How to expand your business – could franchising be the route to follow?

Every business reaches a stage where its owners need to decide where to go next. In many cases, growth of your business is what you want to achieve, and franchising could be a useful avenue to explore. However, you do need to be sure it’s right for your business and that your business is right for franchising.

Franchising is the leasing of a business’s systems and know-how through a legal arrangement, allowing another individual or company (the franchisee) to use your trademarks, business systems and branding to build their own business. In return, you should receive an initial licence fee, and an ongoing payment, either by way of a royalty based on a percentage of the sales the franchisee achieves, or a mark-up on the products you supply to them.

Is your business suitable to be franchised?

• How easy is it to transfer your service, expertise or know-how to someone else?
• What is the competitive edge to your business that attracts customers and will it work in different places?
• Is your business generating sufficient gross profit margin to enable you, and your franchisees, to make money?
• Do you have, or can you acquire, the ability to provide solid ongoing support to your franchisees?
• Is your business successful already? Franchising is not a quick-fix solution to rescue a struggling enterprise.

You will also need to decide what kind of person you are looking for to become your first franchisee. What skills and experience will they need and do they have sufficient funds to invest in the business? It’s not a good idea to compromise on your first franchisee as you may damage your reputation and store up problems for the future.

Examples of types of business that have been franchised successfully range from fast food outlets, courier services and employment agencies to hotels and major retailers.

What’s in it for my business?

From what you’ve read, it might sound like you are giving a lot away, but where is the return for your business?

Here are some of the benefits:

• Motivated individuals
  An individual who buys a franchise will typically have made a personal investment in the venture which will drive them to maximise growth and profitability. This is something an employee is unlikely to do, no matter what incentives are on offer to them.
• Lower overheads
  There are costs involved in establishing a franchise system, and providing ongoing support, but most of the capital involved in establishing the individual outlets will be provided by the franchisee. So you will incur lower overheads than running the branch network yourself.
• Building the brand
  Usually you can achieve more rapid expansion through franchising than other means, subject to the availability of good-quality franchisees. Often a local franchisee will be more acceptable to the local community, which will help with the perception of your business as a national name with local roots. Franchising also means keeping control of the business without the day-to-day running of a network of branches.
• Ongoing revenue stream
  Over time, the ongoing royalty stream should develop to be a significant part of your revenue, or you will have increased the volume of products you sell to or through your franchised outlets, so generating additional margin for you.
• A route to international expansion
  Franchising is one route that can be used to develop your business overseas. By working with a local individual or business, you can benefit from their knowledge of the marketplace. Franchising your business in the UK is not necessarily a prerequisite to franchising overseas, but could be useful.

What could go wrong?

As with any business strategy, there are risks and disadvantages that you need to consider before making a decision. The key ones are:

• Can you afford it?
  You need to be realistic about the cost of establishing a franchise network and the length of time before you see a solid return on your investment. It is a long-term project, which requires a significant capital investment.
• How will you monitor, control and motivate your franchisees?
  Remember, each franchisee is a businessperson in their own right, and as such you do not have ‘hire and fire’ rights over them. You do need to be able to monitor what their business is achieving, and establish the reasons for any poor performance.
  The potential exists for one franchisee to give the whole network a bad name. Regular communication both ways is essential so you can avoid this.
  You also need to think about protecting your business from franchisees who may try to copy your business format and poach customers.
• Selecting franchisees for the wrong reasons
  It is not always easy to find franchisees that are highly motivated and have the potential to be successful. In the early stages of developing your system, you may be tempted to recruit a franchisee simply because they have the money, or you need to get someone on board quickly. Try not to compromise or you could damage the foundations of your franchise network.
• Conflict between you and your franchisees
  Faults can arise on either side of the relationship, but if you are spending all your energies resolving disputes, this is diverting your time from supporting your franchisees and running your business.
• Not delivering sufficient support
  You need your franchisees to be successful if you are going to benefit from the advantages of being a franchise system. Your franchisees will need time and investment to set up and manage, and this will be a learning experience for you.
  If you do not support them they will find it difficult to achieve their aims and your business may suffer as a result. You need to think about how you will provide this support, particularly if you have your own business to look after. Additional resources are likely to be necessary, and you may need to change your business culture to the supportive style necessary to be a successful franchisor.

What next?

Before deciding if franchising your business is the best way forward, you need to think carefully about the following:

• Are the goals you want to reach through franchising realistic?
• Are you prepared to allow a lender to take a share in your business if you need additional financial support to establish your franchise?
• Do you have the patience and tenacity to convert your business to franchising?
• Can you work with a wide range of different personalities?
• Are you willing to rely on franchisees to help grow your business?
• Will you be able to attract, recruit, train, manage and develop people who will respond to you and work with you to achieve your business goals?
• Are you ready for the cash and time costs involved in becoming a franchisor?

Seek professional advice

It’s essential that you take professional advice on setting up your franchise system. Particular attention should be paid to:

• the franchise agreement,
• terms and conditions,
• your legal obligations.

The British Franchise Association (BFA) has a number of affiliate members who have a wide range of franchising expertise. The Association also publishes helpful guides, which provide sound advice on how to franchise your business.

Useful contacts

We have a dedicated franchise team waiting to help you. To discuss any aspect of franchising, get in touch with us through your relationship manager. Alternatively, you can call the team 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.

We also provide information to help you with your franchising plans through our free publication, How to franchise your business. This has been put together in association with leading academics and professionals from the sector and offers clear, unbiased guidance on whether franchising is the right route for you.

If you decide to take your plans further, we will be happy to introduce you to experienced, professional advisors who can help you construct your franchise package. As your system develops, we can also discuss how to arrange the best types of finance for your franchisees.