I’ve adapted this information from the guidance available at the British Franchise Association. They are the trade body for reputable franchisors and hold a number of franchise exhibitions each year for people looking to buy and sell a franchise. NatWest Bank also have a number of franchise specialists who can help with assessing ideas and providing the finance to purchase one.
What is a franchise?
Franchise is a term that covers many different business models but generally refers to a business format that is rented or sold by the originator (franchisor) to someone (franchisee) who would like to use that business format to run their own business. So, a franchise is a pre-packaged business idea where you agree to buy or rent the package from the business owner. This package may be as vague as a concept with a logo or as sophisticated as a fully functioning McDonald's restaurant.
Why consider a franchise?
The appeal of a franchise is that much of the early leg work has been done for you. You get a turnkey business system with all the mechanics in place and you can then get on with running the business.
A franchise can offer the following advantages over starting from scratch:
- You do not have to think of an original idea - someone else already has and they have tested it too
- Franchises from bigger, established brands will often benefit from national advertising and a trusted trading name
- A good franchise will come with regular training to help you grow and run your business
- Franchisors can offer access to funds and bulk discounts on your materials and supplies
- You have the feeling of being part of a larger team which may suit people leaving a job and going into business for the first time
How does a franchise work?
If a franchisor is keen to grow their business or their brand by franchising their business model they will often have a clear process for anyone interested in joining them. They will make clear the criteria for a potential franchisee and provide full information on how the business works. The better franchises will make it easy for you to talk to other people who already have a franchise so that you can ask questions.
A franchise agreement will define the relationship between you and set out the rights and responsibilities on each side. Although the individual franchise will be run by you, the franchisor will often control the way in which products/services are marketed and sold. They will also define quality standards for the business.
Often the franchise has a fixed cost which they or a bank may help you fund. There are additional monthly costs for contributions to marketing and support. You may also have to purchase your supplies from the franchisor.
What are the pros and cons?
As above, a franchise can offer big advantages to someone wanting to take their first steps into running a business. The brand, business process and the idea are all done for you. There is support available, you are part of a team and when you want to move on, your franchise may well have grown in value. Overall, it can allow you to focus on growing the business and working with customers, rather than having to create a business model from scratch. The best franchises have set up their business model so that they are as passionate about your success as you are.
The downsides all centre on the variable quality of the franchises available. There is no doubt that the best franchises offer all of these advantages and more. But not all franchises are like the best…
Shovel or Map?
Who made the most money in the California Gold Rush in the early part of the last century?
It wasn’t the miners who were digging for gold. Many of them lost everything, including their lives. The real winners were the people selling shovels and mining equipment. And innkeepers.
In a gold rush the most money is usually made by selling equipment or instruction to people who want to take a risk.
Who made the most money in the early days of the internet? Believe it or not, people selling products on “How to make money on the internet”. The central question when looking at a franchise opportunity is Am I buying a shovel or a map?
Some franchises are just shovels - great equipment but no guidance about where to dig and find gold. The better franchises are more like a map, not only do you get the equipment but they show you where to dig and they help you find gold.
Shovel Sellers
The middling to worst franchises have worked out that selling a franchise is far easier than growing a business another way. They make money selling you the concept and idea, they take money from you to cover the cost of marketing support and they make money on selling you the supplies that they insist you use, leaving you with all the risk and a significant monthly financial commitment.
Franchisors make money from selling franchises to people who want to buy a franchise. It is always easier to sell tools to someone who wants to do something rather than do it yourself. Often you will pay a large one-off fee plus regular monthly support fees regardless of whether or not you have any customers.
If you are considering a franchise then look for one where their reward is tied to your success so that they are motivated to help you find customers and grow your income. Otherwise, all you have bought is a very nice shovel. What you want is someone to help you find out where to dig.
The other downside is that your hard work, energy and commitment goes into growing their brand and not yours. This means when you walk away, you leave all that value behind.
| For Buying A Franchise | Against Buying A Franchise |
|---|---|
| You get a ready made business with most of the mechanics taken care of | You are making someone else wealthy and the great thing for them is that your fees cover all their risk |
| It’s a lower risk way of entering a market and probably a faster start-up | Regular support fees drain your early rewards |
| There is a huge amount of support and advice out there to help with the buying decision | The contract may be difficult to escape from |
| You get extensive marketing support, joint advertising and help from someone who has found the best way to run this particular type of business | Many franchises are tired formats in saturated markets |
| You can then concentrate on finding customers and running the business | It may be hard to find customers and easier for the owners to sell you their idea than make it work for themselves |
Learn from franchising
Even if you do not want to buy a franchise, can you learn from the idea and approach of franchising? Could you become a shovel seller?
There’s huge opportunity in supplying goods and services to people who want to do something. For example: selling hairdressing supplies to hairdressers or presentation skills training to managers or tools to plumbers.
Selling marker pens to trainers is a lower risk business than finding training work yourself. It's steady work, margins are reasonable and customers are everywhere. It may be easier to sell Prince 2 training to new IT contractors than to try to find work as an IT contractor yourself.
Look closely at the supply chains that you know best. Could you find a part of it where you could ‘sell a shovel’ faster, better, at higher quality or cheaper? Why do the work yourself when you could sell a tool to someone else who wants to do it? Could you turn what you know or a skill you have into a “How To..” business?
What’s the next step?
If you are interested in pursuing a franchise then your research is very important- Go and be a customer of an existing franchisee
- Talk to existing franchisees about their experience with the franchise
- Understand the franchise agreement clearly. Understand your financial commitment.
- Look for significant support from the seller
- Take advice from a specialist at NatWest
- The British Franchise Association website has some information on how to choose a franchise
