10 Golden Rules

1. Research franchising as an option

Businesses of all shapes and sizes are turning to franchising in a bid to expand. But as popular as franchising is becoming, it is certainly not for everyone – and as in any realm of business, careful and thorough research is required before you set of down the franchising path. Alternatives to franchising which may better suit your particular business include licensing, distribution or agencies. The British Franchise Association runs seminars in various locations throughout the year which provide an excellent overview for potential franchisors. 

2. Organise a pilot operation

To build a franchise you should consider devoting at least one year piloting the basic idea. This will mean you can test your sales and marketing strategies, product or service delivery, pricing and staffing. Inevitably there will be some fine tuning of the business and lessons learned. A franchised business must have been thoroughly market tested and proved in practice to be successful and attractive to potential franchisee investors. Until a franchisor tests the market with their own money and resources and proves that the idea works in practice there is nothing to sell. Setting up a pilot operation in a different location to the main business will establish your business idea’s transferability.

3. Evaluate the results

How do you really know the pilot was a success? Before taking the next step it is important to evaluate the pilot operation. Any franchised business must be profitable enough for the franchisee to make a reasonable living as well as covering the ongoing costs to the franchisor. There are many low margin businesses which require a high volume of sales to make a worthwhile living and it can be difficult for this type of business to be successfully franchised. Don’t rush into franchising until you are fully satisfied that the business model and systems will lead to a sustainable and profitable business.

4. Seek professional advice

Franchise consultants play an important role in helping people assess whether franchising a business is feasible and how it can be structured. The advice available can be variable and it is crucial that you seek the guidance of an experienced consultant who is affiliated to the British Franchise Association and who follows their code of ethics. The brand is undoubtedly the most valuable asset of any franchise and it is vital that appropriate steps are taken to protect it. Trade marks, copyrights and patents are important considerations and legal advice should be taken before the business is franchised.

5. Arrange financial support

Developing a franchised business is not cheap and trying to finance the system purely from franchise sales and management service fees seldom succeeds. There are a lot of upfront costs in setting up a franchise and the franchisee training and support structure. It maybe possible to finance these costs from your own resources or you may need to consider bank finance or other sources of capital investment. Banks with specialist franchise departments, such as Lloyds TSB, are keen to support people looking at franchising their business and would also consider setting up a banking services and financial support package for prospective franchisees to assist them in their investment into the business.

6. Draw up key franchise documents

Before you start to recruit franchisees you’ll need to draw up essential documents including an operations manual, franchise agreement and prospectus. The operations manual provides the franchisee with detailed instructions that will guide them in running their business. The franchise agreement is a contract that sets out the legal obligations of the franchisor and franchisee. This should be drawn up by an experienced lawyer who understands franchising and who is preferably affiliated to the British Franchise Association. A full list of affiliate lawyers can be found on the BFA’s website www.thebfa.org as well as useful information about franchising a business. The franchise prospectus is your marketing tool for recruiting franchisees.

7. Establish management control and support systems

To ensure that the franchise operates smoothly you may need to reinforce your own management team to cover areas such as franchisee training and support, advertising, setting up reliable supply lines and collecting management service fees. It is important to closely monitor the performance of your franchisee network and to nip problems in the bud early on. Franchisees require ongoing support, however the level of support needed in their first few months of trading is likely to be significant and as the franchisee network grows more support staff will need to be recruited to manage demand. Maintaining your franchisees motivation is essential through ongoing support otherwise they will start asking ‘What do I get for my fees?’

8. Franchisee recruitment and selection

Spending money to attract prospective franchisees is unavoidable and can be quite costly. Taking a stand at a franchise exhibition and advertising in trade or the national press maybe necessary to stimulate sufficient interest in the business to recruit your first few franchisees. A targeted approach to franchisee recruitment is necessary to ensure that you generate interest from individuals with the required skills and attributes to succeed. Franchisors should not compromise their financial needs to recruit franchisees to recovery their costs in setting up the franchise with being selective to recruit high quality individuals from the outset. Recognising winners is not an easy task and even the best franchisors do not get it right every time. It is very difficult to manage under-performing franchisees and to terminate an agreement for a franchisee operating outside the terms of the contract, so be selective when recruiting franchisees.

9. Communicating with your franchisees

In the early stages when you only have a few franchisees communication is easier than it will be with a large franchisee network. You must maintain a professional, open and honest relationship with all of your franchisees and act upon issues of concern or disputes promptly to retain control over the network. Successful franchisors often involve their franchisees in the decision making process and set up formal channels such as advisory committees. Newsletters, On-line forums and Conferences are also useful ways to communicate to franchisees. Effective two way communication is essential especially when you want to introduce new products or services or changes to the system.

10. Consider British Franchise Association membership

The British Franchise Association promotes ethical franchising in the UK and franchisors have been checked and accredited fulfilling the membership criteria. Membership carries with it several benefits including regular franchisor forums, networking events, annual conference, technical bulletins, reduced exhibition rates and prospective franchisee referrals through the BFA’s website. Demonstrating a commitment to ethical franchising by becoming a member of the BFA can benefit the franchisor with their franchisee recruitment as prospective franchisees are often recommended to check that a franchisor is a member when they start their research into suitable opportunities.

For further information and a free guide about how to franchise your business contact the Lloyds TSB Franchise Unit on telephone number 0117 943 3089 or by e-mail franchising@lloydstsb.co.uk

Richard Holden
Head of Franchising
Lloyds TSB Bank PLC
Tel: 07802 324018
E-Mail: richard.j.holden@lloydstsb.co.uk
Web Site: www.lloydstsb.com/franchising