Becoming a franchisee

Franchising has many advantages, not least the chance to set up in business using a tried-and-tested formula. However, before you invest time and money, you need to review the options and make sure it’s the right choice for you.

This guide looks at:

• Becoming a franchisee
• Choosing the right franchise
• Is franchising right for you?
• Researching a franchise opportunity
• The pros and cons of franchising 
• Professional advice 
• Useful contacts

Becoming a franchisee

You will normally have to pay the franchisor for the right to set up in business under their brand name and in a specific location. Ongoing costs may include:

• A management service fee or royalty.
• A contribution to the advertising fund.
• A mark-up on goods supplied by the franchisor.
• An administration fee for specific services provided.

These will usually be a percentage of your sales, payable on a monthly basis.

In return, a good franchisor should offer you support and guidance to increase your chances of success – it’s in their best interests to do so. They can advise you on:

• How to supply the product or service.
• Accounting systems.
• Staff training and recruitment.
• Marketing.
• Ongoing research and development.

Choosing the right franchise

There are a number of business format franchises available. The one you choose will ultimately depend on your skills, knowledge and experience.

• An investment franchise requires you to invest a substantial sum of money and employ a management team to run the outlet on a day-to-day basis.
• An executive franchise allows you to work on your own to provide a professional service.
• A retail franchise gives you the right to run one or more retail outlets and employ your own staff. You can display and sell only those products or services approved by the franchisor.
• A distribution franchise involves you working from a depot owned and run by a franchisor, from which you deliver products approved by the franchisor.
• A depot franchise means you operate your own depot, serving a mixture of trade and retail customers.
• A job franchise is a one-person business that can be run from home.

Is franchising right for you?

Before you take on the responsibility of a franchise, consider the impact it will have on your life. Consider:

• Are you ready and able to put in long hours to make the business work?
• Do you have all the necessary skills or will you need to hire and/or acquire them?
• If you’re starting the business with other people, are they as dedicated as you?
• Is your family prepared for the impact on your home life?
• What are your long-term career goals?

Researching a franchise opportunity

The aim of researching a franchise opportunity is to ensure that it really is a tried-and-tested formula and one that is likely to succeed in your local area.

Step 1: Make sure you understand the industry sector involved.
Step 2: Identify the potential market for the product or service in your chosen location.
Step 3: Focus on three or four franchises and research them thoroughly.
Step 4: Meet with the franchisors you are interested in working with.

You will need to know:

• Costs and performance projections.
• The amount of capital investment and likely profitability.
• Audited accounts and trading figures.
• How long the company has been franchising the business for.
• The number of franchisees.
• The business formula and the support provided to deliver on it.
• Whether the franchise system has had any failures.

You should also obtain references from the franchisor’s bankers.

The pros and cons of franchising

Taking on a franchise can be a great business opportunity, but, before you commit your time and money, make sure you have also addressed the potential pitfalls.

The advantages

Franchising can offer a number of benefits, including:

• A proven business model.
• An established brand that should make it easier to attract customers.
• The experience of other franchisees in your network.
• Reduced costs due to the buying power of the franchise network as a whole.
• The opportunity to run your own business supported by your franchisor.

The disadvantages

You must follow the business franchise model created by the franchisor, which means there is little scope for individual initiatives. 

• You will be tied to the quality of goods supplied by the franchisor and may not be able to look at alternatives.
• You may be restricted in the pursuit of other business interests.
• Running a franchise can be a long-term commitment.
• If the franchisor or other franchisees get bad publicity, this may have an adverse effect on your business.
• When you sell the business, most franchisors have the right to approve the purchaser.

Professional advice

A franchise agreement is a binding legal contract. Before you sign, talk to a solicitor who can explain the full implications.

For advice on planning your business, discuss the details with an accountant. They can:

• Help you establish whether you are paying a fair price for an existing business.
• Review the franchisor’s projections and guide you on their feasibility.

Useful contacts

The Lloyds TSB Franchise Team has access to a comprehensive database of franchise systems in the UK and can offer advice on all aspects of franchising. Call them on 0117 943 3089, email franchising@lloydstsb.co.uk or write to: Lloyds TSB Franchise Team, Business Banking, Canons House, PO Box 112, Bristol BS99 7LB.

Our free publication, Supporting your franchise business, offers clear, unbiased guidance on whether franchising is the right route for you. We also provide a free franchising information pack. This includes a current industry magazine, free tickets to upcoming exhibitions and advice on planning your research. For a copy, call us free on 0800 0560 181.