6 Things You Need to Know Before Buying a Franchise

Franchises come in all shapes and sizes, from large, consumer-facing retail chains to small businesses operated from home. Most people are familiar with big-name franchise brands such as McDonalds and Subway. However, they might be surprised as to the sheer scale of franchising - both in the UK and worldwide.

Franchising is thriving. An incredible 621,000 people in the UK are currently employed in a franchise – that’s an astonishing 70% increase in size just over the last ten years – and it’s showing no sign of slowing. Franchises report high profitability and significantly lower failure rates than startups, so it’s no surprise it’s a popular choice for those wanting to leave employment and take greater control over their working life. But what really IS franchising, and could it be the right choice for you?

Franchising in a nutshell

Business format franchising is the granting of a licence by a franchisor to a franchisee, entitling them to own and operate a business of their own, using the brand, systems and proven business model of the franchisor. There’s no pre-defined type or size of business that could or should franchise; all that matters for a business to franchise is that it has a proven and replicable business model, which is profitable and provides a “win-win” relationship between franchisor and franchisee.

It’s a very simple concept – use a winning formula to start a new business. Done well, franchising is a great way for a business to expand, and for those who want to start a business, but who prefer to do so with a support network.

There’s a legal contract – a franchise agreement – between the two parties, which sets out the rights and requirements of the arrangement. Agreements vary in length, but are usually around 5 years.

Each franchise business is run by the franchisee. However, the franchise agreement means that the franchisor retains control over the way the products or services are marketed, sold and produced, and also controls the standards of how the business is operated.

The franchise agreement - a serious business

A franchise agreement is a long-term commitment that demands significant amounts of faith, expectation and confidence from both sides. Look at it like a marriage – a franchise agreement should not be signed or taken lightly. Taking on a franchise is entering a business relationship with the franchisor, usually for at least 5 years. As with any relationship, there will be highs and lows across this time, so it’s important to choose your new partner carefully.

Potential franchisees should ask questions and do their research to dispel any concerns as early as possible. In my experience, a lack of clarity on either or both sides inevitably leads to problems down the line, and legal remedies are often a difficult and costly process for both parties.

Running a franchise

You don’t need to have experience in the franchise industry or, in many cases, even in the business sector (though of course it will help). This is because the vast majority of franchisors don’t select their franchisees based solely on a CV. Most franchisors place far higher value on the candidate as a person, their experiences and their attitude. When hiring, they consider primarily whether a candidate would be a good fit for the network, as this is important for the success of the whole franchise network. Certain key values and skills are vital too, and these transferrable skills are usually based around your ability and confidence to:

• Attract and sell to new customers.
• Deliver excellent service in line with the manual.
• Maintain long-term relationships with both customers and franchisors.

There are some brands will only recruit franchisees who have experience in the sector, but others actively discourage this, preferring those who stick to the operations manual rather than previous experiences elsewhere. The operations manual will be your bible in franchising. It’s vital that operations are consistent and structured in a franchise, so that all customers receive a standardised service regardless of where they are. The operations manual is a comprehensive guide to running the business and doing the “job” of the franchise. It contains the ground rules for the business including brand guidelines, operational and administrative obligations, and any reporting requirements. The manual should not be an old book kept in a drawer; it should be continually updated and change organically as the business and the wider world changes.

That said, it would be a very blinkered franchisor indeed who believes that everything is covered by the manual and they have nothing left to learn about their business. Franchisees are out there every day, dealing with the ups and downs of the business in an ever-changing environment, and have a lot of valuable knowledge to share. That’s where Franchise Councils come in. They’re a great way for franchisors to get feedback from their franchisees, as well as to build cross-network relationships. Most good franchisors have a council (though often they have a different name!) and the frequency, format and number of representatives at the meetings will depend on the network.

Franchising is a sizeable investment

There’s the initial franchise fee, and then a franchisee also needs to look at what the working capital requirements of the business will be, such as equipment, lease payments and wages. Even if you were in the fortunate position of being able to fund the entire startup costs of the franchise personally, it’s still worth considering sourcing external funding for a proportion of the costs.

To get funding, franchisees need to set out intentions in a clear, well-constructed business plan that demonstrates the full potential and how they expect to reach their goals.

If a franchisee can show they are aware of the challenges and how the business is expected to perform, they will be far more likely to inspire confidence in the investor. The best way to do this is to find out real information, talk to the franchisor and as many existing franchisees as possible.

Legal advice is vital – don’t be tempted to skimp

The franchise agreement is a major commitment, which ties you in for a number of years and requires major financial input. You wouldn’t purchase a house without a survey and the same principle goes here. Obtaining a review of the franchise agreement from a solicitor experienced in franchising (not just a general commercial or family solicitor) should form part of any due diligence process.

Legal matters are not a place to cut corners; the experience and expertise of a franchising expert is invaluable and simply not available from the vast majority of high street firms. The British Franchising Association can provide you with a list of approved franchise legal professionals.

Selling your franchise

Generally speaking, selling a franchise works in a similar way to selling any other business. It can be one of the most rewarding times of a business owner’s life.

The main difference in franchising is that most franchisors include a clause within their agreement that they will get the final say on recruiting the right purchaser, and that there may be a fee for a successful resale (e.g. if they source the buyer on your behalf). The franchisor should have a meeting with the prospective purchaser at an early stage to establish whether they are suitable to join the network (or not!) as it can be very disappointing for the selling franchisee if the franchisor rejects their buyer late in the process.

In summary - franchising is a fantastic opportunity for you to achieve your dream of business ownership, provided that you enter into it with your eyes open and perform your due diligence. If you want a quick run-down of the main points, take a look at the summarized interactive below:

About the author

Carl Reader is a highly-successful entrepreneur, heading up Team DT, a multi-award winning, mid-tier accountancy firm, and co-founder of TaxGo, a disruptive fintech startup in the gig economy space. Carl is widely regarded as a leading business advisor and author, specialising in startups and small businesses and is in demand to speak internationally on a broad range of business and management subjects.