Franchising: advantages and disadvantages

Before you purchase a franchise, you need to be aware of all that's involved in becoming a franchisee, says The British Franchise Association

The effort it takes to start a small business and keep it going cannot be underestimated. Many fail, even in good economic times. The hurdles and challenges can be substantial and the ability to get a business up to speed, making profit and supporting your lifestyle is not achieved by most that try. Often businesses can fail at the very first hurdle - the concept.

This is why franchising as a business model has attracted the attention of many people over the past few years. The tough economic climate has highlighted its strengths and shown that there is a more secure way to start your own business. Its formula of a locally owned and run enterprise, driven by a small business owner with branding, economies of scale and support from a wider network, gives the business a far better chance of success. However, this is only the case if it is done well, so you need to ensure you do your homework when looking into franchising.

A good franchise will offer you a proven business format with the initial and continuing support you require. Your business will work under the brand established by your franchisor using the business system it has developed and proven in the marketplace. You will pay an initial fee to use the brand and proven business format. You will then pay continuing fees for ongoing support that will help you operate and grow the business - eventually building a capital asset that you can sell.

The ongoing support provided to franchisees is one of the major reasons behind the success of franchising. The franchisor has already gone through the pain of finding out what works and what doesn’t. It has invested in the systems and is now willing to teach you how to replicate it. However, don’t think you can pick and choose which parts of the system you want to use. It is very much all or nothing. But if you’re paying for a proven system, why wouldn’t you follow it?

What are the advantages?
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* About 90 per cent of all franchisees reported profitability over the last 12 months.

* The business format is proven.

* You have the opportunity to build your capital as well as your earnings.

* It is your business and you are the owner-manager. Providing you follow the system, you decide what goes.

* The major banks are very supportive of good franchising.

What are the disadvantages?
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* Running any business is hard work, demanding the highest level of personal and family commitment.

* You make a financial investment. No investment can be guaranteed, especially when it depends on your own efforts, as well as your franchisor and the marketplace.

* You buy into a proven business system for its benefits, but you also take on the responsibility of following it.

If you are considering investing in a franchise, you need to be aware of all that’s involved and be in the best position to identify which businesses may best suit your needs. The following are just a few key areas to consider:

* Membership of the British Franchise Association. The bfa accredits franchisors using a stringent set of criteria based on a code of business practice and the European Code of Ethics for Franchising. All members are listed on the bfa’s website to allow potential franchisees to check which brands have passed these checks.

* Investment level. Levels of investment range from smaller amounts that you may already have available, to larger amounts that you may need a bank loan for.There are three major banks that the bfa recognises as specialists in franchising, providing dedicated franchise teams. These are HSBC, Lloyds TSB/Bank of Scotland and RBS/NatWest.

* Your financial requirements. What do you want out of the business and what bills must be covered each month? You need to have this in mind, not only when looking at realistic earning potential, but also when getting a loan. It maybe that it takes six months, or even a year, to start turning a profit, so you will need working capital to see you through this period.

* Lifestyle. You need to ensure you are happy to invest the time it takes to set up and run a new franchise business. You will also need the support and understanding of family and close friends. In some circumstances, a franchisor may request to meet your spouse or partner - if you have one.This helps the franchisor gauge the level of support you have from those around you.

Research
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* Speak to existing franchisees - you want an extensive list to choose from. Speak to both successful and the less successful ones, as it will give you a much more rounded view.

* Understand the business. Make sure you understand all the business operations and what is involved on a daily basis.

* Investment costs. Understand what costs are involved, both upfront and ongoing, and what you get for your money.

* The people. Don’t underestimate the importance of meeting the people involved in the franchise at their offices. Also, find out who the franchisees’ main contact is, as well as their level of industry experience.

* Success rates. Ask for success rates of other franchisees. There may be failures, but the important aspect is to understand why.

* Recruitment. If a franchisor doesn’t seem to be too picky about who it recruits,walk away. You want to see that the company is stringent in its selection process.

Professional advice
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There are a host of professional advisers accredited by the bfa that specialise in franchising, including consultants, accountants, solicitors, banks and even media. They are invaluable in making sure that you’re taking the right steps and don’t miss any vital information. When it comes to reviewing the franchise agreement, make sure you use a solicitor who specialises in franchising - it can save you a lot of money in the long run.