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Franchises: The Benefits and Drawbacks


Buying a franchise licence is, in many ways, the easiest way into the business world for the budding entrepreneur.

But it also means sacrificing a degree of independence and control – so consider the pros and cons before committing.

Benefits

"If you look at the success rates for start-ups, you’ll see a 90% to 95% failure rate within the first five years; even the VAT office says that 75% of registrations are cancelled within the first three years. But the Natwest/British Franchise Association Annual Survey says that over 90% of franchises are successful."

Marilyn Keen, Swisher Development Director

The hardest part of building a business is the first couple of years. But when you buy a franchise most of the major hurdles have already been overcome by someone else; ie, the right marketing mix has been achieved – the right prices, the right product or service, the right image and the right systems.

"Many of the risks associated with a start-up are offset if you buy into an established franchise with a proven business formula to follow."

Cathryn Hayes, HSBC’s head of franchising

Losses and costs which are unavoidable for start-ups are negated; for instance, the losses suffered from charging too much or little, of experimenting with the product range, or of tinkering with the brand image. In short, you avoid the period of trial and error that results in fluctuating customer numbers.

"It’s common sense really – just follow the system. If they follow the system, then they’ll grow their business."

Marilyn Keen, Swisher Development Director

You inherit an established, recognised and respected brand – and therefore a customer base and customer goodwill. People know who you are, know what you do, and are more likely to trust what you sell.

Retaining and attracting customers is facilitated by the fact that the franchisor does all the marketing for you. Few start-ups will be able to compete with an established franchisor’s marketing budget – and consequently the reach and impact of its advertising. This of course saves you time – always at a premium when you’re running a business.

"That’s why a franchise is attractive: you’re in business for yourself – but not on your own."

Garry Nelson, Kall Kwik franchisee

Your franchising fee also buys you the market knowledge, business acumen and sales savvy of an established market player. And after an initial programme, this training and guidance should be provided on an ongoing basis.

"If you bought a franchise for, say, £200k, and you have staff, property, equipment and a company that is going to help you – that’s a lot safer than something where you don’t know whether its going to work or not."

Garry Nelson, Kall Kwik franchisee

Franchisors can also find suitable locations and cooperate to avoid encroaching onto each other’s territory. Prime locations – such as the high street or popular shopping centres – are more affordable for franchisees than for start-ups.

Due to the aforementioned factors it is obviously easier to make money and to expand your business rapidly if it is a franchise than if it is a start-up.

"One of our franchisees built up a £400k turnover business in just under five years."

Marilyn Keen, Swisher Development Director

Buying a franchise is usually cheaper than buying a business. A stand-alone business with staff, premises, machinery and clients can cost you a lot more than a franchise, where many of these things are provided for you.

Banks will lend up to 70% of the capital for well-established enterprises.

The Drawbacks

Although it can be justifiably said that franchising is the easiest route into business for the uninitiated, franchisors demand varying degrees of previous business or sectoral experience from their franchisees.

"Experience in the recruitment transport sectors is not required […] but previous business experience is important, especially in sales development and customer service."

John Warren, Driver Hire Franchise Development Director

"We look for people that have sales experience."

Caroline Joyce, Kall Kwik Franchise Development Manager

"No previous experience is required."

Matt Baines, ChariSnack Commercial Director

Some franchises will set a minimum level of working capital as a criterion of candidacy.

Fees, which vary considerably, have to be paid. After the initial fee, regular management/administrative fees are often charged. Even the initial fee will have to be repaid if you wish to renew your franchise at the end of the contract.

"You never know what your franchisor has planned for you, because someone did warn me that if they don’t want you, they won’t renew, and then you just get left with the shop. It’s no good to you then and you could lose that money."

Constantinos Zachariou, soon-to-be franchisee

If the business is not profitable, then the franchisee still has to pay fees. This is because fees are usually paid as a proportion of revenue, rather than as a proportion of profit.

"Although buying a franchise helps you avoid many of the pitfalls of starting from scratch, you also need to consider the limitations and restrictions that are part and parcel of becoming a franchisee."

John Warren, Driver Hire Franchise Development Director

Franchisees have less freedom and control than people starting their own business. This is the price of having an established brand and customer base: the franchisee is contractually bound by the franchise agreement to have premises laid out and decorated in the way that the customer is used to, and to sell the goods and services synonymous with, and expected from, the brand.

"If you bought a McDonalds, for example, everything is regimented."

Garry Nelson, Kall Kwik franchisee

Penalties for violations of such contractual stipulations can be harsh – it can even result in the termination of the franchise agreement.

So if the product or service in question goes out of fashion or competitors start undercutting you, you could be rather hamstrung if the franchisor fails to adapt to new market conditions.

One bad apple spoils the barrel: one franchisee’s poor performance can damage the brand – and your business.

"Should you wish to sell your franchise in the future, you will almost certainly not be allowed to set up a competing business for some considerable time afterwards."

John Warren, Driver Hire Franchise Development Director

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