January 22nd 2015

Ask someone to name a famous franchise and they will probably say MacDonald’s or Subway but there are numerous kinds of franchises out there in the market place. In relation to any other small business, franchising has proved to be successful, with 94% of units still operating profitable businesses 5 years down the line whilst it is estimated that more than 40% of small firms cease trading within 3 years.

We are basically talking about a business format franchise, this is where a business has established a successful way of working and in order to grow it licenses the rights to their methods, know-how, name, goodwill and product or service to others for a certain period of time. They are the franchisor and the local operator is the franchisee.

Some advantages of using a Franchise….Is franchising right for you

– You don’t have to go through the learning curve of working out what works.
– There is a proven market for the product.
– You get to use the goodwill and established name of the franchisor.
– You normally have an exclusive area in which to operate.
– All necessary training is provided by the franchisor.
– Marketing assistance is provided by the franchisor.
– Bulk buying powers of the franchisor can be used.
– Banks are often more willing to lend to franchisees where the business plan is more likely to be as predicted.

Franchise costs
The franchise costs are normally the main downside of choosing to operate as a franchise and consist of the following :

– An initial startup fee.
– An on-going management fee or royalty for the franchise which is usually a percentage of annual turnover or mark-ups on supplies.

Whose business is it?
Each franchise is a separate business in its own right and is the business of the franchisee over which they have control. However, the franchisor is likely to retain control over the method of operation and marketing. It is important that franchisor and franchisee get along and work together as a team.

Choosing a franchise
The British Franchise Association (BFA) is a good place to start when choosing a franchise and they are the only independent accreditation body for franchising within the UK. It is also useful to attend franchise exhibitions to compare different franchisees.  They have a free video ‘Your Introduction to Franchising’ which provides a wealth of information – more than 33% of franchisees buy this unique, independent guide before making their decision.

BFA members are recommended as they have volunteered to be ‘vetted’ by the BFA and adhere to its codes and standards, based on the European Code of Franchising Ethics. They are also re-accredited on a regular basis.

Before deciding on the franchise you are going to choose you should consider…

– Can you commit to the time and money needed to get going which are both likely to be significant?
– How viable is the product or service or will it be easy to sell in your area?
– Can you speak to other franchisees to verify how they have done?
– How well has the franchise been tested?
– Does the franchisor have the resources to provide the support you need?
– How well do the franchisor’s systems work in practice?
– What are the trends in the market likely to be?

The franchise contract
A franchise is a long term arrangement and you need to take legal advice on any franchise contract, ideally from a solicitor who has a lot of experience with franchise contracts.

The franchisor will have a lot of control over how the business is run and you need to ensure you are happy with this and what is in the contract.

How we can help
JRW can help you look realistically at any franchise proposition and review the basis of the financial projections with you. We can also assist you with putting together your vital Business Plan too.  Call us directly on 01450 372267.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.