Many people have a dream of running their own business, but you might not know how to start, or perhaps don’t believe you have enough of the skills or experience you need. Franchising could help you by providing a route into business using a tried-and-tested formula. As with any decision you need to look carefully at the options, and decide if franchising is right for you – and if you are right for franchising.

What is franchising and how does it work?

Put simply, by becoming a franchisee you will be leasing a business system from its owner, the franchisor. This usually involves:

• paying the franchisor for the right to set up in business,
  
• using their already established brand name and reliable track record,
  
• working to a tried–and-tested blueprint.

This should give your business a good chance of success, particularly as a good franchisor will provide initial and ongoing support and guidance to help you start and grow your business. The type of support they provide may include:

• full information and guidance about how to supply the product or service,
  
• accounting systems,
  
• staff training and recruitment,
  
• marketing,
  
• ongoing research and development.

A good franchisor will want you to succeed in business because their success depends on how their franchisees perform.

In return for this support, you should also expect to pay one or more of the following:

• an up-front fee to the franchisor, giving you the rights to a specific location,
  
• a management service fee or royalty,
  
• a contribution to the advertising fund,
  
• a mark-up on goods supplied to you by the franchisor,
  
• an administration fee for specific services the fanchisor may provide.

These will usually be in the form of a percentage of your sales, payable to the franchisor on a monthly basis.

You will also be expected to follow the franchisor’s formula for running the business, selling the product in accordance with their guidelines on price, quality, location and the layout of your premises.

Types of franchised businesses

Franchising as a formula can be applied to a wide range of businesses. Traditionally, retailing and catering have been major areas, but there is now a move towards more domestic and business-to-business services.

There are nearly 700 franchise systems currently operating in the UK. Some are very well known: for instance, McDonalds, Burger King, Kall Kwik and Dyno Rod.

Around 30,000 people have chosen to take the franchise route and the options available are extremely varied. There are also a number of ways in which you can become involved in running a business as a franchisee, for example:

An investment franchise
Having invested a substantial sum of money, you will employ a management team to run the outlet on a day-to-day basis. Franchises of this type will typically include hotels and major retail outlets.

An executive franchise
Based on providing a professional service, an executive franchise allows you to work on your own, typically in a field such as recruitment, cost management or financial advice.

A retail franchise
This gives you the right to run one or more retail outlets, such as fast food restaurants or quick printing shops. You employ your own staff and display and sell only those products or services that the franchisor approves of.

A distribution franchise
Working from a depot owned and run by a franchisor, you operate your own round and deliver products approved by the franchisor. Franchises of this type may include milk rounds or food sales.

A depot franchise
You operate your own depot, looking after a mixture of trade and retail customers. A typical business of this type would be a parcel courier.

A job franchise
A one-person business that can be run from home. For example, car repairs or distributing sweets/greeting cards.

The common feature of all of the above is that they are business format franchises. In other words, they all involve you working from a planned formula to launch and build your business. The route you follow will depend on your skills, knowledge and experience, the resources you have available and your preferences. However, before committing yourself, you need to look at your planned opportunity very carefully.

How should you research a franchise opportunity?

The key is to gather as much information as possible from:

• franchise systems you think you would like to work with,
  
• the industry sector you want to operate in,
  
• your local area, to test the market for the product or service.

The next step is to filter the information down to perhaps two or three potential franchisors, and then carry out detailed research on them. This should involve talking to franchisees of those systems and meeting the franchisor several times. This will give you the chance to question them in detail about the system. You need to find out about:

• costs and performance projections; you should also take references from the franchisor’s bankers,
  
• the franchisor’s audited accounts and trading figures – you need to know
  
• how much capital is invested in the business and how profitable it is,
  
• how long the company has been franchising the business for,
  
• how many franchisees there are,
  
• the business and methods,
  
• the support provided,
  
• whether the franchise system has had any failures.

This will help you establish the most crucial thing about a franchise opportunity: that it has been tried and tested. You shouldn’t be paying money for the privilege of proving someone else’s big idea.

Franchise exhibitions and franchising publications, such as The Franchise Magazine, Business Franchise and Franchise World, are also useful sources for research.

Our business managers have access to a comprehensive database of franchise systems operating in the UK, as well as a dedicated franchise team to help you. Contact us on 0117 943 3089 or email franchising@lloydstsb.co.uk

Will franchising be right for you?

At this stage you need to ask yourself a few questions.

• Is the business right for you?
  
• Do you have an aptitude for it, and are you going to enjoy it?
  
• Do you have the skills necessary for your chosen franchise, or will you need to hire or acquire them?
  
• Will what you are planning achieve your long-term goals for you and your family?

Are you right for franchising?

Although you will have back-up and support, you will still be working for yourself. You will need to be self-motivated, and be able to cope with long hours. You will need staying power to deal with uncertainty, the ability to get on with a wide range of people, and you will need to turn your hand to a wide variety of tasks. You will also have to accept the franchisor’s rules and regulations for their business system and work within these.

Is franchising right for your family?

Working for yourself can place additional pressures on family life. You will probably be working longer hours, and many of the perks of being in employment will disappear. Make sure your family supports your decision, as they will be affected.

Do you have the right business partner?

You may be starting your business with other people, so make sure your new colleagues are likely to be equally dedicated. The same pressures that may affect a family can impact on friendship too.

Is the price right and can you afford it?

These are very obvious questions, but in the euphoria and enthusiasm of researching a business, it can be easy to get carried away. If you pay too much you will have put an extra burden on your business from the outset, particularly if you are borrowing money to get it started. The business has to be able to generate enough cash to repay its borrowings, and hopefully provide you with an income.

What are the advantages of franchising?

Choosing to become a franchisee has a number of advantages:

• You’re buying into a proven business format.
  
• The established name of the franchise should make it easier to attract customers.
  
• A good franchisor will provide comprehensive training, advice and ongoing support, not only when you start, but also when you are up and running. It’s in their interest to do this – their success as a franchisor depends on successful franchisees.
  
• You can benefit from the experience of other franchisees in your network.
  
• You may benefit from reduced costs due to the buying power of the franchise network as a whole.

What are the pitfalls?

Lack of independence

One of the main reasons to choose to work for yourself is independence. If you are an entrepreneur looking for your own way of doing business, a franchise may not be right for you as you will have little scope for individual initiative. For example, the products you sell, the layout of your premises, and the style of promotions are usually all laid down for you, as part of the tried-and-tested formula.

Restrictions on the business

You are tied to the quality of goods supplied by the franchisor, and may not be able to look at alternatives. You will also have restrictions on pursuing other business interests. In addition, you will be committing yourself to a potentially long term-agreement, and you may not like the idea of paying ongoing regular fees to your franchisor.

Sale of the business

When you come to sell the business, most franchisors will have the right to approve the purchaser, to ensure they are suitable to run the business. This affects the flexibility that owning your own business usually gives you.

Franchise failure
If other franchisees, or even the franchisor, get bad publicity through failure, this could have an adverse effect on your business. Failure can result from:

• a poor level of support being provided by franchisees,
  
• the franchisor not being selective in whom they grant the franchise to,
  
• unrealistic expectations on the part of the franchisees and franchisors about what their business could actually achieve.

Professional advice

Before you go ahead with a franchise, it is sensible to take advice from the following professionals:

Accountants

The old maxim is true: failing to plan is planning to fail. A good local accountant will be able to give you a wealth of advice about planning your business, and could help you establish whether you are paying a fair price for an existing business you may want to buy. If you are investing in a new franchised outlet, they will review any projections provided to you by the franchisor, and guide you on their feasibility and reality.

Solicitor

A franchise agreement is a binding legal contract, designed to protect the franchise know-how and brand for the benefit of the entire network. However, before you sign any agreement, it is important that you have it explained to you by a solicitor who understands franchising. This will make sure you are aware of all the implications of entering into the agreement.

Useful contacts

We have a dedicated franchise team waiting to help you. To discuss any aspect of franchising, get in touch with us through your Business Manager. Alternatively, you can call the team on 0117 943 3089, email franchising@lloydstsb.co.uk or write to: Lloyds TSB Franchise Team, Business Banking, Canons House, PO Box 112, Bristol BS99 7LB.

We also provide information to help you with your franchising plans through our free publication, 'Supporting your franchise business'. This has been put together in association with leading academics and professionals from the sector and offers clear, unbiased guidance on whether franchising is the right route for you.

If you decide to take your plans further, we will be happy to introduce you to experienced, professional advisors who can help you construct your franchise package. As your system develops, we can also discuss how to arrange the best types of finance for your franchisees.

For our free franchising information pack, which includes a current industry magazine, free tickets to any forthcoming exhibition and a copy of a brochure which will help you plan your research, call us free on 0800 0560 181.

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