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  • Writer's pictureAndy Fraser QFP

What is Franchising?

This seems like a sensible question to cover in my first article on the new Albany Fraser website.

Franchising is first and foremost a business growth method...hence the well-used stock image below that features on so many articles about franchising!

'Business in a Box'

Franchising is where one party (the "franchisor") grants another party (the "franchisee") the rights to operate their business in the franchisee's local area using the franchisor's brand, knowledge and proven business systems.

The franchisor essentially gives the franchisee a 'Business in a Box' which includes:

- initial training to get started

- rights to use the brand and logos

- a package of standard equipment, furnishings and tools for the job

- an Operations Manual explaining, in detail, how to operate the business - access to ongoing advice and support

- an exclusive territory to work in - usually (this can vary from business to business!)

So what are the advantages of franchising to the franchisor?

Network Growth - Franchising allows a business to grow into a major brand far quicker than 'organic' growth. When a business chooses to franchise, it uses the financial resources, dedication and local knowledge of multiple franchisees to help grow simultaneously in different locations. Each franchisee pays for all of their own equipment and set up costs, which means there is little cost to the franchisor. This allows a brand to be built far more quickly compared to the franchisor doing it themselves.

Lower Overheads - Franchising is perfect for a business owner that wants to maintain a relatively small 'Head Office' function. As it is the franchisees who go out and sell the product or deliver the service in their local area, the franchisor does not have the day-to-day hassles of the operational aspects of the business. The franchisor can generally operate on a very lean basis as the function of Head Office becomes predominantly about supporting the franchisees and giving them the right tools and materials to run the business.

Continuing Revenue Streams - The franchisor usually charges franchisees the following fees:

  • Initial Fee - a lump sum payable up-front for "buying" the franchise. In return for this, the franchisor provides the training, a package of equipment and support and assistance in setting up the business;

  • Management Services Fee - a monthly fee paid by the franchisee in return for ongoing support and assistance provided by the franchisor. This is usually expressed as a percentage of the franchisee's turnover;

  • Marketing Contribution - a fee that each franchisee pays that goes into a collective 'pot' which the franchisor can use for advertising and promoting the brand

There are other fees that a franchisor may charge including Product/Service Fees or IT Support Fees, however these vary from network to network. The key thing is that the franchisor gets the benefit of these continuing sources of revenue for the duration of the Franchise Agreement.

Recession Resistant - OK, no industry is recession proof. However, businesses that use franchising have been proven less likely to fail in a recession than others. One reason for this level of security is that franchisors tend not to be exposed to the high levels of debt and overheads that are involved in non-franchised businesses. However, the main reason in our view us that each business in the network is run by a dedicated franchisee who will work tirelessly to protect his or her business.

Economies of Scale - buying coffee or baguettes for a single cafe unit will likely mean paying a higher price per item than paying for a network of 100 cafes! The more units, the cheaper the item price and the more competitive franchise units will likely be. Some franchisor's will have special rebates in place with suppliers to their network (as an extra source of income), but this is not always the case.

What are the advantages of franchising for the franchisee?

As a starting point, those who buy franchises want to be in business for themselves. So the question then is, what are the advantages of buying a franchise compared to setting up your own business? Here are just a few reasons why franchising can often be better:

Established Brand - I could start my own burger shop or cafe tomorrow, but it wouldn't have the established name or recognition of a 'McDonalds' or 'Costa'. This brings a big advantage to franchisees as they are getting a foot-up in their business by being part of a bigger brand.

Proven Business System - a good franchisor has "been there and done that" and made plenty of mistakes along the way, allowing them to create a tried and tested formula for business success. In theory, if the franchisee works hard and follows the system, success will come. This is obviously very appealing for franchisees.

Support - its often said (usually attributed to Ray Kroc, the mastermind behind the success of McDonalds) that franchisees are "in business for themselves, but not by themselves". The franchisor is there to support the franchisee along their business journey, which many franchisees appreciate.

Lower Commercial Failure Rate - According to the most recent study carried out in 2018 by the British Franchise Association and NatWest, failure rates for franchises remains very low, with fewer than 1% per year closing due to commercial failure. In addition, 93% of franchisees claim to be profitable. This is in stark contrast the general failure rate of non-franchised businesses where more than half of all businesses make it through the first three years.

Access to National Accounts - some franchisors (such as contract cleaning and automotive care and repair style businesses) have nationwide contracts with organisations. The franchisor needs franchisees throughout the UK to fulfill orders for these clients and their franchisees get access to these clients from their first day of trading.

Economies of Scale - as mentioned above, being part of a bigger brand brings better economies of scale and, in theory, the franchisee can get better prices on products from their franchisor (or the franchisor's approved suppliers) than they could by going directly. However, this is not necessarily always the case if the franchisor is getting a rebate or not passing discounts on to franchisees.

If you are looking for advice on franchising your business, or on buying a franchise opportunity please get in touch with us now!

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