Starting a Franchise – What you need to know

Starting a Franchise – What you need to know

If you are running a solid, successful small business, your thoughts for future growth may well turn to franchising.

And they would be good thoughts – the franchise industry is thriving.

According to a recent report by the British Franchise Association (bfa) and Natwest, the contribution of franchising to the UK economy has grown by 20 percent in the last 5 years, despite the overall economy shrinking due to the recession and four out of five franchises are profitable within their first two years.

However, not every business is suitable for franchising and you need to be sure you’re not going into it for the wrong reasons. The bfa is clear on this:

‘The first thing to understand is that franchising is not a tool to fix a bad business. It is not there to provide injections of income from other people to underpin a failing elsewhere.’

Franchising is a model used to replicate a successful and proven business, using the investment and skills of new individual business owners, who will be trained and supported to run the business under the agreement, conditions and format, as proven and agreed.’

What needs to be established from the outset is that your business works, is profitable and, most importantly, transferable (i.e. easy to replicate in different locations using a consistent system, brand and quality.)

Once you are sure that your business can indeed be franchised, there are a few vital things to get sorted. Here’s what you need to do:

Get ‘franchise ready’

If you are going to teach potential franchisees exactly how your business works, you will need to hone all aspects of it so there are clear guidelines to follow. Everything from marketing and staff training to branding and customer relations will have to follow a strict protocol.

At this stage, any imperfections and inefficiencies will need to be ironed out and relationships and terms with suppliers consolidated.

You will also need to create a universal ‘operations manual’ – a vital part of a franchisee’s toolkit – that will constitute a guidebook to running the franchise including company policies and best practices.

Even if you don’t end up starting a franchise, this process will streamline your existing business and be a very worthwhile exercise

Sort out the legalities

Compared to the US, franchising in Europe is not heavily regulated. This is the cause of much debate but the bottom line is that, if you enter into a franchise agreement in the UK, you are relying more on trust than legal imperatives.

To be considered reputable, UK franchisors have to produce a disclosure document and agreement that falls in line with the European Franchise Federation’s Code of Ethics (although this is not a legal requirement).

Franchisors registered with the bfa will be expected to comply with this – so sensible prospective franchisees will be looking to select franchisors from this cohort. And franchisors who want sensible franchisees will want to be part of it!

While the US system is considered more useful in protecting the potential franchisee from falling prey to unscrupulous ‘franchisors’, its worth noting that there has been little abuse of franchisees by bfa members in the 30 years since the association began.

To draw up your franchise agreement you will need to employ a lawyer who specialises in them. The bfa has a useful resource. The rights and obligations of both franchisee and franchisor will be clarified and terms including fees, exclusivity, training and support, period of agreement as well as exit procedures will be set.

It’s worth noting that this is not an agreement between equal business partners. You, as the franchisor are responsible for a whole network and that sometimes means you have to prioritise that network over the interests of an individual franchisee. Your agreement should stipulate this and you should also take steps to legally protect your brand/trademark and set up a post-termination restrictive covenant.

Pick the right location

When choosing where to place a franchise, you need to think carefully about how that will help the growth of the business as a whole.

Picking a location relatively close to the master business, where you already have brand recognition, but that won’t damage the sales at your existing premises is a good move. This will enable you to manage logistics easily.

If you choose to expand your franchise network to numerous locations – using mapping technology will be invaluable. There are a wide range of digital territory mapping tools available now to ensure a more scientific approach to area allocation and the good news is that there are packages to suit nearly every budget.

Geographic Information Systems (GIS) can vary from simple post-code based systems to complex packages which offer detailed business and demographic data at a micro-geographical level.

The data can be tailored to your specific needs, including market analysis for your own particular business.

Be highly selective

Finding the right franchisees is the biggest challenge for a franchisor. According to the bfa, new franchisors have conversion ratios of serious enquiries to appointment of approximately 10:1 and they claim that ‘established franchisors have a conversion ratio which is often higher than 50:1 sometimes higher than 100:1.’

This makes sense when you think that you have to find a person with the right skills and experience to run your business and, more importantly, who ‘fits’ with your ethos and outlook.

It’s worthwhile making a list of all you are looking for (as well as deal-breakers!) when setting up the interview process.

In order to find your dream franchisee, you’ll have to cast your net wide: attend franchise exhibitions, advertise in established franchise magazines and on reputable websites - and if you have existing franchisees you can ask them for referrals.

Consolidate your brand

If you are going to franchise your business, your brand will become your most valuable asset and you will need to protect and strengthen it.

Brand means not only the decorative style and logo of your business, but also it’s ethos and relationship with customers.

It’s a risk to entrust that brand to a new person, so you will have to be sure to set crystal clear guidelines on how the business should appear and function – and those directives should come from only you and be consistent throughout the franchise network.

Be supportive

Finally, if you are going to be a good franchisor, you will have to be willing to put on your nurturing hat.

No franchisee is going to represent your business well without extensive training and consistent support. Be prepared to spend plenty of one-on-one time with your chosen candidate and always keep the lines of communication open.

It’s also vital to enable a communication network between all franchisees – they will gain support and learn from each other.

Organise regular gatherings and rewards and incentives for exceptional performance.

If you can foster the feeling of a franchise ‘family’ – you are on the right track for success.

Good luck!

About The Author

Nicky Tatley Writer
Nicky contributes articles to all titles in the Dynamis stable, primarily, and and is a regular contributor to other business publications including Talk Business, and NuWire Investor.