If you’re thinking of putting employment behind you and taking your career to the next level, franchising is a good way to go about it. Thanks to the supportive framework of a franchise business and the fact that pretty much everything is available to you from the start, franchising has many benefits over starting up alone. But just like starting up a business, franchising comes with a lot of considerations. Before you jump into the world of franchising, you need to understand whether it is right for you. In this article, we’ll go over some of the key considerations you should understand before investing in a franchise. But before we do, let’s have a recap on what franchising is.
What is Franchising?
Rather than starting up a business alone and from scratch, entrepreneurs can invest in a franchise. A franchise is an already established, already developed and already recognised brand, made available to investors. Investors – known as franchisees – will purchase the rights to trade as that business in their own area. Along with this comes support from the franchisor, and everything you need to get the business off the ground. That might include equipment, starting stock, materials and training.
The main benefit of investing in a franchise rather than developing your own is the support and the already-successful business model. As well as being beneficial for you, franchising is also beneficial for the franchisor. It helps them to attract a wider audience, boost brand recognition and ultimately attain more business.
In This Article
- Finding a Franchise
- Franchise Funding
- Stepping Back
Things to Consider When Investing in a Franchise in the UK
Let’s go over some of the things you need to get to grips with before you leap into business ownership via franchising.
Finding a Franchise
The first step to investing in a franchise is actually finding a franchise to run. You need to ascertain your interests. There are over 1,000 active franchise opportunities in the UK. You need to spend some time exploring the market and seeing what’s available. If you’re interested in a coffee franchise for example, take the time to see which different coffee businesses are franchising.
Is the brand well established? How many years’ worth of experience does the franchisor have in their field? And how many years’ franchising experience? How many franchisees do they currently have? Spend the time to explore the brand. It is also a good idea to check out review sites such as Trustpilot and Google Reviews. Yes the franchisor and the franchisees may represent the brand well, but what do the customers think? Is the general image of the business good? Look for patterns in negative reviews, is there an area that the business does not perform well in? If there is, find out what the franchisor is doing to address that. If a franchise business has good reviews generally all round, this can be a positive sign. Remember that franchising isn’t employment, it’s business ownership, so how the business performs will be down to you. You’ll be defining the brand in your own area.
Are They a Franchise Association Member?
Franchise associations are membership organisations which operate within the franchising sector. Most countries have one, and in the UK the most recognised is the British Franchise Association. The British Franchise Association welcomes hundreds of member franchises, who of which must go through a rigorous accreditation process. Documents like franchise manuals and agreements are thoroughly checked, and the franchise must abide by the European Code of Ethics. If a franchise is a member of the BFA, it means they have passed thorough operational and franchisability checks to ensure that their business is deemed safe for investors.
If a franchise isn’t a member of a franchise association, it doesn’t mean they’re not successful. Many franchises are not part of a franchise association and are franchising successfully. However being a part of a franchise association can help give some assurance to anyone looking to invest, peace of mind that the franchise isn’t a dangerous venture. For a franchise to be a part of a franchise association too comes with benefits for the franchisor. From assistance to finance partners and suppliers, through to mediation and support, franchise associations are a keystone in the supportive framework that franchising offers entrepreneurs.
Speak with Franchisees
It is a good idea to speak with existing franchisees if the business has any. As part of due diligence, you should ask the franchisees some questions. Does the franchise still live up to their expectations? Do they get sufficient support? If they went back to square one, would they still invest? It would be a good opportunity to ask them how many hours they work and how much the business makes. When you do this, you should look for franchisees that operate in a franchise territory of a similar demographic to yours.
Compare Different Franchises
Take a franchise sector and research it, and you’ll find that with most, there are usually two or more franchises that do similar sorts of things. Oven Cleaning – you’ve got Prestige Oven Cleaning, Oven Wizards and Ovenclean to name but a few. Food franchises – McDonald’s, KFC, Chicken Cottage – all franchises.
When you’re doing your due diligence, make a list of franchises that you’re interested in, and compare them. Take the time to compare things like:
- The investment – how much does each franchise cost
- The franchise package – where are those costs spent, and what do you get for your money, both initial and ongoing
- The training and support – what training will you receive? Do you get to spend some time working with another franchisee to get some experience?
Understandably, some of the investment information will be behind an NDA, to protect the franchise against people looking to copy the business model. Once you’ve signed an NDA, you’ll have more access to the workings of the business. Find out what the monthly fees are spent on. Some brands use this for national marketing to drive more business for franchisees, like TV campaigns and newspaper adverts.
Compare the franchise package of each. What equipment is included, what start stock and what marketing?
Behind the NDA
There will, inevitably, be information behind a Non Disclosure Agreement, that will contribute to your decision of whether to invest or not. You will need to read the franchise agreement, and read it again. The franchise agreement sets out the relationship between the franchisee and the franchisor, as well as the rights of the franchisee and the responsibilities of both parties. Most franchise agreements will be over 20 pages long, and will often favour the franchisor to protect their brand. You should also read the franchise operations manual as well because although the franchise agreement cannot be changed without your approval once you’ve signed, the franchise operations manual can. The franchisor can change the franchise ops manual – which outlines operational processes of the franchise – without your approval. Not necessarily a bad thing, because any changes will (hopefully) benefit the franchise network.
Funding Your Franchise
The big step with getting into business is funding the franchise. There are a lot of considerations when it comes to funding the business.
How Much Does the Franchise Cost?
What is the total investment of the franchise? Some franchises might list the cost as a license fee, others might show “minimum investment”, mixed in with funding, it can be quite confusing to understand exactly how much you need to have to invest. Speak with the franchisor and request a franchise prospectus, this should give you an overview of where the franchise costs are.
Also understand more about the monthly fees. Are these fees fixed percentage of your turnover? If not, how much are you expected to pay the franchisor each month?
How Will You Fund Your Business?
Many people write off owning a business because they think it’s expensive. It can be, but franchising is favoured by banks and lenders as a more secure way of getting in to business ownership. As a result, most banks can lend up to 70% of the investment. There are also many businesses which operate within the franchising sector – many are too, BFA members – aside from banks. The more funding assistance you get, will depend on your financial background and how well constructed your business plan is. The franchisor can help you draft a business plan.
Thanks to the supportive framework of franchising, you can spend less time thinking about the initial investment, and more time preparing a business plan and working capital to get the business off the ground.
Set Aside Working Capital
One of the biggest mistakes people make when investing in a franchise is having not enough working capital. Often going overlooked, the investment you make upfront won’t see you 3-6 even 12 months into the business, to the point which you start making profit. Break even is where you have made enough money from the franchise to now cover your losses, and the business thereon in starts profiting. How much working capital you will need will depend on the business. Once you’ve signed an NDA, you can speak in more detail with the franchisor about cashflow forecasts, profits and losses, so you can get a firmer understanding of where the money goes and how much working capital you’ll need. For a typical low cost franchise, between £20 – £50k should be sufficient.
Running the Business
Before investing, you need to look ahead. You need to see yourself running the business. Can you see yourself running the franchise five maybe ten years down the line? As mentioned up the article, you need to find something you enjoy doing. Let’s take a look at some of the things you should consider about operating the business.
Understanding the Market
Following on from the “find a franchise” section above, you need to look into each of the brands. Spend some time digesting the market and understanding whether there is demand for the franchises you’ve looked at. Is there demand for the business? If you live surrounded by cities that are mostly residential, something like an industrial franchise wouldn’t immediately work so well. There might be demand, but would it be enough to keep the business going? Or would the franchisor negotiate and give you access to a neighbouring, unused territory?
Understand the Competition
When researching the market, identify how the market is filled. What solutions do the consumers have and are those solutions working? With some examples:
- Mobile Coffee Franchises – is there already a mobile coffee business in your area actively doing what you would do as a franchisee, selling in the places that you would sell?
- Pet Sitting Franchises – is someone already dominating the local market? A good place to check is local Facebook groups. What solutions are in place for dog walking and pet sitting?
- Domestic Cleaning Franchises – again has someone already prominently established themselves as a reputable, trustworthy and affordable cleaning company?
It is also a good idea to digest the competition and come to terms with how you would improve on what they do. Just like if you were to start a business from scratch, get an understanding of what they do, how you would do it differently.
You need to understand whether or not the gap in the market has already been filled. Obviously, if there is an existing business doing what you’ll be doing, it goes to show that there is already existing demand. You can use this competition to your advantage.
What Will You Be Doing?
Part of the due diligence process, you need to establish exactly what will form your role as a franchisee. At first glance, an oven cleaning franchise will involve you cleaning ovens. If you enjoy the prospect of meeting people every day and upselling to make extra money, fantastic. But invariably there will be other parts to the role too. How much time will you be spending in the office? 12 hours a week? This will eat away at the potential earnings. How will the marketing of the business be run? How will you find clients? While you’re spending time in the office finding clients, money isn’t being made. Some franchises do help you to find clients, such as guaranteed leads in your first year.
Franchising is a fantastic route to business ownership. You get full training and support, plus everything you need to get the business off to a flying start. As with anything, you need to supply the drive and determination for the business to be successful. If you can give it your all, and you have the funds to make it work, there’s little stopping you from making that business ownership dream come true. But before you do take the leap into the world of franchising, step cautiously because owning a business is a big decision. Whilst franchising does eliminate a lot of the mistakes and risks, you need to make the decision that’s right for you. Choose the right franchise, check out the competition and if done correctly you will be enjoying yourself from day one.