Pros and cons of franchising

It offers a ready-made business model, but you should understand the entrepreneurial sacrifices entailed.

The franchise industry is going from strength to strength, documenting rude health and continuing prosperity.

Franchising’s contribution to the UK economy now stands at approximately £15.1 billion, showing an increase of 46% over the last decade according to the British Franchise Association and NatWest Franchise Industry Survey.

The total number of people employed in franchising is reported to be 621,000, 321,000 of which are employed full time – showing a 70% increase over the last 10 years.

And a record-breaking 97% of franchisee-owned businesses have reported profitability this year - so what's holding you back?

The pros

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 carefully before you commit. Here are some opinions and comments from experts, franchisees and franchisors that you may find useful.

“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 head of franchising

Losses and costs which are unavoidable for start-ups are negated — for instance, the losses suffered from charging too much or too 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 a 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. Almost two thirds of people in a British Franchise Association poll said they were more likely to trust products sold by a franchise.

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. Not having to do the marketing yourself saves you time, something always at a premium when you’re running a business.

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

Garry Nelson, franchisee

“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. The right marketing mix has been achieved — the right prices, the right product or service, the right image and the right systems.

Are you suited to franchising?

Yes, if you...

  • …wish to minimise risk — this might be because you are conscious of supporting your family, for instance;
  • …want to make a profit more than you need entrepreneurial freedom;
  • …are limited in the capital you can raise yourself or from banks for a start-up;
  • …wish to avoid two years of struggle keeping a start-up afloat, and establishing the brand image as well as the right products and services;
  • …wish to avoid doing your own marketing;
  • …want to avoid the hassle of finding a profitable location;
  • …want to expand your business rapidly.

And do not mind…

  • …missing out on the challenge of finding the right product or service mix;
  • …sacrificing creative freedom in forging your own brand;
  • …missing out on the challenge of identifying and targeting markets — and adapting your brand, product/service range and marketing strategies to suit those markets;
  • …being at the mercy of the franchisor’s tactical and strategic decisions;
  • …paying ongoing fees to the franchisor;
  • …being prevented from working in the same industry for competitors after the expiry or sale of your franchise.
     

Your franchising fee also buys you the market knowledge, business acumen and sales savvy of an established market player. Your franchisor will give you all the training necessary to equip you to run the business, and should always be on hand to provide further training, advice and assistance once you’re up and running.

“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, franchisee

Buying a franchise is usually cheaper than buying a business. A stand-alone business with staff, premises, apparatus, stock and clients can cost you a lot more than a franchise, where many of these things are provided for you either free of charge or at a discounted price. And banks will lend up to 70% of the capital for well-established franchises, again proving that they’re a safer bet.

Franchisors can also find you the best locations. Prime locations — such as the high street or popular shopping centres — are more easily obtainable for franchisees than for start-ups.

In conclusion then, it is generally easier to make money and expand your business rapidly if you run a franchise rather than a start-up.

“One of our franchisees built a £400k-turnover business in just under five years.” [in washroom services]

Marilyn Keen, Swisher development director

The cons

“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

Franchising is often the easiest route into business for the uninitiated, but franchisors expect varying degrees of previous business or sectoral experience from their franchisees.

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

John Warren, Driver Hire franchise development director

“We look for people who have sales experience.” [in design, digital printing and copying]

Caroline Joyce, Kall Kwik franchise development manager

“No previous experience is required.” [in the supply of health snacks to workplaces]

Matt Baines, ChariSnack commercial director

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

Fees have to be paid, and they vary considerably. After the initial fee, regular management/administrative fees are often charged. Even the initial fee will have to be paid again 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.”

A 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 a proportion of profit.

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, which sets out the terms of the franchisee-franchisor relationship, including what the franchisee is and isn’t allowed to do with their business.

Essentially, when you run a franchise, it has to be indistinct from the company’s other outlets around the country. Among other things, this invariably means having to use company signage and stationery, laying out and decorating premises in a certain way, and selling only certain goods and services at prices determined by the franchisor. Though there are opportunities to use your initiative and creativity, you won’t have carte blanche to do as you wish.

“If you bought a McDonald’s, for example, everything is regimented.”

Garry Nelson, 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 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

 



Adam Bannister

About the author

Adam Bannister writes for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other industry publications.

@Be_TheBoss