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How to successfully franchise your firm

By Simon Smith, Partner at Wellers

There are approximately 48,000 franchise units operating in the UK – a 25 per cent increase when compared to 2011, according to the 2018 BFA NatWest Franchise Survey.

This is for a number of reasons. Not only is franchising a cost-effective way to scale a business but it further limits the risk attached to growth because the owner’s investment is relatively little when compared to the capital needed to open a new outlet. 

Essentially, franchising is based on a marketing concept that can be adopted for business expansion. 

A business owner (franchisor) licenses the intellectual property, brand, business model and rights to sell branded products/services to a third party (franchisee), in return for a percentage of revenue. Famous franchised businesses include McDonald’s, Marriott International and Hertz, which all operate as separate entities but utilise the same business model.

What you need to know 

When it comes to franchising a business, there are some key considerations which should be taken into account. Firstly, ensure that franchising is the right avenue to pursue. Secondly, make sure that the business is fully prepared for this approach to growth.  

In order to franchise a business, the proposition must be valuable to potential franchisees. If a third party is going to invest, rather than set up their own business, they need to understand what makes the proposition unique. They need to value its brand, processes, and approach. 

This means a business plan is critical. As with all ventures, a business plan will detail the organisation, growth projections, competitors, goals, suppliers and much more. This is similar for franchising. The business plan will inform the third party how to set up, where to order supplies from, the competition and how to maintain the books. A thorough plan of action will ensure everything is set up properly with the necessary back office infrastructure in place to support the franchises. 

It is important to note that there are no specific laws which regulate franchising in the UK. Therefore, legal advice should be sought at every step of the way. The legal representative will ensure that the brand is protected and create contracts for both parties to abide by. This will clearly denote the roles, responsibilities and restrictions on both sides of the agreement. 

Once franchises are up and running, consistency across all locations is imperative. This keeps a brand authentic and it can be a make or break factor for the franchise’s growth. It is important that relevant training programmes are in place to ensure that franchises remain consistent across the board. 

As an example, during the early stages of McDonald’s, when the fast-food giant first franchised in 1955, the outlets began adding their own items to the menu. This impacted on the brand and was soon stopped. 

Although it is important that uniformity is maintained across outlets, franchisees must be given an element of creative licence. It should be made clear in the business model exactly where a third party is permitted freedom, but it is paramount that franchisees can tailor the business to specific customer needs and to explore new business ideas.  

What to remember

While franchising a business has its benefits, be aware that there are potential drawbacks. The main downside of franchising is that it limits the ability for the business to innovate, as it is much harder to roll-out new innovations to stores not under direct ownership. Innovation isn’t impossible in a franchise setting, but it is a slower process because if the controlling entity wants to introduce something new, there has to be a negotiation with the franchisees to get them onboard and accept new methods. 

Franchising also limits the business’ control over management. As a franchise is an independent business, a franchisor cannot tell them what to do, as they could with an employee. They are dealing with an independent business! Often, they will have a different set of goals to that of the franchising company. 

As an example, the franchisee may want to boost profits rather than sales. However, the franchisor takes a percentage of revenue. If sales do not increase but profits do, it will mean the franchisee is making more money and the franchisor is missing out. 

This could also work to the opposite effect. If the franchisor wants to introduce a coupon to increase sales, it may not be attractive to the franchisee because although coupons attract more custom and increase sales, it doesn’t mean profits will rise. 

There are important things an entrepreneur should take into account when considering scaling via a franchising business model. There are many benefits to this expansion method, including fast growth that involves a relatively small amount of investment, but there are drawbacks. Whatever the business owner chooses to do, it is important that good advice is sought throughout the process.