Make the right choice

There are around 900 systems operating in the UK and 40,000 franchised units. Those units employ approximately 600,000 people, and 90 per cent are profitable. These organisations can differ enormously – from McDonald’s restaurants requiring initial investments that can reach hundreds of thousands, to smaller operations that can be set up for under £5,000.

What these businesses share is the concept of franchising – a company, often with a well-known brand, licensing others to operate under that brand using the tried-and-tested, marketing and business systems of the franchisor and with the benefit of set up and ongoing consultancy.

This, of course, does not come free for the franchisee. Typically they will pay a significant sum on entry and then an ongoing management services fee – perhaps 10 per cent of turnover. Potential franchisees should take that into account (and that it is a tax on sales, not profit), as well as the amortisation of the initial franchise fee over the term when creating a business plan for the franchised business.The immediate benefits are two-fold. Firstly, new franchise businesses are substantially less likely to fail than other small

The immediate benefits are two-fold. Firstly, new franchise businesses are substantially less likely to fail than other small start-ups and, secondly, in recognition of that, the major banks will generally lend a larger proportion of the start-up capital than they would otherwise.Running a franchise is not, however, without risk. Franchisors are not immune to failure, no business is, and this, obviously, will effect their franchisees. Also, and almost without exception, franchisors require their franchisees to enter into franchise agreements that are drafted somewhat in favour of the franchisor. These agreements include clauses such as being tied in for the term and although the franchisee is given the option to renew at term end (usually five years) that is almost discretionary for the franchisor who can impose a different agreement upon renewal. There is also generally only one guaranteed renewal, so the term ‘maximum’ can be 10 years. (Although the franchisee agreement will be stated to be non-negotiable, always get it reviewed by a

These agreements include clauses such as being tied in for the term and although the franchisee is given the option to renew at term end (usually five years) that is almost discretionary for the franchisor who can impose a different agreement upon renewal. There is also generally only one guaranteed renewal, so the term ‘maximum’ can be 10 years. (Although the franchisee agreement will be stated to be non-negotiable, always get it reviewed by a

Running a franchise is not, however, without risk. Franchisors are not immune to failure, no business is, and this, obviously, will effect their franchisees. Also, and almost without exception, franchisors require their franchisees to enter into franchise agreements that are drafted somewhat in favour of the franchisor. These agreements include clauses such as being tied in for the term and although the franchisee is given the option to renew at term end (usually five years) that is almost discretionary for the franchisor who can impose a different agreement upon renewal. There is also generally only one guaranteed renewal, so the term ‘maximum’ can be 10 years. (Although the franchisee agreement will be stated to be non-negotiable, always get it reviewed by a bfa-affiliated law firm.)

Provided that he or she complies with the procedures manual of the franchisor, the franchisee is his own businessman or woman but, increasingly, franchise agreements include performance clauses allowing substantial management from the centre, and even termination if the financial performance is not as the franchisor would want.

On the up side they may have the advantage of a well-known brand name, assistance from experts at head office and the ability to build a capital asset to sell when they want to retire or do something different. Some franchisees end up with multiple outlets of the same franchise. Choosing the franchisor is probably more important than choosing the area of business or trying to negotiate a better agreement, which is rarely achieved.

A good, well-established, franchisor gives much greater chances of success and is much less likely to abuse the extensive powers given to it by the franchise agreement. Further advice can be sought from the British Franchise Association (bfa), which acts as the guardian of good franchising practice in the UK. Membership is open to franchisors who agree to comply with its code of ethics and can demonstrate that they have a sensible, franchiseable concept and current franchisees.

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