Could you turn your business into a successful franchise?
Unsurprisingly, McDonald’s was number one in Entrepreneur.com’s 2018 Franchise 500. With net global income of about £4.2bn in 2017, the company has more than 36,000 restaurants in 100-plus countries. In the UK, there are about 1,300 McDonald’s restaurants and 1,100 are franchise businesses.
The origins of the business go back to 1937, when Richard and Maurice McDonald opened a hotdog stand in Monrovia, California, followed by their own drive-through restaurant in San Bernardino in 1940. McDonald’s is a phenomenal example of the success that can come from franchising your business.
What is a franchise?
According to the British Franchising Association (bfa) there are about 1,000 franchise brands in the UK. Business format franchising is the granting of a licence by the franchisor to the franchisee, which entitles the franchisee to own and operate their own business under the franchisor’s brand, systems and proven business model.
The franchisor retains control over brand, products/services and how they’re marketed and sold, and receives an initial fee from the franchisee, followed by ongoing management service fees (usually based on a percentage of turnover or mark-up on supplies).
“There’s a huge variety of franchises,” explains bfa compliance and training manager Carly Liaromatis. “Some of the most popular are home-based or van-based operations, in sectors ranging from food to care at home and children’s services. Creating a franchise requires significant time and money, but your business benefits from the capital investment and your franchisees, who help to fuel brand growth.”
Liaromatis cautions against recruiting franchisees until a pilot scheme has proved successful for a year or more. “Ideally, it should be tested in different geographical areas,” she adds. “A comprehensive pilot can test viability and highlight any problems, so the franchisor can fine-tune the package before fully launching.”
Crucially, others must be able to replicate the business model’s success in other sales territories. “If you can’t teach someone else to run the business, because it relies on your specialist knowledge, you won’t turn it into a successful franchise network,” she warns.
“And the franchisor and franchisee must both make enough profit. Franchising is not a tool to fix a bad business. It’s not there to provide cash to bail out a failing operation. Franchising is a long-term commitment and the franchisor must recognise this,” she stresses.
Creating a franchise
Once the business model has been piloted successfully, Liaromatis says the franchisor should draw up a detailed business plan, then a comprehensive operations manual, explaining how to run the franchise and what training/support will be provided.
“A franchise agreement must also be drawn up, setting out roles and responsibilities, while helping to safeguard your brand,” Liaromatis adds. “This is a substantial legal document that must be tailored specifically to your business, so seek guidance from a UK franchise lawyer. You must also protect your intellectual property, including your trademark, while being fair and reasonable in your treatment of franchisees.”
All information that is material to the franchise proposition and contract should be “disclosed without ambiguity to prospective franchisees”, says Liaromatis. “When providing financials to prospective franchisees, they must be accurate and realistic, backed up with actual figures and evidence,” she adds.
The recruitment process must be “carefully thought out”, says Liaromatis, because “recruiting the right franchisees can be the most difficult and expensive franchisor task”. The franchise should be structured and operated in accordance with the European Code of Ethics for Franchising, she stresses.
“Other key considerations include territory planning, marketing and advertising strategy and establishing a central management function to support the franchisee network and monitor performance,” Liaromatis adds. She says it is vital to seek sound professional advice throughout when creating your franchise.
“Franchisors often engage a franchise consultant to explain the framework for franchising the business and to prepare documents such as the operations manual. Alongside a franchise solicitor, they work with the franchisor to create the foundations on which the network will be built. Taking the wrong advice here – or trying to cut corners – can lead to expensive mistakes,” she warns.
Support and finance
Andrew Brattesani, HSBC’s UK Head of Franchising, also believes that recruiting the right franchisees is vital. “Get it right and you gain financially, while leaving you free to concentrate on running your business and managing and growing the network.
“If you recruit the right people, franchising can be a quicker and less risky way to scale your business and increase your personal income. But, if you recruit the wrong people, it can damage your brand and end up costing you lots of money and time.
“If you want to franchise your small business, or need finance, we can help – we have more than 30 years’ experience. Small businesses can give our UK-based franchise team a call on 0800 234 6224*. One of our managers will get to know more about your business before assessing your lending request. We may also be able to provide loans that enable people to buy into your franchise network.”
* Calls may be recorded for training and monitoring purposes. Lines are open from 9am to 5pm, excluding holidays.
Gearing up for success
Brattesani likens setting up a successful franchise to trying to reach sixth gear when driving. He explains: “You must start slowly and move up through the gears gradually, changing at the right point of momentum. You need to get first and second gear right, which is starting off, refining your offer, finding your niche, getting better established, proving that your business model works, getting to a point where others can successfully replicate what you do.
“Once you reach third or fourth gear, you’re ready to leave organic growth behind by creating a franchise network and attracting franchisees. Accessing the right support at every stage and recruiting the right franchisees is crucial if your franchise is to succeed – so you can cruise along nicely in sixth gear,” he smiles.
- The bfa runs seminars around the UK that provide would-be franchisors with reliable guidance at the beginning of their journey, while also offering a free online training course for prospective franchisors. The bfa website contains a wealth of free information about franchising.