The dos and don’ts of franchising

Carol Davis has spoken to some of the leading lights in the franchising industry in the UK and has come up with the definitive ‘how to’ (and ‘how not to’) guide…

Investing in a franchise is a huge financial undertaking, and so you’d expect everyone to get it right. After all, there’s the back-up of an established franchisor that has put years into making a profitable business model work flawlessly – and since you’re buying a tried-and-tested model, the risk of failure is substantially lower than for other start-ups, even faced with the challenges of recession.

Start-up costs are hefty – the average total start-up fee for a franchise operation, including equipment costs, the franchise fee and working capital, was £64,900 last year, according to the NatWest/British Franchise Association Franchise Survey 2008. Add in the amount of sheer entrepreneurial verve needed, not to mention the demands on the new franchisee and their family, and the pressure is on to get it right.
But be warned – things can go wrong. While nine out of 10 franchisees say their business is trading profitably, that means that around one in 10 is running at a loss. And surviving the first two years is vital.

So what goes wrong? Talk privately to experienced franchisors, and while they enthuse about the successes of their most go-getting franchisees, they also despair at the under-achievements of the minority who get it wrong. A not untypical tale: the franchisee from a strong corporate background who spends his or her redundancy cheque in the firm belief that they are buying a job for life, yet find that they struggle to adjust to the new routines and systems. Some franchisees come a cropper by thinking that changing the franchise drastically will improve it. And while many franchisors are happy for new franchisees to bring their skills acquired through a successful career to improve the marketing or accounting methods of the entire group, others are less happy about those who are so keen to reinvent the wheel that they fail to use a successful business model effectively.

Talk to new franchisees, and many are happy to admit that taking on a franchise is a steep learning curve. Even after a successful career, they often find that they need to quickly acquire new skills – sales, marketing, technical or human resources expertise. Others have simply underestimated the impact on their family, and the sheer hard work and self-discipline needed to build a successful franchise.

Yet many a successful franchisee who admits that the early years were tough then goes on to acquire new skills to build the business, and calls on the expertise of the franchisor and fellow franchisees to make sure they get it right.

So for new franchisees who want to prosper and avoid the pitfalls, we talk to some experienced franchisors about the do’s and don’ts of being a successful franchisee.

 

“Think long term”

Derek rogers

Head of franchising, Mcdonald’s

To be successful, franchisees need to make sure they have enough working capital. We work to a ratio of 3:1, so 75% borrowing to 25% capital. Since we work very closely with several banks who understand our system, they offer favourable rates.

Get involved – we encourage our franchisees to use their entrepreneurial talents and creativity to help shape our marketing strategy, which is then approved by an independent company with direct input from our successful franchisees.

Or franchisees can join our planning arm, which likewise uses the skills of our franchisees. But don’t try to re-invent the wheel in an individual restaurant – we have a very successful business model, and our customers value consistency.

Remember to involve family in the business, because their support is vital. As well as involving spouses, we also have a Second Generation programme which includes siblings, and encourages longevity for the business.

Think long term – our standard franchise term is 20 years, so a franchisee should be in a good position to build the business and plan an exit strategy too.

Don’t rush into anything: never underestimate just how much hard work goes into making a success of a restaurant – it’s not like buying a job. We always encourage prospective franchisees to talk to our competitors too, and think hard about whether franchising is really for them – that way, we cut the risk of failure.

 

“GET A LOAN, NOT AN OVERDRAFT”

Alan Haigh

Chairman, Minster Cleaning

Do make sure you have “committed money” to use as working capital during a recession. You can do this by getting a bank loan instead of an overdraft (make sure it is a term loan and not an on-demand one).
With a bank loan, as long as you make the required repayments, the bank cannot ask for their money back, whereas an overdraft is repayable on demand and also has to be renewed annually. None of us know how the banks will react during this downturn – and as we have already seen, anything can happen.

Predictably, some businesses are faring less well than others during this recession – therefore don’t get involved with a new or untested franchise, without several years’ proven track record, in this recession.

There are two reasons for this. First, some business models don’t stand up in a downturn. When household incomes are being squeezed, consumers respond by cutting spend on certain home services (such as car washes, lawn maintenance and home cleaning) because they are suddenly perceived as an expensive luxury. Such spending is as discretionary as buying a cup of coffee.

Secondly, because new franchisors probably won’t have a large enough royalty income stream, they will need the upfront fees from the sales of new franchisees to survive. Therefore, they may be tempted to use sales and profit projections that are far too ambitious for the current economic climate. Test their figures and assumptions rigorously.

 

“FOCUS ON WHAT YOU’RE GOOD AT”

Nigel toplis

Managing Director, Recognition Express

Franchising is a partnership – good franchising is a marriage! Franchising is a powerful and calculating blend of the best elements in “big” and “small” business, and very much a mixture of conformity and individuality.
So do take care to select the right franchise – a good franchise should have a proven business history, documented systems, effective training and security of tenure, as well as an ongoing support structure and membership of the British Franchise Association. And determine how much you can afford to invest, without over-extending yourself.

Do evaluate the market, too – is the industry a good market? Can demand be sustained, and is the industry growing or declining or even cyclical? Do a few key players dominate, and how do competitors build market share? Compare different franchises, talking to both franchisor and franchisees to ask how positive they feel, and how supportive of the franchise they are. Take professional advice too, from a solicitor and an accountant.

Learn to plan your strengths and manage your weaknesses. Work with the system, don’t hold back on effort – keep in regular contact with the franchisor, and attend regional meetings too. And don’t assume you know the answers – be prepared to ask.

Franchisees who fail generally do so because of personal issues including divorce, family crisis or loneliness; or laziness, and not following the system. So do as the most successful franchise owners do – they work hard, and focus on what they are good at. They are also proactively and continuously active in their marketplace, and work with but challenge the franchisor.

 

“SPEAK TO EXISTING FRANCHISEES”

Carol Stewart-Gill

Founder and Chairman, Dublcheck

When looking at a franchise, it is good to look for a well-established brand which has demonstrated a track record of success in a business sector which is sustainable. Established franchisors like Dublcheck, which celebrated its 15th birthday last year and retains over 90% of its clients year on year, can demonstrate just that.

Reputable franchisors will have no problem in allowing prospective franchisees to speak to a number of existing franchisees in order to demonstrate the benefits and reality of being part of the franchise network. And do ensure that the franchisor offers comprehensive and relevant training – this should be confirmed by talking to existing franchisees.
Do remember that you are investing in a tried and tested business model. When the research is complete and a decision is made, any new franchisees must follow the system prescribed by the franchisor, and not try to re-invent the wheel – after all, it is this that they have invested in, and what convinced the franchisee to join in the first place.

Do choose a franchise carefully to reflect your own skills and expertise, and don’t forget to consider where you may need some support. Choose a franchise which enables you to use your natural opportunities and skills – for example, if you are not comfortable in a sales arena, try to find a franchise which does some or all of the selling for you. A good franchisor will always have solutions to problems, because, after all, they’ve been there before.

 

“DO YOUR HOMEWORK”

Lioyd Evans

Chief Executive, Chipsaway

For an increasing number of people facing redundancy or worried about their long-term employment prospects, franchising offers a real, lower risk alternative. But don’t assume that you are buying a job.

Naturally, simply buying a franchise can’t guarantee success in self-employment. It can provide a blueprint for a profitable business, but ultimately it will be your business and your responsibility to make a success of it.

So before you reach for your chequebook, do your homework. Check out the market potential, check out the franchisor, the brand, the franchise package and the franchise contract. Check your competitors – but most importantly of all, check out your own suitability for self-employment.
Do ask about training, and comprehensive training and support from your franchisor. Those first few months out there on your own are undoubtedly the toughest and can be the loneliest too; therefore a good business developer, providing one-to-one mentoring and practical hands-on help, can be invaluable in the early days. So check out the support structure of your potential franchisor. Good communication is crucial.

Do check what happens if things go wrong. Find out if and how the company is prepared to invest back into its franchisees’ business. Good franchisors will not stand by and watch hard working franchisees fail, but should be prepared to invest in extra support or training wherever possible.

On the other hand, if your business goes great guns, find out whether your success triggers a package of benefits that will enable you to build and develop your business. So choose wisely, and be prepared to put in 100% enthusiasm and hard work.