Buying into a franchise model

The success of McDonald's shows how profitable franchising can be, but there are many other choices for the would-be franchisee.

If you’re eager to start a business but are unsure about your idea and are having trouble getting the bank on side, buying into a franchise model could be the best way to go.

A trusted name

The obvious advantage is that a franchise provides you with a tried and tested business and established brand recognition. Jo Tolley started a branch of infant swimming company Water Babies after having worked as one of their instructors.

‘I was thinking that I might set up a similar business of my own, but I liked this company and wanted to use their brand recognition – which I think is useful when people are spending less,’ she says.

Despite the fact that franchising takes away some of the usual pressures of setting up a business (for example product research), Tolley cautions against seeing it as an easy option. ‘However much time you think it’ll take up, double that,’ she says.

Tolley adds it’s also important to take your time to see the process through. ‘It took about eight months between first deciding to do it and then going through with it. We went to lots of seminars and met with the owners first. One of the main advantages for us has been the support involved.’

Sharing the load

Peter Ivens decided to turn his 22-year-old printing business into an online franchise through Netstationers because he also wanted the support of being in a network.

‘I’ve total control over how I run my business still, but have the advantage of not having to spend all my time worrying about invoice and credit control, warehousing and distribution,’ says Ivens. ‘I can now go after bigger and better contracts for the first time in a long while.’

He has also saved a lot of time and money in the process. ‘Now I’m able to go on holiday – working for myself wasn’t allowing for much time off. And in the process of moving online, I’ve also saved £80,000 by reducing my overheads.’

The right fit

Of course, being part of a franchise won’t be for everyone. Michael Evans, a partner at law firm Davenport Lyons, says that one of the most common reasons for a franchisee failing is because the owner isn’t suited to the arrangements. ‘You should think carefully and be quite searching about your own motivation. The legal obligations tend to be set in the terms of the franchisor. There tends to be very little wiggle room in terms of changing the contract, but there are advantages to having consistency in the running of the brand,’ he says.

See also: I would like to buy a franchise but don’t know where to start. Have you any advice?

Take your time selecting a franchise

Most people have heard of the phrase ‘marry in haste repent at leisure’. Well this is also appropriate in the world of franchising. A decision to purchase a franchise is not to be rushed into, as there are many aspects to investigate, questions to be asked and professionals to consult.

Many companies advise that recruiting franchisees is difficult at the moment. New franchisees, on the whole, are making a positive decision to start their own business by purchasing a franchise, rather than being forced into a new direction by being made redundant.

Taking your time to select the right franchise is imperative. Franchisors may offer attractive incentives for a decision to be made quickly. It is recommended that this is not taken up, at least not until all your investigations have been carried out.

Research research research

Before signing any legal agreement, or making a financial commitment thorough research is vital. You must satisfy yourself that your chosen franchise is a well-established concern with a proven track record and satisfied, successful franchisees. To find out if the current franchisees are satisfied with the support provided, obtain a full list of the franchisees. The named list should match the number of franchisees the franchisor states they have. Any less and they may be providing you with a list of the satisfied, or good performing franchisees only or they have misled you in the number of franchisees they have. When you have the list speak to as many of the franchisees as possible to gauge what they really think about the franchise and the support they receive from their franchisor. It is also a good idea to visit franchisees to get a better understanding of the way the business operates at first hand.

This is not as easy with a new franchise, particularly if you are their first. In this instance you must satisfy yourself that the franchise has been piloted and the results provided to you. The franchisor should also have, or used, people with a proven track record in establishing a new franchise.

Always seek appropriate professional advice including a suitably experienced solicitor, preferably one affiliated to the British Franchise Association or similar, who will be able to explain the clauses in the legal agreement to you. It is unlikely that the franchisor will amend any of the clauses, but you should be aware of the implications of them. To use an analogy, you would not buy a house without a survey, so do not buy a franchise without having the legal agreement checked.

Show me the money

An assessment of the franchisor’s financial stability should also be undertaken, to ensure that they have the funding to support the franchise network.

Major high street banks generally lend to franchisees through a network of Area Franchise Managers, based in local business centres across the UK. They have a detailed understanding of franchising and mix this with the knowledge of the location in which they operate.

When dealing with a potential franchisee the Area Franchise Manager will want to know not only which franchise you want to purchase but details about yourself, as it is the individual and not the specific franchise that we assess. This is because your success will be determined by your level of commitment and enthusiasm.

The Bank will lend up to 70 per cent of the total start-up costs for a franchise, although this may be nearer to 50 per cent for a less established concept. In view of the likely amount required, security, such as a second mortgage on your home, may be required. This will be discussed with you during a detailed meeting.

Before a loan is agreed a business plan will be required and should include details about the franchise, the costs, the sector it operates in, their competition, both locally, regionally and nationally, your CV, your assets and liabilities and projected financial information. If you are buying an existing franchise business we would like to see the actual financial performance; the last 3 years would be helpful.

Many franchisors will assist in completing a business plan, however the Area Franchise Manager will expect you to know and understand the various statements and financial figures it contains. There will undoubtedly be questions about parts of your plan. The financial information, particularly the forecasts, will help you to assess the performance of the franchise in the early months.

It should be noted that any bank will not warrant, endorse or recommend any franchise. The decision as to which franchise to buy is left to individuals who should undertake thorough research into the franchise.

Related Topics

Franchise Opportunities

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