Franchising Business: Buying Guide

If you understand the contract you will achieve far greater control over your legal advisers (whose fees can escalate considerably when clients fail to understand what's going on), and also greater control over the other side and their advisers, and you will generally be able to negotiate a much more advantageous outcome.

You don't need to become a lawyer - just understand what the contract means - you'll be surprised how easy it is if you take a bit of time to learn.

To help you - see the free guide to understanding business contracts and legal terms .

Buying a Franchise

The following information about selecting and buying a franchise business is provided by Business Link, which is gratefully acknowledged. While the information is essentially for the UK franchising market the principles are generic, sensible, and transferable to anywhere. The material is subject to Crown copyright. For further information visit the Business Link website.

Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn't have a specific idea or prefers the security provided by an established concept.

The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the company offering you the franchise, giving you help and support.

Successful franchises have a much lower failure rate than completely new businesses. But it isn't all plain sailing. Some franchises are better than others. And some people find that running a franchise just isn't for them.

This guide will help you decide whether franchising is for you. It shows how you can find the right franchise, and highlights the key issues you need to consider.

What is Franchising?

The term franchising can describe some very different business arrangements. It is important to understand exactly what you're being offered.

'Business Format' Franchise

This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchiser) grants a licence to another person or business (the franchisee) to use its business idea - often in a specific geographical area.

The franchisee sells the franchiser's product or services, trades under the franchiser's trade mark or trade name and benefits from the franchiser's help and support.

In return, the franchisee usually pays an initial fee to the franchiser and then a percentage royalty on sales, although some franchising arrangements do not include a royalty payment.

The franchisee owns the outlet it runs. But the franchiser keeps control over how products are marketed and sold and how their business idea is used.

Many well-known businesses offer franchises of this kind, including famous brands in sectors such as fast food, drain clearance, print and copying, cleaning chemicals, pet food deliveries, and automotive repairs.

Other Types of Sales

Different types of sales relationships are also sometimes referred to as franchises. For example:

• Distributorship and Dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
• Agency - you sell goods or services on behalf of the supplier.
• Licensee - you have a licence giving you the right to make and sell the licenser's product. There are usually no extra restrictions on how you run your business.

A Word about Multi-Level Marketing

Some businesses offer 'franchises' that are really multi-level marketing. It is fair to call many of these businesses 'pyramid schemes'. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other agents you recruit. 

However, many of these multi-level marketing organisations do not represent the proper spirit of franchising: many do not give good support, many are based on poor-integrity business models, and some multi-level marketing schemes are downright dishonest and illegal. So be warned.

Advantages and Disadvantages of Franchising

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

• Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
• You can use a recognised brand name and trade marks . You benefit from any advertising or promotion by the owner of the franchise - the "franchiser".
• The franchiser gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchiser won't sell any other franchises in the same region, though there will be competition from other businesses.
• Financing the business may be easier. Banks are sometimes more likely to lend money to a franchise with a good reputation.
• Risk is reduced and is shared by the franchiser.

Disadvantages

• Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchiser.
• The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
• The franchiser might go out of business, or change the way they do things.
• Other franchisees could give the brand a bad reputation.
• You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchiser.
• Reduced risk means you might not generate vast profits.

Are you Suited to Franchising?

As with any new business venture, you need to carefully consider whether you have got the right skills and attitude to run a successful franchise. Analysing your own temperament can also help you decide which type of franchise would be right for you.

Assess Yourself

• You must be prepared to sell. A franchise gives you a business blueprint - but it won't give you customers.
• You'll need to work hard, probably for long hours. Do you have the necessary stamina?
• Running your own business can be stressful. Think how you react to pressure.
• You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
• On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.

The Right Franchise For You

• Do you like office work? Or would you prefer a business that involves physical labour?
• Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
• Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
• Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?

Research Possible Franchises

You can find out about possible franchise opportunities from a range of sources.

A useful starting point in the UK is the British Franchise Association. As well as offering guidance and seminars on franchising, it provides:

• details of members who may be offering new franchises
• details of members who may be offering existing franchises for resale

Franchises are advertised and written about in various national newspapers and in trade publications such as Dalton's Weekly and Franchise World.

Websites such as Whichfranchise and Franinfo can be a useful source of information on franchises. You can find other listings using a search engine and employing search terms such as franchise opportunity or franchise directory.

Attending a franchise exhibition can also be a good way of finding out what's on offer. Details of some major exhibitions are available from FranInfo.

Do tread carefully. Advertised franchise opportunities - particularly multi-level marketing schemes - can be untried, dishonest or even illegal. Assess the franchise opportunity carefully and check whether the company offering the franchise is a member of the British Franchise Association, or your own country's equivalent.

Assess the Franchise Opportunity

To assess whether a franchise represents a sound business opportunity, you'll need to consider:

• what the business is and how it operates
• the location of the franchise
• the success of the franchise concept - the number of franchises in the UK and how financially successful they are
• the strength of competition from other businesses
• how long the franchiser - the company offering the franchise - has been in business and how financially secure it is
• levels of initial and ongoing costs
• how much training and support you'll get in setting up and running the business
• conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew

The franchiser will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims.

Visit other franchisees and talk to them. Ask the franchiser for a full list of past and present franchisees, not just the two most successful ones.

Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers such as Business Link, your solicitor or your accountant.

Write an Outline Business Plan

This doesn't need to be War and Peace - a basic outline is enough to tell you (and your bank manager) whether your preferred business franchise is a sound proposition or not. Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance. Business Link has information about writing a business plan, and there is also a lot of information, templates and examples about business plans, and advice, techniques and ideas for sales planning and development on the BusinessBalls site.

The Costs of a Franchise

When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account. You must also take into account what 'working capital' you need - this is the money you and the business need in order to run and survive before profits (and cashflow) are generated.

Initial Costs

The franchiser - the company which sells you the franchise - usually charges an upfront fee. This should be a relatively low administration fee. 

Good franchisers make most of their profits from continuing royalties. This is the Business Link view - I personally think that there are examples of very good franchises.

Your largest initial costs are usually your investment in:

• premises and/or vehicle(s) - (many franchises are
• equipment
• initial stock

Continuing Costs

You usually pay a royalty - a percentage of sales - to the franchiser. Alternatively or additionally you may pay a management fee of some kind. It is common also for franchisers to derive revenues from the franchisees through the supply of stock, marketing materials, and training etc.

Under the terms of the franchise agreement, you may have to purchase stock from the franchiser. 

Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.

You also have to pay the usual business costs - for example, rental on premises, utilities or the costs of any employees you take on. Again, check whether anything you pay for through the franchiser has a realistic cost.

Check too whether the agreement includes additional charges. For example, you may be required to pay for training, or contribute to the cost of national advertising campaigns.

How to Select and Buy a Franchise

There are a number of key things you should and shouldn't do when planning to purchase a franchise.

Do

• Assess yourself to see what kind of franchise, if any, will suit you.
• Find out what franchises are available.
• Assess franchise opportunities carefully, ask questions and talk to other franchisees.
• Investigate the financial prospects for the business.
• If you'll need to raise bank finance, ask your bank if it will consider a loan for the type of franchise you're considering.
• Do your own market research into customers and competitors in your area.
• Draw up a business plan.
• Check the franchise agreement and get professional advice.

Don't

• Take up the first opportunity before investigating alternatives.
• Allow yourself to be hurried into making a decision.
• Pay any non-refundable deposit.
• Commit yourself before you're completely satisfied.
• Assume a business will work in your area just because it works elsewhere.
• Rely on the forecasts provided by the company selling you the franchise.
• Sign any agreement without legal advice.

Tips on Franchise Agreements and Contracts

The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. 

Get a specimen contract for them to review. Here are definitions of contracts and agreements legal terms which will help you to understand yourself the basic contract meanings.

Areas Covered by a Typical Agreement

• Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
• Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
• Fees - what initial fee will you pay? What royalties will you pay on sales? Will you pay a regular management fee? Will you have to pay other costs? How are the costs worked out?
• Support - how much help will you get starting the business? What continuing support will you get?
• Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
• Exit - what happens if you can't continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?

Buying and Starting a Franchise: A Case Study

Business Link provide the following new franchise case study, which gives a real first-hand perspective of the issues:

Entrepreneur and trained optometrist Stephen Halpin always intended to run his own business. In his chosen market, the high street optical services sector, a franchise seemed like a good way to get a head start. After considering the options, Stephen bought one of the first Boots Opticians franchises in Northwich, Cheshire. Here is the story, lessons learned, and tips from the experience:

Select the Franchise

"The retail optical services market is highly competitive and starting an outlet in your own name is a risky affair. A franchise made sense, because it reduces some - not all - of the risks, offers a familiar brand name to build on and provides support with marketing and other aspects. There are several franchisers out there and I considered them all. I decided to go for a Boots Opticians franchise."

"Boots' reputation with UK consumers is excellent and brand awareness is almost universal. Also, because I was applying for one of the first Boots Opticians franchises, there was more scope to get involved in developing the operational systems. This was important to me I found that longer-established franchisers had a less flexible attitude."

Work out the Figures

"With the help of an accountant, I put together a detailed business plan. The store I wanted to take on had been trading as a Boots Opticians for several years so it had financial records to assess. Other factors I considered were the store location, local competitors and current operational practices. Without a clear idea of how much the business could make and how much cash I needed, it would have been impossible to tell if the franchise agreement on offer was worthwhile."

Check the Agreement

"The business plan also formed the basis of the presentation I gave to Boots' management. This was a key part of the process of being accepted for the franchise. The presentation and plan also gave me the information I needed to negotiate a contract. Following the presentation we had a number of conversations about the principles of any agreement."

"Once I had been accepted for the franchise, Boots drew up a franchise agreement setting out terms, conditions and fees. I got advice from specialist franchise solicitors before signing. One of my key objectives was to ensure that the agreement benefited both parties, that I made money and so did Boots."

"Starting from this position, I didn't accept the initial agreement and was able to change a few things. I wanted an incentive to grow the business, rather than just keep it ticking over, and Boots recognised that. One very useful point we negotiated was a deferment of payment on the upfront licence fee, which is one of the biggest franchise costs. I paid a portion on signing, the rest a few months later. It meant I had to borrow less in the early days."

Lessons Learned

Get Even More Advice

"I made use of professional advisers and also had help from Boots, who paid for a course covering tax planning, regulatory compliance and so on. Even so, I wish I'd had more advice, especially with regard to employment law and the impact of VAT on the business."

Understand 'TUPE' better

"TUPE (in the UK) stands for the Transfer of Undertakings (Protection of Employment) Regulations. It's a piece of legislation that's concerned with the transfer of staff from one employer to another. As I was taking on existing staff with the franchise, a better understanding of TUPE would have been helpful during negotiations."

This issue is only relevant to franchisees who are buying an existing business, with obligations to existing staff.

Franchise Tips Summary

• "Don't assume a franchise is an easy, risk-free option - you'll be running your own business with all the responsibility and hard work that running a business entails."
• "Use professional advisers and make sure they're franchise specialists."
• "Negotiate your agreement and don't think you have to accept the first set of terms put in front of you."

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