How a franchise works – pros and cons, costs and how to set one up for your business

Find out how a franchise works and all of the important points you need to know before setting one up for your own business.

Franchise might come across as an appealing option for your business because it can be a cost-effective and quick way to grow.

But is it right for you and your business? We’ve covered everything you need to know in this handy guide.

How does a franchise work?

The business owner (franchisor) creates the franchise and grants franchisees permission to use their established brand (think Subway, Costa) and run their own branch of the business with the same branding and products/services. The franchisee invests in the business, effectively ‘buying the rights’ to use company’s name, branding and product. Franchises can run on a premises or be home-based.

How to franchise your own business  

Establish whether your business is franchiseable

The four questions you should be asking yourself here are:

  • Can your business be easily replicated and transferred to different locations?
  • Can you teach somebody to do what you do within a reasonable timeframe?
  • Is your business profitable enough for a franchisee to be able to pay a monthly service management fee?
  • Is it an ethical business?

Find a franchise consultant

A franchise consultant can run a feasibility test on your business to find out whether you’re franchiseable.

Franchise consultants will then work with franchisors to help them franchise their business. They can offer differing support services – such as recruitment and mentoring support, to help make sure that their franchisors are successful.

“It’s not so easy to know which bits you can teach somebody to do,” Pip Wilkins, chief executive of the British Franchise Association (BFA), told Small Business. She added that during the feasibility test, the franchise consultant will assess if there is enough profit in the business for a franchisee to be able to run this and pay the management service fee. The management service fee is normally a percentage of turnover. Anything from around about 10 per cent is the average.

The chemistry you have with the franchise consultant will play a part in your success. “You’ve got to be able to gel with this person, because they’re going to work with you in a partnership approach. It’s someone that you might go for a beer with. You want to find somebody that matches, and truly wants to understand your business,” said Wilkins.

The BFA website accredits franchise consultants based on how they have helped and supported other franchisors in the past as well as looking at the documentation that they would assess and put together for different franchise businesses, plus references and testimonials of people that have used their services.

Write your business plan

Even though the structure is different to an independent, you still need a business plan, especially if you want to raise external funding. It may be up to you to guide your franchisees’ business plans too. Your business plan should include your expansion strategy along with all of the basic details supplied in a non-business plan, plus the franchise fee and the franchise package that will be used. It will need to be updated at least once a year once it’s created.

Protect your brand and intellectual property

Registering your trademark is fundamental to protecting your intellectual property. It costs £170 to register a trademark in one class and £50 for each additional class and can be done through the Government’s website.

Read more at How to protect your intellectual property as a scale-up business.

Sort out your essential documents

Get your operations manual together. “That is the Bible to the business, everything that you need to know on how to sell, how to market and how to do the finances [is in there],” said Wilkins.  

Then set out the franchise agreement. The franchise agreement is the document that protects the franchisors branded business system, and it clearly sets out the rights and obligations of both parties.

> See also: Top ten things you should know about the franchise agreement

Put together a support package for franchisees

The support of your franchisee(s) continues way after they start their territory. You’ll be expected to be on hand to help with everyday queries as the franchisee’s business grows. “I get so much help through [the Razzamataz] head office,” said Samantha Wingfield-Jones, franchisee of Razzamataz in Leighton Buzzard. “I was constantly emailing them and messaging and texting and finding out lots of information to make sure that I was doing everything correctly. They really started from scratch with me, introducing me to the company as well as what it meant to be a franchisee.”

Having everything in place made life much easier for Wingfield-Jones. “The website is already there for you, everything is already there for you. That’s one of the reasons why I wanted to go down the franchisee route, rather than setting up my own business.” For Razzamataz, all the uniform has to be the same and the documents sent out to the parents are the same, using the same email structure. The training process lasts about a month, according to Wingfield-Jones. It was two weeks of intensive course training and then various meetings.

Make sure you know how to support your franchisees as they go through the different stages of business. That could involved meeting them in person, having contact details for dedicated staff and links to useful articles with common questions from franchisees. It can also help to put them in touch with each other so that the newer franchisees can learn from the more seasoned ones.

Get in touch with the British Franchise Association

When your brand is ready to franchise, look at joining the British Franchise Association. Once franchisors are on board and have gone through that accreditation process, then the BFA gets franchisors together to share best practice. “Despite the fact they’re in very different sectors, and sometimes in competing businesses, all franchisors have the same sort of challenges: How do I recruit franchisees? How do I monitor them? How do I motivate them? What rewards programmes do I give? How do I really support them to be successful?” said Wilkins.

Find your franchisees

Your relationship with your franchisees is one of the most important elements of the business. Depending on your business, the screening process is likely to include an information day, application form, interview(s) and submitting financial information. During the process, you should also be paying attention to what kind of personalities work for the franchise you’re running as these play as big a part in the franchise’s success as the franchisee’s skills and training.

Advertise on your website and social media channels. It’ll also helps to optimise your SEO so that someone who’s considering starting a small business might find you and veer towards becoming a franchisee instead.

Don’t jump on and expect to take on loads of franchisees. It’s wise to take on a small handful while you test out the efficacy of your franchise offering.

Take dog sitting and dog boarding service, Barking Mad, as an example.

It started to franchise back in 2001. The first 18-24 months were spent running the pilot business to ascertain that it was viable, profitable, scalable and marketable. In 2016, Franchise Brands Plc, the multi-brand franchisor, bought Barking Mad. It’s now consistently in the Elite Franchise Top 50 franchise business in the UK. “It’s an initial investment that pays off long-term – as your network grows, your saleable asset grows!” said Rachel Stewart, managing director of Barking Mad.

Wilkins said that most franchisors will only take around about five people on in the first year, because you want to work with them to pilot, to test and to make sure they’re successful. And then you’ll see most franchisors taking on maybe a dozen franchisees every year. “So not everybody will be right for every franchise business. It’s knowing what you want and what your ideal franchisee persona is. Everyone will say they want someone that’s passionate, that’s systems-orientated, but is there a particular skill set you want to see somebody bring – or can you teach them how to do it? Recruitment is probably the biggest challenge for franchisors,” she added.

A franchisee contract will last between five and 20 years, depending on the business. To maintain a harmonious relationship, make sure franchisees know the terms and conditions specific to your franchise before they sign up. “Part of the contract that I signed, there was a bit that said that I wouldn’t be able to open my own school until X amount of years after I left the business,” said Wingfield-Jones.

Be clear as to what franchisee costs are. “Make sure that you know exactly what you’re paying for,” Wingfield-Jones advises fellow franchisees. “So when they tell you the figure of how much whatever the franchise is, how much individual thing costs, what you’re paying for and if you have to pay any extra after that. You pay for the franchise and then you find out later that you need to pay for the uniforms on top of that.”

Marketing your franchise

Once you’ve established yourself as a robust franchiseable business, it’s up to you to create a solid marketing plan to guide your franchisees. This should be part of your operations manual. The plan could include a brand overview, a mission statement, quality control and operations. To support the franchise’s marketing efforts, create branded backgrounds and templates as well as stock assets and software that they can use in their own marketing.

>See also: The importance of design and branding in franchising

It also helps to have some knowhow in local SEO, pay per click (PPC) advertising and email marketing. If you’re unfamiliar with these, a digital marketing agency will help. You might also find you want to hire a web designer for your website to give it that professional feel.

How much does a franchise cost?

As we’ve said, a franchise consultant is essential. “A franchise consultant will have a lifetime relationship with the franchisor to help them in the various stages of their development,” said Wilkins. How much you pay them will depend on how much ground work you’ve been able to lay yourself. Wilkins said it can cost anything between £10,000 and £50,000, depending on the size of your business and how much work the consultant has to do.

A standard franchise agreement will be anything between £3,000 and £6,000.

“Getting the business ready to start off with, you’re probably looking at an investment of £25,000 as this is what you need to get your document in place. However, if you’ve got a lot of that already – systemised operations manuals and intakes – then your fees would be reduced,” said Wilkins.

Why you should franchise a brand

Franchising is an easier and quicker route to growing your brand. The whole process of franchising a business will vary in length. “It can be done in a few months. Some it will take a year. It absolutely depends how much you’re doing yourself and how much you’re paying a consultant to do and how much resource you have,” said Wilkins. It’s pretty quick to set up territories once you’ve got the go foundations set. Wingfield-Jones had her first meeting with Razzamataz in January 2021, started training in February and opened in September that year.

Investing in a franchise is a lower-risk strategy for franchisees as they don’t have to start from scratch. What’s more, the failure rate is significantly lower than it is as an independent start-up. In fact, the failure percentage has been sitting at less than five per cent for over 20 years.   

You’ll get more loyalty from a franchisee than an employee as they’re more invested – literally and figuratively – in your business. “Over and over again, I would take franchising,” said Wingfield-Jones. “If I’m going to open another school, I will open another Razzamataz, which I’m actually in talks of doing now. Even though I would be able to open my own school with all the knowledge that I have now from opening my own franchise, it’s so much easier.”

Franchisees will also have the insider knowledge on the area they want to open a territory in. “Their local expertise helps them to grow their business in that territory far better than you could,” said Stewart. “Franchisees can also help to contribute to the success of the brand by coming up with new ideas and opportunities that you may not have identified or considered.”

These businesses are, for the most part, profitable. According to Franchise Direct, the UK franchise industry has a net worth of £17.2bn and creates 710,000 jobs annually. A huge 93 per cent of franchise businesses are profitable, with 60 per cent of those having a turnover of more than £250,000.

Pitfalls of franchising a business

The greatest downfall is that your business simply might not be suitable for franchising. “If you’re running something that is very unique to a particular town, say. A surf shop would work really well in Cornwall, but will it work in the city of Leicester?” said Wilkins.

It may not be suitable inasmuch as it’s too costly (in terms of time and money) for your business. “It’s not a solution for every brand and is only a suitable route if your business is already successful and up and running,” said Stewart. “There are high costs at the outset which will involve financial investment such as legal advice for franchise agreements, creative agencies for help with marketing materials and training companies to help develop your training programme. Recruitment of new franchisees is key, so you need attractive recruitment strategies and some good selling skills! It takes a lot of time and effort, so you need to be motivated to do it.”

As you don’t necessarily need qualifications to become a franchisee, you could be dealing with someone who is inexperienced in business, meaning you have to do a lot of hand-holding, particularly in the early days. They may also be more liable to making mistakes and potentially losing the company money or damaging the franchise’s reputation.

If you do decide to go for it, be prepared for your role to completely change once you go from business owner to franchisor. “Your job as the franchisor is going to be managing, recruiting, supporting and motivating groups of franchisees,” said Wilkins.

The British Franchise Association has a free online course on franchising a business as well as monthly education seminars.

Read more

Expansion through franchising

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Anna Jordan

Anna is Senior Reporter, covering topics affecting SMEs such as grant funding, managing employees and the day-to-day running of a business.

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