HOW TO SUCCESSFULLY FRANCHISE YOUR BUSINESS

Thursday 1st October 2009

Clive SawyerManaging Director, Business Options

Presentation Format• What is franchising• Franchise industry overview• What makes a business franchiseable• Franchise revenue streams• Stages in franchising a business• Cost of franchising a business• Return on investment when franchising• Other expansion models – overview• Summary• Questions & Answers

Introduction• About Business Options• Only consultancy accredited by all of the below

– British Franchise Association– Irish Franchise Association– Institute of Business Advisers– Institute of Business Consulting

• Offices throughout the UK:– Alton (Head Office) Birmingham, Norwich, Southend-on-sea,

Scotland, Wales, and Northern Ireland

• Women Franchise Ambassadors and chair the Encouraging Women into Franchising Group

What is Franchising • Referred to as Full Business Format Franchising• Enter a contractual long-term relationship• Grant licence to franchisee • Franchisee operates under their own business

– Therefore Franchisee is liable not Franchisor

• Franchisee has the right to sell their franchise• Franchisee gets:

– Tried and tested product/service– Profitable proven business model to follow– Experience and know-how of the franchisor– Entitlement to use the trade name / mark– Entire package

Example Franchises

Franchising – Industry OverviewNatWest / bfa Annual Franchise Survey 2009: • By end 2008 the UK industry worth £11.4 bn• 835 franchise systems

– Property services 205– Personal services 171– Business and commercial services 163– Hotels and catering 125– Store retailing 100– Transport and vehicle services 71

• 34,200 franchise units• 278 franchise systems have international operations• 90% of franchisees claim to be profitable

If you look at published Franchise Directories:• British Franchise Directory 2009 (Franchise World) => Over 1,100• The UK Franchise Directory 22nd Edition (FDS) => Over 1,350

Is your business franchiseable ?1. Is it a financially viable business?

- Would it still be viable with an additional 15% costs?

2. Is there long-term and widespread demand for your product / service?

- Most franchise licences are for 5 years and renewable

3. Can you prove that it can work in other parts of the country and without your skills and ability?

4. Are the business processes easily replicable?

5. Can you easily train an unskilled person to run the business?

Not Suitable for Franchising• A business that is failing• Low gross margins

– (e.g. newspaper delivery)

• Where product range has short life-cycle– (e.g. something that is a fad or gimmick)

• Geographically defined market i.e. little or no potential to repeat in other places

– (e.g. Tower of London gift shop)

• High technical skill levels required– (e.g. brain surgery)

• Not proven– (e.g. 6 months old)

Franchise Revenue Streams• Initial Franchise Fees

– Franchise Fee: Average is £14,200 – Training Fee: Average is £8,900

– Equipment: Average is £23,000

– Stock: Average is £10,200

• On-going Fees– Management Services Fee: Average 8.2% of Gross turnover (never profit)

– National Marketing Levy – Average 1.9% of Gross turnover

– Mark-up on Goods– Service fees (book-keeping, software licences, IT support etc.)

• Others: e.g. re-sales (transfer fees)

The franchisor should not be looking to make a profit from the initial fee but from the ongoing success of the franchisee

Source: (Nat West bfa Franchise Survey 2009)

Stages in Franchising a business• Franchise Development Model (Feasibility Study)

– Assesses the viability for the franchisor and for their franchisees

– Develop the franchise package (fees, services, support, territory criteria, minimum performance) “Blueprint”

• Infrastructure Development– Franchise operating and reporting systems – Franchise legal documents– Trade Marking– Franchise operations manual– Franchise detailed territory mapping

Stages in Franchising a business• Recruitment

– Franchise recruitment strategy– Franchise recruitment material– Franchisee training programme– Marketing the franchise opportunity– Franchise enquiry processing– Franchisee interviewing

• Support– General franchisee support– Franchise support staff recruitment– Franchise support staff training– Franchise network meetings and conferences

• Exit Strategy

Costs of Franchising a business• £0

• £20,000 - £25,000 to be ready to take to market

• £1,500+ a month franchise recruitment budget

• Look to recoup the development costs from first few franchisees (upfront franchise fee)

• Funding options:– Banks look favourably on proven profitable businesses that

want to franchise– Government: Enterprise Finance Guarantee Scheme, Local

grants / support initiatives– Private investors

Ongoing Obligations• FRANCHISOR

– Ongoing franchisee support – Research and development– National marketing– Protecting the brand

• FRANCHISEE– Pay the franchisor ongoing fees – Run their business in strict accordance with the Operations

Manual– Local Marketing– Non competition (exclusive territories)– Confidentiality (franchise systems; staff)

Is now a good time to Franchise?• People being made redundant, have a pay off and its

difficult to find new jobs– Franchising is an option

• Businesses have less money to expand using company owned expansion

– Franchising is an option

• The success rates are higher for both franchisors and franchisees than for non franchise businesses

– Businesses and individuals are more risk adverse in a difficult economic climate and therefore franchising is an option

Note:• For Franchising to succeed still need to apply proper/sound business practices• Whatever the economic climate, if you haven’t a sound business don’t franchise

Some Other Expansion Models• Company owned expansion• Licensing• Acquisitions• Agents

• It is important to find the right expansion model for your business.

• Find / adapt a model to fit your business DON’T adapt your business to fit a preconceived model

Company Owned ExpansionMost common form of expansion in the UK. Wait until you have made sufficient profits in the business to fund or to allow you to borrow sufficient money to fund another outlet / office

PROS– Profit potential: You own the new unit totally so you keep all the profits it

generates– Control: You keep total control over the unit– Corporate and product brand development: Grows the brand name which

benefits the existing business– Economies of scale

CONS– Time: Time it takes to expand i.e. wait until you have sufficient funds– Cost: Cost of opening a unit – Staff: You have to recruit and manage staff in a remote unit(s)

LICENSINGSomeone pays you money and you grant them the right (licence) to sell your product or service under their own company name

PROS– Time: Don’t have to wait until you have funds to expand as the licensee pays you– Cost: you have to develop the licensing model, have a licence agreement; and have to advertise for licensees.– Income stream: you get an income from both the licence fee & the ongoing fee– Staffing: You don’t have the problem of recruiting and managing staff in a

remote unit– Product brand development: However not company brand development as Licensees trading under their

own name

CONS– Profit potential: as it isn’t your business you don’t make as much profit as if it was company owned.– Corporate brand development: you do not grow the corporate brand as the licensee trades under their own

name– Control: you do not have much control over how the licensee runs their

business however you can control how they market and sell the licenced product– Focus: the Licensee will sell other products therefore they will not be focussed

on selling your product range

AcquisitionsYou buy an existing business, rebrand it, and run it as a company owned operation

PROS– Existing customer base: managed correctly should be able to maintain the

existing customer base. – Funding expansion: you borrow against the trading performance of the

company you are buying. – Profit potential: you own the new unit totally so you keep all the profits it

generates– Control: you have total control over the unit– Corporate and product brand development: you develop both the companies

name and products

CONS– Staffing: you will be inheriting someone else's staff (TUPE) – Time: it can take along time to identify suitable companies, make an approach,

negotiate, complete the purchase – Customer reaction: customers will be used to the old brand and service

offering; they may not like any changes.

AgentsAn Agent represents your company and sells on your behalf.

PROS– Speed: it is relatively easy to recruit agents (lists of Agents)– Profit potential: they are acting on your behalf so you keep all the profits– Corporate and product brand development: They operate under your brand

name so you develop both the companies name and products – Cost: Agents normally work on commission

CONS– Liability: You are responsible for the Agents actions– Compensation: You can be liable to pay compensation for loss of earnings to an

Agent (Commercial Agents Regulations 1993 )– Control: Ensuring they operate exactly to your rules given that they are not

employees and are commission based.

SUMMARY• Franchising is a well established industry• Franchising can provide the opportunity for businesses

to create a national and/or international brand cheaper & quicker than company owned and financed expansion

• Many elements in developing a franchise model before it is ready to take to market

• If you have a good, profitable business now is a good time to franchise as more people looking at becoming franchisees

• Where a business isn’t suitable for franchising there are many other expansion models

• Opportunity for questions

CONTACT DETAILSClive Sawyer

Managing Director

Business Options

5 The Windmills, St.Mary’s Close, Alton, Hampshire GU34 1EF

Tel: 01420 550890 Mobile: 07773 347635

Email: clive.sawyer@businessoptions.biz Web: www.businessoptions.biz

Regional offices

Birmingham, Norwich, Southend-on-sea, Wales, Scotland, Northern Ireland

National Business Link Consultant

Accredited member of the British Franchise Association

Accredited member of the Irish Franchise Association

Member of the Federation of Small Businesses

Women’s Franchise Ambassador

Accredited member of the Institute of Business Consulting

QUESTIONS