FRANCHISING in the UK has grown dramatically over the last decade. Much of the impetus has come from America, although increasingly UK companies are seeing it as a cost-effective and quick means of expanding their brand across the country and beyond.
Turnover last year in the UK was £9.2 billion spread across a range of franchises covering retail, tenanted pubs, the automotive industry and restaurant and food service management.
The British Franchise Exhibition was held in Glasgow over the we
ekend and many may have come away thinking that this is a relatively inexpensive way of starting a business.
The cost can be as low as £10,000, but how much you need depends on the business, its stage of development, and the levels of support you will receive.
For those interested in using franchising as a means of expanding an existing business, the British Franchise Association (BFA) are holding two events in Glasgow on 16 and 17 July for prospective franchisors (further details from the BFA on 01491 518050).
According to the BFA the industry employs 324,000 people in the UK and is responsible for creating around 3,000 new businesses a year. More importantly for those considering a franchise, it is the BFA’s assertion that 93 per cent of all franchisees report profitability, with the figure rising to 96 per cent among franchisees operating businesses for more than five years.
Franchising is generally defined as when the owner of a business - the franchisor - grants a licence to a local operator - the franchisee - to use the franchisor’s name, product, service and associated goodwill for a specific period of time. The franchisor in turn supplies a complete, proven business concept together with his or her own unique knowledge of the chosen industry or sector, thereby removing, for the franchisee, some of the uncertainties in setting up a new business.
The advantages for the franchisee are that they usually require less money than an independent start-up would require (with a price range from a few thousand pounds up into the millions). They are provided with an established brand, which is usually marketed centrally, and they are given support in building and developing the business.
The franchisor has an obligation to support the franchise network, usually with training, product development and advertising. This set-up provides a safer opportunity to develop a business, and banks will fund up to 70 per cent of the costs for a franchise compared with about 50 per cent for an independent start-up.
The downside is that you pay an initial fee and then continuous management service fees for the license, which is usually based on a percentage of annual turnover or mark-ups on supplies. While each business is owned and operated by the franchisee, control over the way in which products and services are developed and delivered remains under the control of the franchisor.
For the ambitious, independently-minded entrepreneur this set-up may feel slightly restrictive. The returns are also likely to be considerably lower than if you had started the business yourself.
Franchises have a higher success rate than non-franchised businesses, although it pays to look around at exactly what the franchisor is offering.
One area which causes difficulty is if the perception by the franchisor and the franchisee differs. It is important to ensure that you are aware of exactly what is required of you, targets which need to be met, what growth rate the business must achieve within what period of time and how many other similar franchises will be agreed in your area.
It is an area which is worth looking at but, as with all business decisions, requires a degree of scepticism over the forecast margins and the potential for growth. If this is overestimated then disappointment and potential failure may be on the horizon.
Involve your advisors at an early stage as they will be best placed to take the sceptical, independent position and challenge your expectations. Disappointment before rather than after you sign up is a much lesser evil.
Franchising allows individuals a potentially safer route to start a business but this is tempered by the reduced profitability. It can afford people the chance though to utilise an existing brand without the dangers of creating a product or service from scratch.
Patrick McLay is audit partner with Grant Thornton.
