The Perils and Pitfalls of Franchising

Introduction

We have all heard of the term “franchising”, and most of us know people involved in it. After all, it now contributes more than 10 billion to the UK economy, across numerous business sectors. But what is it really all about, and how are some businesses so successful at it, whilst for others it brings disaster? In this article we will be looking at:

The basics – what is a franchise, and how does it operate?

What do you need to know if you are thinking about buying a franchise?

What should you consider if you are thinking about developing your business through franchising?

The basics of franchising

The concept is fairly simple. In a franchise, an established business (“the franchisor”) grants someone (“the franchisee”) the right to trade under the franchisor’s trade mark or trade name.

Most franchising is actually “business format” franchising. This means that the franchisor develops a business concept, including a trade name and operating methods, and they train the franchisee in how to run their business using this concept. The franchisee operates his/her own business under the franchisor’s name and under some fairly tight controls and guidance. These are set out in a franchise agreement, and usually an operations manual as well.

At heart, a franchise agreement is essentially a trade mark licence, with a number of operational instructions and controls placed on the franchisee.

In many cases, the franchisee is given an “exclusive” territory in which to operate during the term of the franchise agreement.

In exchange for the right to use the trade name and operating methods, the franchisee normally pays the franchisor:

An up-front fee (usually 5k upwards)

Ongoing payments (referred to as “royalties” or “management service fees”) which are usually paid monthly, and tend to be either a fixed percentage of gross sales (generally 5 – 11%), or otherwise a set monthly figure.

The franchisee is sometimes required to make contributions to a central marketing fund operated by the franchisor.

In addition, the franchisee may have to pay to acquire premises, stock, equipment etc.

For franchisors, franchising can therefore be an exceptionally quick route to business growth, with low overheads and low risk. We will look at this in more detail later on in this article. For franchisees, franchising can provide an attractive opportunity to own and operate their own business, but one which has a proven business concept and which provides training and support. Franchising can in some cases also provide a very rare opportunity for genuine work/life balance.

What you need to know if you are thinking about buying a franchise

Sadly however, as with everything in life, it is not always that simple. Although survival rates for franchisee businesses are much higher than for other business start-ups, franchisees all too often fail. Some lose substantial amounts of money, often through no fault of their own.

Below are some of the perils to avoid:

Peril No. 1 – Not doing enough “homework” before handing over your cash

Most franchisors can “talk a good talk”. It is their job to convince you that their franchise offering will bring you wealth and success. However, whilst many franchisors are scrupulously honest and professional in their dealings with prospective franchisees, some of them are unfortunately not.

Remember – when you take on a franchise this is a “business to business” agreement. There is no consumer law to protect you, so your legal remedies may be very limited. It is your responsibility to check out what you are being told, and never to take promises and forecasts on face value.

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