Federation of Small Businesses - Manchester and North Cheshire Voice - November / December 2006
Buying a Franchise
(The differences to starting a normal business)
Buying a franchise licence is, in many ways, the easiest way into business for the budding entrepreneur. However, it also means, in some cases, sacrificing a degree of independence and control.
Franchising started in 1850, when the Singer Sewing Machine Company distributed the right to sell their machines to shopkeepers. A franchise involves a contractual arrangement between a franchisor (a manufacturer, a wholesaler, or a service provider) and a franchisee (the entrepreneur). This allows the entrepreneur to start their business quickly while also having the backing of an established brand and operational model to work with.
The hardest part of starting or building a business is the first couple of years. When you buy a franchise most of these major hurdles have already been overcome by someone else; e.g., the right marketing mix has been achieved with the right prices, product, image and operational systems in place.
When you buy into a franchise, you are also buying a brand. With this brand therefore you are also buying directly into customer goodwill, which sometimes takes years to achieve from start-up.
The franchisor is also critical to the franchisee’s success, as they will be providing the marketing muscle to attract more customers. Essentially, you are in business for yourself, but not by yourself. In return, the franchisor expects a regular fee, which is usually an agreed allocation of revenues.
A franchisor will also expect you to adhere to a ‘franchise agreement’ – a binding legal contract that ensures you, the franchisee, adhere to the franchise’s business formula. This usually means one or more of the following: selling the goods and services synonymous with, and expected from, the brand; using only the franchise’s official insignia; decorating and laying out premises according to a prescribed model; ensuring staff wear particular uniforms; conforming to various business practices; and using certain computer systems.
Are you suited to franchising?
Yes, if you...
...are limited in the capital you can raise yourself or from banks for a start-up;
...wish to minimise risk – this might be because you are conscious of supporting your family for instance;
...value making a profit above entrepreneurial freedom; and
...want to expand your business rapidly.
And do not mind...
...sacrificing the freedom to forge your own brand, experiment with goods and services, and develop your own marketing strategies;
...being powerless, to a degree, to influence your own fortunes, depending instead on the performance of the franchisor and other franchisees;
...losing a percentage of your revenues to the franchisor;
...generally missing out on the joy of seeing your own business grow from a vulnerable ‘sapling’ to a strong ‘oak’ with an extensive network of roots.
Finance options
A detailed business plan is a prerequisite if you are to obtain finance from a bank for any business and this is also true for a franchise opportunity.
The average initial cost of buying a franchise – including stock, premises and the initial fee is - £42,200.
Banks are more "generous" in their loans for franchises than they are for start-ups overall. In general, a bank will lend up to 70% of the capital, including working capital, for well-established franchises. However, the term of the loan will not extend beyond the term of the franchise licence, although a capital repayment holiday, of up to two years, could be available.
If no security can be provided for a franchise purchase, then many entrepreneurs consider asset finance. Alternatively, one can apply for a Small Firms Loan Guarantee Scheme (contact the DTI for more information), although interest rates are usually higher than on a secured loan.
Franchisees should also consider seeking help from local authorities, who can provide soft loans and grants, or business support organisations and regional development authorities, who can provide grants. Business awards will also help the lucky few looking to set up a franchise.
Finally
Within the UK the franchise market is set to grow two-fold in the next four years. Keen entrepreneurs looking to get into business effectively and successfully should seriously consider the franchise ownership route as a comparatively easy method of building a business and securing preferential commercial funding. To find out more or to see franchise opportunities currently available please go to www.FranchiseSales.com or www.BusinessesForSale.com.
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