Guide to Buying a Franchise - How to Become a Franchisee?

We look at the steps involved with buying a franchise in the UK including the discovery stages right up to signing the agreement, paying a deposit and launching the franchise

Investing in a Franchise - Steps to becoming a franchisee

Investing in a Franchise UK – Step By Step Guide

If you’re at a point in life where you’re reconsidering your career, you feel overwhelmed with choices. Or underwhelmed, if you think that business ownership could be out of reach? But the truth is business ownership is not always as expensive as it looks.

When looking to go into business ownership, you’ve generally got three options to choose from; three routes you can go down. First of all – the choice many default by – is starting up a business yourself from scratch. The most attractive option but this beauty comes at a cost, in that one of the main reasons these startups fail is because of mistakes or lack of planning.

Starting up a business alone requires extra care not to make these mistakes, both operationally and financially. Whilst starting up alone comes with the flexibility of modelling the business on what you enjoy and love, this can shroud in mist the actualities of factors like demand and costs. The second route is buying an established business. Buying a business that is already trading will be expensive, six or seven figures most likely because it is set up, established and (hopefully) profiting with a track record.

The third option is franchising. With franchising, you’re enjoying many of luxuries of the above. You go through the rewarding process of building up a business in your area, while having the advantage of a proven business model and established brand name behind you. Some good examples of top franchises include McDonald’s, OSCAR Pet Foods and Wiltshire Farm Foods.

The 2018 bfa NatWest Franchise Survey has shown that the franchising industry is growing more than ever before. The industry now contributes £17.2 billion per annum to UK GDP, employing 710,000 people, with 93% of franchisees claiming profitability and less than 1% of franchisors closing per year due to commercial failure.

The British Franchise Association

What is franchising?

Franchising is a method of business expansion where a company or business owner (the franchisor) grants access to the rights to trade to a third party, the franchisee. Unlike other methods of business expansion, it is the franchisee – the investor – who purchases the rights to set up the business in their own area. Beneficial for the franchisor because it allows for faster growth compared to company-operated unit expansion, as costs fall on the franchisee, whilst this route of business ownership is beneficial for the franchisee because it is much safer than starting up a new business alone, from scratch.

There are many benefits of franchising for both parties, but for you as a franchisee, your benefits will include:

  • Full training and support provided by the franchisor and/or a franchise support team
  • A proven, established business model that has demonstrated successful expansion through the franchising framework with franchisees before you
  • A recognised brand that already has a track record and reputation
  • Business ownership with less risks and mistakes that would otherwise be made through “going it alone”
  • Greater brand purchasing power and powerful marketing such as TV advertising, funded by franchise royalty fees

What is the difference between a franchisor and franchisee?

The franchisor owns the intellectual property of the brand, and the rights to trademarks including the franchise network. The franchisor might be a company or an individual. The franchisee is the company or individual purchasing the rights under a franchise agreement, to trade as the franchisor’s business in their own area.

Steps to Investing in a Franchise

The first step of investing in a franchise should be asking yourself whether franchising is right for you. Personally and financially, can you see yourself running a franchise? Can you commit the time to meeting with the franchisor, writing up a business plan and establishing the funds to cover the investment and any working capital required?

1. Finding a Franchise to Invest in

What are your interests? What are you looking to get out of business ownership? Once you’ve agreed that franchising is the right decision for you, make a list of franchises that match your interests. Look for franchises that:

  • Are of a similar initial investment to the amount you’re happy to invest
  • The investment does not completely exhaust your finances – you should ideally set aside half of the initial franchise investment as “working capital”
  • Are in demand in your local area – competition is fine as it shows there is demand for that particular service
  • Are strong in numbers. Obviously all franchise networks have to start somewhere, but if this is your first franchise, you’ll want to invest in a brand that has as much experience in franchising as possible

How to Find a Franchise?

Attend franchise exhibitions, look on franchise directory websites such as Franchise Planet, and take a look at members of the British Franchise Association. The bfa is the UK’s trusted body within franchising because franchising is not at present, government regulated. Anyone can set up a franchise, and anyone can become a franchisee. The bfa self regulate the sector with an accreditation process that thoroughly checks franchise businesses for trustworthiness and stability.

Franchise exhibitions are a great way to speak to the franchisor and their team, plus franchisees attending. Make a list of questions to ask at a franchise exhibition, and make a list of brands you want to meet with in advance.

Franchise portals and directories usually offer a wide range of opportunities, listing their investment, working styles and benefits. Portals are a great way to conduct research into the different brands franchising.

The British Franchise Association has an active directory of members who have passed rigorous checks into their agreements, operations manual and other documentation including financials, so that only reputable franchises are part of the association. The kudos franchises show for their membership demonstrates resilience and security for those looking to become a franchisee.

2. Request a Prospectus and Attend a Franchise Discovery Day or Call

For each of the opportunities you’re interested in, request a prospectus. It won’t show much more information than that of the franchise directory ad, but it’ll include more detail about the brand’s story and the financials.

Compare the information from the brands you’ve enquired about and shortlist the businesses from ten down to three or four. The next steps are to book a discovery call, or attend a franchise discovery day.

You will be expected to sign an NDA in most cases, because at the franchise discovery day the franchisor will be a lot more open to ask questions about the business model. Factors such as profits, losses and operating expenses will be shared, and both parties can be more open about what they’re looking to achieve.

Following the franchise discovery day, you may be asked to attend an interview one to one with the franchise recruitment panel. Again, a chance to ask more questions about the franchise and what both parties are looking to achieve. Learn more about the franchise owners and what they are looking to achieve within the next 5-10 years. Franchising is a big commitment for both parties but done right, it fuels growth for both franchisor and franchisee.

It is at the interview that you will be given a copy of the franchise agreement, and a copy of the franchise operations manual, to look over so you can make an informed decision about continuing. It’s important to emphasise that each franchise is different and when you get access to these documents, will very much depend on the franchisor. But it’s also important to know that franchising needs to be right for both parties, for the sake of the business’s success. So you won’t be forced into or sold into, buying a franchise.

3. Speak to a Franchise Consultant and Franchising Solicitor

Many franchise consultants are eager to help those looking to get in to franchising and will be happy to explain to you anything that you don’t understand.

Go over the franchising documents with a franchise legal specialist, including the franchise agreement which will in many cases, reference the franchise operations manual. A franchise agreement can’t be changed without your approval, but a franchise operations manual can. Whilst the franchise agreement won’t cover absolutely every scenario imaginable, it should cover the roles and responsibilities of both parties, setting out obligations and legalities. Make sure you check with a legal specialist and go over anything you’re not sure about, raising concerns with the franchisor.

You may not get access to the franchise operations manual until you are ready to launch your franchise.

4. Securing a Territory

Your territory in most cases will be exclusive to you. No other franchisees of the same franchise can trade in that territory. Once you’ve decided on the franchise you wish to invest in, after checking out the business model with a legal advisor, the next steps to progress would be to put down a deposit to secure your territory and interest in the franchise. How much a deposit costs and what the deposit covers (including its terms) will be covered in what’s called a franchise deposit agreement. This isn’t the same as the franchise agreement, the deposit agreement covers the deposit and what the deposit covers. Again, go over this with your legal advisor.

The deposit usually secures your territory, whilst you prepare the funds and financing in readiness for your franchise investment.

Signing a deposit agreement may come before or after signing an NDA and franchise agreement it can vary between franchises in their individual steps for recruiting a franchisee. Usually you’d want to read the terms outlined in the agreement before putting any sum of money down, which is why I have placed this section after looking over the agreement.

5. Launching the Franchise

After signing the franchise agreement, placing the deposit down and getting things together, it is time to launch your franchise. Your franchisor will help you market the business, but before all of this happens they will provide you with the training and support required to make everything fall perfectly in to place.

They’ll work with you to set up your premises including store fitout if your franchise is premises based, all ready for launch day.

The Franchising Process

All franchises are different, and this guide is not a concrete answer to the steps involved with buying a franchise. It should be noted that every franchise is different, and the steps involved may take different form to those outlined above. With some franchises such as McDonalds, there are multiple interview stages, panels to meet and multiple discovery days. When you get access to the franchise agreement and operations manual too will vary by franchise.

However the steps above are very close to what you should expect to see when on a journey to becoming a business owner through franchising, and we hope that this guide will help you on that journey.

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