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Buying a franchise

Many people have the desire to set up and run their own business; they like the idea of being their own boss. The problem for most, however, is that finding the right proposition can be difficult. A much easier route to success can be found through buying and owning a franchise.

What is a franchise business?

A franchise business is a tried and tested business model that is already in existence. In buying a franchise you will also benefit from the experience and support of the franchisor (the company offering the franchise). Franchisees can enjoy many of the advantages of self-employment, e.g. enjoying the freedom of choosing working hours, when to take holidays, how they work, etc, but with less associated risk. Successful franchise operations invariably have a much lower failure rate than completely new businesses. 

The most famous examples of companies who use the franchise model are invariably in the fast food industry, such as McDonald’s and KFC. However, many industries offer franchising opportunities from financial services to healthcare. 

How to buy a franchise

According to the British Franchise Association (BFA), the market for buying a franchise is huge. Its January 2016 BFA/NatWest Franchise Survey reported that franchises in the UK were turning over around £15.1bn, through 44,200 franchised units with 621,000 people, 97 per cent of which were profitable.

It is possible to franchise pretty much any type of business – retail, service, or consultancy. In terms of the franchise sectors covered, the list is almost endless and this is one of the reasons why franchising is gaining popularity. The BFA offers a list of available opportunities which include – non-exhaustively – garden and landscape services, photographic services, fast food, hair and beauty, and pet care. The BFA offers a full list of available opportunities.

We’ve picked three of the main industries below and some examples of franchises that are available to buy.

  • Retail

    Retail franchises offer a huge range of opportunities from fast food outlets to pubs, from greetings card outlets to furniture. Example: Smallprint specialises in creating silver jewellery which captures children’s unique fingerprints, hand and footprints in fine silver. Each item is hand-finished. The firm started in 2004 and now has 70 franchisees in the UK and more around the world. The typical startup cost is £18,500 and franchisees work from home.

  • Service

    A service franchise is typically skills based (eg plumber or electrician). Service franchises include home and garden maintenance, childcare, education, healthcare and more. Example: Two Men And A Truck is a removals franchise with 300 plus franchisees who serve both businesses and consumers with residential and commercial removals as well as storage and packing solutions. The company suggests that the typical startup cost is £50,000 and franchisees start with just three trucks and associated drivers and movers.

  • Construction

    The range of opportunities available in the construction sector is broad, ranging from decorating to conservation, from light construction to designing and building a home. Example: Dream Doors Limited specialises in kitchen facelifts involving swapping the old doors and drawers with made-to-measure replacements, adding new worktops, a sink and taps. It has nearly 70 showrooms throughout the UK and the typical startup cost is £75,000 with a minimum personal investment of £30,000.

How does a franchise work?

The franchisor, who owns the existing business, will licence the right to run a branch or subsidiary of the business for a set fee and for a period of time. The fee will include use of the brand name, systems, operational guides, training and more (depending on the type of franchise) and all the terms will be laid out in the Franchise Agreement.

From the franchisor’s perspective, this is an alternative to growing a large chain of businesses themselves. This way they can expand the business and generate revenue without taking on all of the additional staff, management and infrastructure. The franchisee is buying into an established business and brand, spending money on tried and tested methods, systems and support. 

Franchise advantages and disadvantages

Buying into a franchise has a number of risks – just like any other business venture – but get it right and it could be the best decision you’ve ever made. Most entrepreneurs want to be their own boss but are a little uncertain. By taking the franchise route they have the freedom that comes with running their own business but have the support that comes from buying a well-honed business formula that has the backing of a much larger concern, both in terms of support and marketing know-how.

What are the advantages and disadvantages of buying a franchise?

Advantages

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Because a franchise is usually based on a proven business idea, you will be copying a viable product, service or business. A successful franchise will bring benefits to both the franchisee and the franchisor. 

A good franchisor will continuously research and update the business idea, saving you time and giving you extra know-how. 

You may be working with an already well-recognised brand, making it easier to sell to customers who are familiar with the name, while also being able to use any trademarks the franchisor owns.

A good franchise operation will give you full support. Typically, this includes introductory training, usually covering general skills, as well as training; help in setting up the business; a detailed operations manual that tells you how to run the business; and ongoing advice. The franchisor will also undertake promoting and marketing the brand.

Banks are more likely to be supportive because of the backing a good franchisor will give.

You will usually have exclusive rights in your territory/area. 

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Disadvantages

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As a prospective franchisee, you need to be happy that the franchisor’s services will justify the costs they levy, which will continue even after you have learnt the business.

When buying into a franchise you have to agree to operate within certain restrictions. The contract between you and the franchisor will usually restrict what you are allowed to do. You cannot change the business; this means that you cannot introduce new products for your local market, and you can only sell your franchise to a buyer approved by the franchisor.

Your relationship with the franchisor means you are exposed to certain risks that are outside your control. This includes the risk of the franchisor failing to fulfil its obligations (such as providing support in the form of brand advertising or training), the franchisor going out of business, or the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with.

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What are the costs involved in buying a franchise and what returns can I expect?

The cost may be more than initially meets the eye. You will have to pay a deposit early on followed by an initial franchise fee to buy into the franchise (often £5,000 to £20,000, but it can be as much as £250,000 or more) and you also have the usual business costs (premises and equipment, stock and other supplies). In many cases, these will be bought from the franchisor.
 
However, while there are upfront costs to pay, financing a franchise is likely to be more straightforward as the banks will be more sympathetic. It’s clearly going to be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven startup. Indeed, some franchisors have relationships with banks and can help you borrow money, and local initiatives may supply startup finance. More good franchise finance guidance can be found at Which Franchise.
 
It’s worth checking that the initial fees only reflect the costs of franchise development and administration. At the same time note whether items you buy through the franchisor (such as sub-leasing premises or stock) will include any mark-up. Also, what percentage of royalties are payable and how are they assessed? Some franchisors reduce the percentage payable once a set turnover is reached.
 
Don’t forget that you will pay continuing royalties on sales, or a management fee, regardless of whether you’re making a profit or not. This can be a fixed amount, a percentage of sales, or a mixture of both. On top of all of this, there may be some extra costs charged separately, for example, a contribution towards the franchisor’s advertising costs or fees for the training you receive.
 
Lastly but most importantly, find out what financial performance you can expect. What actual returns are existing franchisees achieving? Note that the earliest franchises may have cornered the easiest or most profitable territories. Projections of very high profits from a small investment are probably unrealistic.

Checklist: Evaluating a franchise

As you consider a franchise your franchisor should provide a prospectus that answers all the basic questions such as the nature of the business. You need enough detail to give you a broad understanding of the business concept. N.B Don’t commit yourself in any way before completely evaluating the franchise and especially do not pay any non-refundable deposit or part with money until a lawyer sees the draft agreement. Whilst evaluating the franchise you should also ask questions such as:

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