Franchising

Daphne Clifton

• Publisher: A&C Black Business Information and Development
• Year: 2009
• eBook ISBN: 9781408105641
• Edition: 1
• Topic: Business
• Subtopic: Small Business
• Index: Business

The...on a Shoestring series helps small business owners grow their business imaginatively, effectively and without spending a fortune. Aimed at entrepreneurs with plenty of vision and commitment but not a lot of cash, each book is packed with ideas that really work, real-life examples, step-by-step advice and sources of further information.

Franchising is a popular option for many people who want to run their own businesses. It's a way of benefiting from the branding and reputation of an established enterprise and striking out on on your own at the same time. This book helps you to build a successful franchise, by:

• Working out if franchising would suit you (and your business)
  
• Investigating the pros and cons
  
• Working out the costs involved in a franchise
  
• Researching possible franchise options: what to look out for
  
• Finding a potential franchise
  
• Finding potential franchisees
  
• Vetting candidates if you're franchising your business
  
• Investigating non-traditional options: social enterprises, workers' co-operatives, employee-owned businesses and charities
  
• Understanding the importance of the franchise agreement
  
• Knowing what to do if things go wrong

1

THE LANGUAGE OF FRANCHISING

As part of your investigations into franchising, it’s worth taking time to understand the language used as it can be complicated, unclear and, at worst, confusing. Throughout your investigations, be sure that you understand each step of the process. As a franchisee, you will be running your own business and must manage it closely at all times, being clear about what is happening at all stages. Part of that understanding comes through using the right language and not giving up until you are clear on what is expected of you and what you can expect of the franchisor (or vice versa if you are the franchisor). As a franchisor, you need to be completely clear in the language you use and what you are communicating.

Most business language is the same, with similar principles applied. Of course there will be terminology appropriate and helpful for the franchise business. Take time to look at the glossary of terms (below) and be sure to ask a decision-maker at every stage if you are unsure of what is being expressed. When employing a lawyer or accountant, make sure they are familiar with the world of franchising. There is a comprehensive list of affiliated professional advisors on the British Franchise Association website. Be sure to talk to two or three before deciding who to work with. Culture will be important here: you must have a good rapport with your lawyer or accountant. And cash – what will be their fees?

Avoid ambiguity

As with any language, there can be ambiguities along the way. Whether you’re communicating verbally or in writing, have the confidence to ask for clarification if there’s even a remote possibility that you are or could be confused.

As you consider options, sign agreements and communicate with potential and existing business partners, listen out for vagueness or very general terms. For example:

• you may earn up to £1 million per annum

• you could receive 20 leads per week

• this is likely to be a profitable business

None of these are certainties. What does ’unbeatable training’ really mean? And ’continued support’ could be one phone call a month or weekly training for which you will be asked to pay additional costs. Phrases such as ’you will’ and ’we guarantee’ are more positive, but still be sure to check out exactly what they mean for your set of circumstances, and have all agreements backed up in writing.

Communicate simply and clearly

Popular though business jargon is (and if you’ve seen The Apprentice, you’ll know what I mean), there is no need to fall into the trap of using it. There will be some terminology that you’ll need to get to grips with (see below), but that doesn’t mean that you can’t ask questions or use simpler language to check that you’ve understood.

The alphabetical glossary below covers the key expressions you will see and read when living in the world of franchising.

Area development franchise – This type of franchise will include the rights to expand a region through appointed sub-franchises or multiple managed outlets. It may also be described as a regional franchise. BFA (the British Franchise Association) – The organisation set up to regulate the industry on an ethical basis. The Association has a Code of Ethics and Procedures, and those franchisors meeting its criteria are granted membership. Check out its website at www.theBFA.org. The BFA highlights the following as the benefits of becoming a member:

• public recognition of having met the Association’s established standard, and being among the best in franchising

• increased public awareness of member franchises through BFA PR, franchise guides and monthly e-magazines with a circulation of 20,000

• being part of the authoritative voice of franchising, lobbying UK and European governments in the interests of franchisors

• inclusion on the BFA website which provides members with more than 14,000 leads for prospective franchisees each year

• access to discounted schemes for exhibitions, advertising and other benefits

• eligibility for the BFA Franchisor and Franchisee of the Year awards

• national and regional forums, bringing the best advice and latest news in franchising

• the BFA franchisor mentoring scheme, providing access to the best network of franchise experience

• a regular news service, keeping members up to date with the BFA and broader franchise issues

• access to exclusive BFA training programmes

• access to cost-effective dispute resolution procedures

• assistance with the international development of member franchise networks

• participation in the BFA’s national programme of franchise seminars

Block exemption – The European Union concessions to franchising. These bypass the normal EU anti-restrictive trade practices legislation which seeks to protect competition – for example ’exclusive areas’ can be deemed to contravene it.

Brand – A collection of images and ideas representing an economic producer. More specifically, the word refers to the concrete symbols of the producer, such as a name, logo, slogan and design scheme. Brand recognition and other reactions are created by the consumer’s accumulation of experiences with the specific product or service, both directly relating to its use and through the influence of advertising, design and media commentary. The brand – and ’branding’ and brand equity – have become increasingly important components of culture and the economy, now being described by marketing professionals as ’cultural accessories and personal philosophies’.

Business format franchise – This is where you buy into a whole package, called a ’total turnkey system’, which will include the brand, know-how, training, methodology and support.

Buyback – If a franchisee no longer wants to continue with his or her franchise, the franchisor may agree to buy it back. If you’re a franchisee in this position, it’s important to understand what you have delivered to the business, how you’ve grown it and the value that it offers. We’re back to knowing your business inside-out, how it ticks and what it’s worth.

Costs – There will be fees involved in the purchase or sale of a franchise, whether it be for solicitors, brokers or accountants. Both buyers and sellers need to find out who is responsible for which costs. Remember that you may well regret your economies if you take short cuts in the early stages of buying or selling a franchise.

Decision-maker – The person or people who are in a position to make a decision about something – that is, whoever is ’signing on the dotted line’ in whatever deal you are doing, for example the person at the franchisor who can authorise your marketing spend.

Disclosure – The practice of revealing detailed information about the franchisor’s business track record and franchise package. This is a legal obligation in the US but voluntary in the UK. Finding out this kind of information must form part of your due diligence. Check out the situation for the country relevant to you: visit the British Franchise Association’s website for more help here.

Due diligence – The process you go through to establish the viability of the franchise you wish to buy or set up. This involves taking a detailed look at the promises being made to you, and gives you the opportunity to see how they stack up. There should be a prospectus available to you with information about the business so you can establish its worth. If this isn’t available, you will need, at the very least, to ask for the last two years’ accounts and customer, staff and equipment lists where appropriate. Leave no stone unturned with your due diligence (see Chapter 6 for more on this).

Exclusive area – This may also be called a ’territory’ and is the area licensed out to franchisees in which they may conduct business. Check out ’exclusivity’ carefully; this will, or should be, defined by the terms of the franchise contract (see below).

Fees – The amount of money and frequency of payment agreed between the franchisor and franchisee. This must be stated clearly in any agreement.

Franinfo – This is a complete source of franchising information, offering a comprehensive directory of UK and Irish franchises for sale, as well as expert franchise and business focused advice and news. Franinfo is also the official website (www.franinfo.co.uk) for the UK Franchise Exhibitions, which are exclusively supported by the BFA.

Franchise contract – This can also be known as the ’franchise agreement’ and is a document that defines the legal relationship and obligations existing between franchisor and franchisee.

Franchise fee – There are two common types of fee: initial and ongoing. The initial fee is sometimes called the ’front-end fee’. It is a one-off payment designed to cover the franchisor’s costs of recruiting and setting up the franchise. The ongoing service fee, or ’management fee’ (see ’Management service fee’, below), is most commonly based on a percentage of sales turnover. It is the usual way for the franchisor to obtain his or her continuing income from the franchisees. Occasionally a franchisor will choose to charge a fixed fee on a weekly or monthly basis. Beware of this (see Chapter 5, Continuing fees section).

Franchisee – The person who buys the licence to replicate the business system.

Franchise package – This is the total offering purchased by the franchisee, and includes all the licensed rights, branding, know-how, systems, territory, training and so on, for which an initial fee is charged by the franchisor.

Franchising – Simply put, this is a method of marketing goods and services via a business formula that is licensed for others to copy, usually in exchange for an initial fee, a percentage of gross sales or profits, and some annual fees (see Fees above).

Franchisor – The company or individual that offers the licence to replicate their business system.

Franchisor News – This is the only publication exclusively for franchisors. The magazine provides the latest news, features and advice.

Intellectual property – The franchisor’s secrets of doing business and various trademarks, copyright, methods of producing and/or processing, branding, manuals etc. which should be legally protected before being sold in a franchise package (see also ’Know-how’, below). This is important in order to protect the business – imagine how you’d feel if you had a great business idea which someone else copied, protected in their name and then stopped you using!

International Franchise Association (IFA) – the franchise trade association for the US.

Job franchise – This is where the franchisee is a hands-on owner/operator rather than a manager (usually linked with van-based services, such as maintenance).

Joint venture franchise – Common in international franchise agreements, in a joint venture franchise the franchisor also takes a financial stake in the project. For e...

Table of contents

• Cover
• Title Page
• Table of Contents
• Introduction
• 1. The language of franchising
• 2. Will franchising work for you?
• 3. Investigating the pros and cons of a franchise opportunity
• 4. Investigating the pros and cons of franchising your business
• 5. How much do I need to invest in the franchise business?
• 6. Understanding the importance of the franchise agreement, operations manual and checking credentials
• 7. Running your franchise business – the first year
• 8. What to do if things go wrong
• 9. Non-traditional franchise options
• 10. Marketing your business
• Acknowledgements
• Notes
• Imprint