Franchising

At AHACCOUNTANTS, we consider the advantages and disadvantages of franchising, as well as operational issues. If you’re contemplating entering into a franchise in the Nottingham area, we can assist with business plans and provide independent advice.

Franchising is a thriving industry in the UK, featuring nearly 1,000 brands across various sectors. The business community increasingly recognizes the potential of franchising, with approximately 90% of franchisees reporting profitability. While the benefits of owning a business are clear, so too are the risks. Franchisees generally face less risk than those starting their own businesses, with fewer than 4% of franchises failing for commercial reasons. This is primarily due to the established and proven business models and the support of a tested brand name.

What is Franchising?

Franchising is essentially an arrangement in which one party, the franchisor, grants another party, the franchisee, permission to use the franchisor’s name, trademarks, and business system in exchange for an initial fee and ongoing payments. Each franchise outlet is owned and managed by the franchisee, while the franchisor retains control over marketing, sales strategies, and quality standards.

Advantages and Disadvantages of Franchising

Advantages:

• Ownership: You operate your own business.
• Proven Model: The business concept has been tested and validated.
• Brand Recognition: You benefit from an established brand name with existing customer loyalty.
• Marketing Support: Often, there are national advertising campaigns.
• Training and Support: Many franchisors provide training in business operations and sales.
• Funding Assistance: Some franchisors help secure funding and offer discounted bulk supplies.

Disadvantages:

• Evaluation Difficulty: Assessing the quality of a franchise can be challenging, particularly for newer franchises.
• Extensive Research Required: You may need to conduct thorough investigations to ensure the franchise is robust.
• Fees: A portion of your annual profits will be paid to the franchisor as a fee.
• Restrictive Rights: The franchisor may have rights to inspect your business and dictate operational methods, which can feel limiting.
• Brand Dependency: If the franchisor fails to uphold the brand’s reputation or commitments, your business may suffer with little recourse.

Costs Involved in Franchising

Franchisors typically charge an initial fee alongside ongoing management service fees based on a percentage of annual turnover or mark-ups on supplies. These fees can vary widely among different franchises. In return, franchisors are obligated to support their franchisees with training, product development, advertising, and a range of management services.

Financing Your Franchise

Financing a franchise purchase is similar to financing any business startup. Major banks have specialized franchise departments to assist you. Be cautious of hidden financing costs, which may arise if the franchisor earns a commission by introducing you to financing providers or leasing companies. Such costs are significant only if better financing options are available elsewhere.

Choosing the Right Franchise

When selecting a franchise, consider the following factors:

• Self-Assessment: Evaluate your strengths and weaknesses to ensure compatibility with the franchise.
• Thorough Investigation: Research the franchise thoroughly.
• Market Research: Investigate local competition to confirm there’s room for your business.
• Legal Considerations: Carefully review all legal contracts.
• Financial Projections: Discuss financial projections with us, including cash flow, working capital needs, and profit forecasts to form the core of your business plan.

Finding a Franchise

A great starting point is the British Franchise Association (BFA). Their official online partner, whichfranchise.com, lists BFA-approved franchises. Additionally, theukfranchisedirectory.net provides a comprehensive directory of available franchises in the UK.

Once you have narrowed your choices, contact a shortlist of five or six franchise companies for further details, including business projections and draft contracts. If the franchise is attractive, expect competition from other applicants. Present yourself as the ideal candidate to the franchisor by providing references and a strong case for your suitability as a franchisee.

The Franchise Contract

The contract serves as the foundation for the franchise agreement, outlining how you will operate your business according to the franchisor’s guidelines. Key areas covered should include:

• Business Details: The name and nature of the business.
• Territory: The geographical area where you can operate under the franchise name.
• Duration: The length of the franchise agreement.
• Fees: Both initial and ongoing fees charged.
• Termination Terms: Conditions for selling the franchise or ending the agreement.
• Support Terms: The obligations of the franchisor to provide training and advertising, as well as your responsibility to adhere to the franchisor’s guidelines.