Understanding Industry Terminology

David Glover, franchise director at Caremark, demystifies some of the common terminology prospective franchisees need to be familiar with

It’s easy to feel daunted by the jargon when you’re entering a new industry - and franchising is no different.

So I’ve demystified some of the common terminology prospective franchisees need to be familiar with.

Management service fee

Usually abbreviated to MSF, this is a monthly fee payable to the franchisor. These are not hidden costs - they’re vital to your success as a franchisee.

The question to ask isn’t: Why am I paying this? It’s: What am I getting for my money? What support, services or core products does your franchisor provide in return for your MSF?

MSF charges are structured differently from franchisor to franchisor. Some adopt a percentage of turnover, which means charges will seem minimal in the initial months, but will increase in line with your turnover. Others work on a fixed fee basis, a fl at rate that remains the same no matter what. Take time to understand how this impacts you and your business going forwards.

Operations manual

Also referred to as the ‘ops manual’, this document is unique to franchising.

When you buy a franchise, you’re buying a proven model - and it’s this knowledge, intellectual property and years of experience that’s contained within each franchisor’s operations manual. It will off er guidance and should provide the answers to most, if not all, the questions you’ll have when it comes to the day to day running of your business.

Ops manuals are living documents. As the franchisor introduces new technology, launches new products and services or invests in new markets, the manual will be amended to reflect enhancements to the model. The key thing to remember is that while the franchisor has the right and indeed, the duty, to make changes, franchisees do not.

Don’t be surprised if you aren’t allowed to thoroughly inspect it before you officially join a franchise, but make sure it exists and discuss the types of information it contains to be sure it’s comprehensive and has been updated to include things like social media and GDPR.

Territory

A territory is the area in which you’ll operate your business.

In most cases, franchisors split the country into territories by taking a number of factors into account. Things like population density and demographics to postcode and local authority boundaries.

Usually, territories are marketed as ‘exclusive’ or ‘protected’, meaning other franchisees in the network are not permitted to trade there. Not every franchisor off ers a protected geographic territory, with some preferring a ‘keep what you win’ approach to customers. In my experience though, most franchisees expect a piece of the country they can call their own.

Caremark franchisees operate in exclusive territories and have the option to expand into multiple territories - something more than a dozen of our franchisees have already done.

If you’re looking for a scalable business, it’s important to know exactly what your rights are in your current and any future territory.

Due diligence

When you reach a certain point in your journey, you’ll no doubt hear a franchisor telling you to go away and do your due diligence. Basically, this means research. And lots of it.

It’s important to remember your due diligence should cover more than the brand you’re considering investing in. You will need to speak to existing franchisees, learn as much as you can about the model and the success of the business to date. But due diligence should cover much more than that and it’s important you understand why.

I always tell my prospects to research other care brands because I want them to understand who we are and make sure they feel comfortable our culture, ethos and brand are the right fit.

Research the proposed or offered territory for more than just its boundaries or demographical split: what are the market opportunities, who are the most prevalent competitors at the time and what, if any, nuances and logistics will impact on a local level?

For Caremark prospects, this could be anything from how the local authority works with care providers in the area to likely availability and locally focused ideas for recruitment of staff.

Far from being put off by undertaking this level of research, you should see this as arming yourself with the knowledge required to make your business a success. With these facts, your subsequent meetings with any franchisor can be more comprehensive.

Renewal

This is the point at which your franchise agreement comes to an end and you have the opportunity to sign up for another term.

Don’t take for granted that your renewal is guaranteed or that the initial term is five years. Some franchisors operate on five, 10 and even 20-year terms and you should expect a formal business review prior to renewal to make sure both parties are still benefiting from the relationship. It’s unusual to have to pay to renew, but this question should form part of your due diligence too.

If you’re looking at a franchise opportunity, it’s sensible to familiarise yourself with industry terminology, as it shows initiative, motivation and that you’re serious about a future in franchising.

Other key concepts

There are some key concepts that, while not specific to franchising, are crucial to business ownership and are often misunderstood:

• Business plan

People need to get away from the idea that a business plan is essentially a funding document.

Your business plan should be a working document that you regularly review. It should be constantly updated, preferably in conjunction with your franchisor.

For Caremark franchisees, the business plan becomes a growth and development plan for the lifetime of their business.

•Profit and loss vs cash flow

Many people get these two things confused and if that happens you can run into all sorts of trouble.

A profit and loss can look surprisingly healthy for a business that’s in liquidation. The thing you must grasp if you’re going to run your own business is that cash flow is king.

Profit is defined as revenue less expenses. But just because you’ve made a sale doesn’t mean you have that cash in the bank - think credit terms, late payment and defaults.

That’s why money physically moving in and out of the business (cash flow) can be very different to how the finances look on paper (profit and loss).

Whether you have clients who pay monthly or any type of transactional business, understanding your cash flow is essential to ensure you can pay suppliers, staff and overheads on time.