should be capable of being taught to newcomers who have no prior experience and should be based on an easy-to-follow business system. The more skills, training or personal ability required by franchisees, the harder it becomes to recruit the right people.
- Control – the business should be one in which the franchisor is capable of exercising some control over the franchisees and the way they operate their outlets.
- Price – the price of the franchise is also important. The lower the start-up costs, the easier it should be to find franchisees.
In Britain, there are a number of experienced firms who you can call upon to assist you in the different aspects of setting up your franchise.
Franchise consultants – a consultant can carry out a feasibility study to determine whether your business is suitable for franchising, help you prepare your company for franchising and assist you with the various elements of your 'franchise package'.
Accountancy – an accountant will help you prepare your figures - projections and cash flows for your own business and for your franchisees. You will need a business plan to show to potential investors or lenders if you need extra capital to develop the franchise.
Legal assistance – franchise contracts are, in essence, restrictive agreements and can be caught by UK and EU legislation. You will need the services of a lawyer who is fully experienced in franchising.
British Franchise Association – there are a number of lawyers and consultants who specialise in this field who are also affiliated to the British Franchise Association.