chaldea catnap: Becoming a franchisor

Want to grow your business? Why bother doing all the hard work yourself when you get can others to build an empire for you - and pay you for the privilege? But is becoming a franchisor the fast and cheap path to riches? Er, probably not. EN takes a look.

Although it's often seen as a quintessentially American business model, elements of franchising have been around in the UK for centuries, from feudal lords flogging the rights to run the village well to the town market, where stall holders pay to sell their wares in a specified territory.

Nowadays, businesses of all shapes and sizes have embraced the franchise model to supercharge their growth. Last year, the Subway sandwich chain overtook McDonald's as the number one fast food chain in terms of units and it now has over 36,650 restaurants in 100 countries, including 1,459 in the UK, which didn't have a single Subway until 1996.

Tom Endean of the British Franchise Association, an organisation set up in 1977 to create a formalised structure and standards for franchising in the UK, says, "You tend to be able to extend your brand much faster than you would be able to organically because you're using other people's money, essentially. Other people are investing into the brand by them starting up their own business under your brand and your system.

"And you tend to build a more robust business because rather than starting an outlet and then staffing that with a manager and other staff, you're actually setting up a new outlet or an operation with somebody that has a much higher vested interest in the success of that outlet."

Endean adds that because you're not directly employing the franchisee and their staff, you can actually run a nationwide chain from a relatively small headquarters, which means less direct overheads.

But, let's be clear, franchising is not a quick ticket to global brand domination and your own personal island.

"All of the advantages only follow the right structure being put in place," Endean cautions.

"So if you hear people saying that franchising is fast and cheap to grow, it may be faster and it may be cheaper than doing it organically, but it's not fast and it's not cheap."

And if you think franchising is just getting a bunch of cash-rich suckers to do all the hard work for you, think again.

"At the outset, you've got to put a lot of investment in upfront with probably little income," Endean notes.

"You've got to pay to put the right franchise agreement in place, which are the contracts that stipulate the obligations on both sides; you've got to put the right operations manuals in place to stipulate all of the aspects of how the business will operate; you've got to think about the support staff; you might have to put training processes in place because you might be taking people on who have completely new to the industry in which you're working."

Indeed, finding the right franchisees to take your business model to the masses can be a tricky task. Many established franchisors only recruit one in 50 or even one in 100 of serious enquiries.

"You've also got to put a lot of time and money into the recruitment - that is, of course, if you only want to take people on who are going help grow your business, not somebody who has a pulse and a cheque," Endean says.

But no matter how good your recruits are, franchising will not magically fix a flawed business because it's about replicating a formula. Replicate a bad formula and you'll just have a bigger problem.

Bill Pegram of the Franchising Centre, a consultant that advises new franchisors and provides franchisee training, says: "Franchising isn't about dumping loss-making units and it's not about trying to roll out unproven businesses before the concept's been proven."

So how do you know if your business is suited to franchising?

"Almost any type of business can be franchised if the business can be duplicated, if there is sufficient profit in there for two parties - franchisor and franchisee - [and] if you can train someone to do it fairly easily," Pegram says.

The "best practice" on proving the concept of your business is to have three units operating in three locations for three years.

"But commercial reality often says I've started a business, it's going like wildfire, I've got a march on the competition - how do I get involved in franchising it? That's okay, as long as there's some level of proof there because there is such a thing as the early adopter or risk-taker of a franchisee who likes to be in on the ground floor," Pegram adds.

Nevertheless, he cautions, if your sure-fire jackpot of a business exists only on paper (or in your dreams) you're best coming back when there's something tangible to look at.

Once you've decided the business model can be transplanted to other locations while making enough money to make it worth everyone's while, it's time to recruit some franchisees.

"The thing that makes franchise companies is recruiting the right people," Pegram says.

"The thing that kills them is if the early franchisees are wrong because when a potential franchisee looks at a franchise business, the first question they ask is how are the franchisees doing? If they're not doing well, then they walk away."

As a business owner, you might be used to giving everything your personal inspection but with a franchise, you'll have to trust the franchisees to take on your model and get it right without your hand on the tiller.

"With any small business, once you get to a certain size you need to let go of certain aspects of the business to be able to manage the business properly," Endean says.

"With franchising, you're taking that to the next level. Not only are you having to step back from part of the business, you are actually handing over an operation to somebody to say you are now going to follow my system.

"I think one of the biggest problems and the hardest things for a franchisor taking on their first couple of franchisees is actually to say no to people.

"They come to you and they're very enthusiastic and seem very keen and have the money and want to take on the business but may not be right.

"You may really like the person [but] you have to be careful to make sure that they are really the right person for the business, that they're going to add value to the business, that you're going to be able to get on with them and that they're going to prosper.

"If you've put ten years of your life - blood, sweat and tears - into creating your business, you don't just want to hand that over to somebody that might wreck it."

Consultants like the Franchising Centre can develop a franchisee profile setting out how much candidates have to invest, as well as the required experience and skills.

"As you can imagine, the profile for a prospective gardening franchisee is going to be very different from someone who's going to run a day school or a restaurant or an IT company, so the criteria is different for each franchise," says Pegram.

But while this can help you whittle down the pack, there is always that unpredictable human element, which is why it's so important to have the right structures, support systems and, crucially, the right franchise agreement and operations manual.

Franchise agreements are hefty documents, usually 40 to 60 pages long, covering myriad issues from fees, royalties and territories to specifying where your franchisees buy the equipment or products they use in your good name.

Duncan Vaughan, head of commercial and intellectual property in Leeds and Newcastle at law firm DWF and a BFA-accredited franchise solicitor, says the details of an agreement will depend on the individual business but there are "certain basics that you will see again and again".

"A franchise agreement, at its most basic, is a trademark licence and it's also a business method licence," he explains.

"The reason it's so detailed is for the protection of both the franchisor and the franchisees because if you have a rogue franchisee who starts creating a bad name for the whole of the network, it protects the franchisor but it also protects the franchisees because one bad apple will ruin the name for everybody else.

"If your food franchise serves meat that's off, the public won't necessarily say oh, it's a rogue franchisee - that will tarnish all of those franchises."

That is one of the big reasons why franchise agreements are a) weighted in favour of the franchisor and b) non-negotiable. As franchisor, you need the power to protect the wider network from one of your franchisees going off the reservation, whether it's using cheap and nasty produce in a food-based chain or deciding they want to change the colour of your logo.

"The point of a franchise is you're building a common brand and therefore a common promise to all consumers to build confidence and advantages to the consumer that will help you in business - but if you've got somebody that's messing around with the brand that obviously detracts from that and everybody loses benefits as a result," Endean says.

The franchise agreement can also offer some protection if a former franchisee decides to give you a run for your money.

"There's what you call a restricted covenant, that's to stop a franchisee setting up in competition with you," Vaughan notes.

"If they've been operating in south Manchester it might be reasonable to say, okay, you won't set up as a competitor in south Manchester for six months in the franchise agreement - and that's just to give you a reasonable amount of protection.

"It won't work if the clause goes too far. If you say nowhere north of Birmingham for the next 20 years, that wouldn't be enforceable. It needs to be reasonable in terms of scope, the extent of the geographic scope but also the duration."

Many franchisors who lease premises to franchisees also insert clauses that make the lease co-terminus with the franchise agreement. If the franchise ends, the lease terminates at the same time, allowing the franchisor to reclaim the premises for a new franchisee.

Another critical element is deciding on fees and royalties. You need to make percentages attractive to potential franchisees while making sure you won't be left taking a bath when things take off.

Pegram says that financial forecasting, usually one of the first pieces of work carried out by a consultant, helps to find the right balance.

"We spend some weeks with the client and they tell us pretty much how they see the franchise operating. Then we build that into a financial model, which is a financial model for both the franchisee and the franchisor," he explains.

"Then we look at recruiting and training franchisees and if you recruit three a year, five a year, ten a year, whatever it is, how does that then feed through into your business?

"Once you've got that model set up, you can play with the sensitivities and the percentages and you can arrive at a level of fee which is deemed to be fair and acceptable, so there's enough there for the franchisee to make a profit and for the franchisor to make a profit.

"There has to be a balance ... otherwise there's going to be resentment there from one side or the other - and if there isn't good profit in there for both parties then you haven't got a franchise."

A franchise agreement will also cover a number of different income streams for the franchisor, including the initial buy-in payment, the fee paid when the agreement is signed, ongoing royalties and marketing fees, which are often split into two types.

"One is the amount that you expect the franchisee to spend advertising in their local area and, often, you also see a central advertising fund," Vaughan says.

"A good example of that is when you see sandwich franchises or burger franchises advertising on TV. The way they pay for that is to get franchisees to contribute a percentage or a fixed fee into a central advertising fund, which the franchisor will administer.

"That works really well for the franchisees: they can afford to pay for and benefit from national advertising that they couldn't possibly afford on their own."

A franchise agreement can also stipulate where franchisees will buy stock and equipment - whether that's direct from you or from an approved supplier. That can create collective purchasing power while also helping to ensure a uniform quality across the chain, so consumers know what to expect when they use your brand, whether they're in Manchester, Mumbai or Moose Jaw.

All these variables underline the importance of having a bespoke agreement for your business that each franchisee can work from.

"There are sites out there that will talk about a franchise agreement that you can download for ?50 and fill in the gaps, which is all great until something goes wrong and you realise you've just lost your business, your brand and it's absolutely worthless," Endean warns.

"It's not the case that you have to draft every clause from scratch but making sure that it's tailored to your business is important," adds Vaughan.

"The benefit of having a decent agreement drafted for you by a solicitor is that it makes your franchise network easier to administer. All your agreements are largely standard except for specific amendments that you might make such as cheaper royalties in the first year, smaller territories etc."

Let's talk turkey. How much is a franchise agreement going to cost?

"It will vary but if we were to say a standard agreement at a standard level of complexity, you're looking at ?6,000 to ?8,000," says Vaughan.

"If it's particularly complicated, it could be more. If it's really straightforward - a really straightforward one would be somebody doing, say, an after-school club that really is just one person with minimum equipment and just light training - really quite straightforward and cheap to set up, it could be less because it would be quicker to draft.

"In terms of length of time to draft, it involves quite detailed meetings. We'll run through everything, make sure we've got it right and prepare a first draft that goes for approval then we make amendments. I wouldn't budget any less than two weeks to do that."

Like most things in business, setting yourself up as a franchisor will probably cost more and take longer than you think it will. It will definitely take a lot of work and investment before you start to see some returns and there's the added complication of finding and entrusting the right people with your brand.

"You do need to make sure you're objective about the process," Endean says.

"Being motivated and being enthusiastic are not bad things; they drive a lot of businesses and that's fantastic, but you do need to sometimes step back and take stock of what's in front of you and make sure this is what you want to do and you can do it and that it is something that somebody would want to take on."

The BFA offers full-day seminars as well as step-by-step guides for prospective franchisors on its website, www.thebfa.org. In addition, it has directories of lawyers, franchise consultants and accountants that meet the organisation's voluntary code of conduct.

So there's plenty of information out there and no need to rush.

As Endean says, "Take a few days, take some time out and decide if it's the right thing for you."

By Andy Jowett