However, the process of turning a business into a franchise begins long before the first advertisements are placed for potential franchisees. The people who run the business, whether they are main board directors of a Plc, or are virtually a one-man band, must first gain a full understanding of franchising, including its advantages and disadvantages, and its likely effect on their existing operation.

Only when fully armed with all the relevant information should a business make the decision to become a franchisor. This information includes hard elements, such as the financial aspects, and the softer, personal elements of the unique franchisor/franchisee relationship.

It is important to look very closely at the more personal elements because there is much more to building a successful franchise than the cold legal agreement and financial projections. Whilst advice on these matters from properly qualified professionals is, of course, essential it must be considered in tandem with issues concerning human resources and personal development. Make no mistake, if a business becomes a franchisor, personal development is the name of the game.

Whatever it is you do now, whether you are a restaurateur, printer, carpet cleaner, car tuner, fashion retailer, or deliverer of parcels, your business will change when you become a franchisor. It will then be all about recruiting, training, monitoring and motivating people who want to run a business under your name, using your system and operated to your standards.

They will expect leadership and direction; help when they want to expand, or when they meet the inevitable problems; on-going training and marketing support; and the product or service development to keep their business at the forefront of its marketplace. They will also expect you to create and maintain standards, both in your own business and throughout the network.

As this is what you will have promised them when they were considering joining you as a franchisee, you had better deliver it. Whatever happened, you may ask, to running a restaurant, printing, cleaning carpets, tuning cars, and so on?

If you are ready for this fundamental change, let us look at how we decide whether a business is franchiseable. We will examine firstly the mechanics and then the cultural implications.

Five-star franchising

Just about any type of business that operates as a branch network has been already franchised somewhere in the world.

In the U.S. for example, you can be born in a franchised maternity hospital, buy just about every product and service you will need in your lifetime from franchised outlets, then be seen off by a franchised undertaker, and finally buried in a franchised cemetery. However, not every business that has tried to franchise has been successful, and this is due to a number of reasons. To create a successful franchised network certain key elements need to be present. These are:-

• A business with a clearly defined image and system of operation, both at branch and head office levels.
• A business with a proven and successful format suitable for franchising and with a product or service that has stood, or will stand, the test of time.
• A business that is easily duplicated and easily learned
• A business that generates enough profits to support both the franchisor and the network of franchisees.
• A business which has, or can adapt to, a culture of mutual respect and support, and in which it is clear who is responsible for what, and how often, and how well, they will perform their obligations.

Image and system

The clearly defined image and system are what we call the intellectual property. This includes the trade name, the method of operation and the way in which the various elements of the business come together to make up the franchise formula. None of the elements of the package need to be individually secret. What matters is the way that the franchisor has combined them to create a successful business system.

Naturally, the trade mark or name has to be owned by the franchisor as he is licensing others to use it, but do not worry if your name is not yet well known. That will not stop franchisees from joining you. After all, even McDonald’s and Marks & Spencer started with only a single outlet.

All the elements of the package from the design and layout of the premises, through marketing campaigns, to accounting and administration will be detailed in the franchise manual, and it is the system in the manual that the franchisee agrees to operate.

Proven format

Pilot operations prove that the concept works and it is the evidence of their success that will convince your first franchisees that they should choose your franchise. Even if you have run company-owned branches for years, you must be aware that things will change when you franchise and you must be prepared to run pilot units at arm’s length.

This is just as important if you currently have company-owned outlets which you are planning to convert to franchises and even if the franchisee is going to be the existing branch manager. Something different will happen when it becomes a franchise, so it is wise to find out what that is before you take the plunge.

Pilot units should, of course, mirror the proposed franchised outlet as far as possible in terms of size, location, catchment area, population profile, staffing and so on. It is no use doing brilliant business from a site in London’s Leicester Square and then expecting a franchisee to be equally as successful in the high street in Leicester. Ideally, you should pilot the concept in two or three places for at least one complete trading cycle.

Pilot operations help to prove that what you thought on paper will work in practice. If it does not, then you still have the chance to adapt it before offering it to franchisees. Pilot units also give you the opportunity to write the manual from practical experience rather than theory.

Easily duplicated

Depending on how many franchisees you need to properly service your potential market, you will not want to have too much difficulty finding premises, or people to join you as franchisees.

If there are a limited number of sites suitable for your business, or it needs particularly unusual conditions (say a constant supply of fresh spring water) then it will not be easy to duplicate in sufficient numbers to support a network. Similarly, if it calls for special skills which few people possess, say something particularly artistic or creative then franchisees will not be able to learn how to do it. Every rule has its exceptions, but generally speaking the easier it is to duplicate and learn the business, the easier it will be to franchise it.

Profitable

The whole area of profits and fees is what we call structuring the franchise, and it is one in which you will need professional advice. Do not just look at a similar business and simply decided to charge the same franchise fees.

Whatever percentage they charge for their management services fee and advertising levy, or the size of the mark-up they charge on supplies, will probably not be appropriate for you, and it may not even be right for them either.

A franchising feasibility study has to consider many things. Having sorted out whether the business is proven, and easily duplicated and easily learned, it is then necessary to look at the structure. How big is the market? How much business can the proposed size of outlet handle? Consequently, how many franchisees will we need?

Having decided the number, what support staff and structure will you need to recruit and support a network of that size? Can the business make enough to satisfy the franchisee, and give the franchisor a profit?

These and many other considerations are best discussed with someone who has franchising experience as it is easy to overlook simple items when you have not had experience as a franchisor.

Naturally, it is sensible to work out the franchisee’s finances first. After all, if it does not work for the franchisee, it will never work for the franchisor. If things look good for the franchisee, then go on to work out your finances as a franchisor. Ideally, you should prepare a three-year profit-and-loss and cash-flow forecasts for both your franchisees and yourself. These can later be used as the basis for business plans, both for raising finance and the on-going monitoring of the business.

It is vital to get the structure right. This may seem obvious, but if one or other of the parties sees the other making all the money or, indeed, if neither of them is making enough, the relationship will come to an end.

The business, therefore, has to generate enough profit for the franchisee to make a decent living and pay back whatever he borrowed to start the business, and also make some more on top to re-invest in future improvements. Finally, the business must contribute enough to the franchisor for him to do the same, and in addition provide on-going support to all his franchisees.

So if your business has a low margin it is likely to be difficult to franchise successfully. It also really goes without saying that if your existing business is not making sufficient profits, franchising will not offer a way out of the problem. In such a situation, you must first put right whatever is wrong and then use franchising to build on your new success.

Franchising culture

None of the above will work if you do not get the relationship right and build a business based upon mutual trust, respect and support. To support franchisees, it is essential that franchisors and their support staff understand the unique relationship between the franchisor and franchisee.

Like all relationships, both parties in franchising have different motivations for becoming involved, and there are advantages and disadvantages on both sides.

For the franchisor, the benefits have mostly to do with using other people’s money to expand the network quicker than would otherwise be possible, whilst having less involvement in the day-to-hassle of running branches. The disadvantages are having to accept that the bulk of the profits from the branches will go to the franchisees, and learning how to deal effectively with people who are using your name and system, but who own their own businesses.

Some research says that it is a relationship which is becoming increasingly attractive to many businesses as proved by the fact that more franchisors come to the market every year. However, other research says that as many as two-thirds of franchisors drop out within the first 10 years.

There may be any number of reasons for firms dropping out, and they are not all due to failure or disappointment with the system, but it is likely that many of those who did withdraw did so because they had failed to understand the principles of good franchising practice before they started and were subsequently unable, or unwilling, to get to grips with the all-important question of the franchisor/ franchisee relationship.

As in many relationships, the major cause of failure is often due to the failure to communicate. It is the franchisor’s job to communicate what the network is trying to achieve; how it will be done; who is responsible for what; and by when it should be done. He should set an example by his own actions, and motivate and encourage franchisees to play their part in making the system successful. Not many networks fail because of the franchisees.

Assuming the franchisor has properly piloted and proven his system, he then needs to understand the motivation of franchisees for choosing this particular form of self-employment. Research tells us that at the top of the list comes reduced risk, marketing and training support, the fulfilment of a long-term desire to have their own business, and trading under an established name. At fifth place is the level of prospective income.

If you have recruited your franchisees, or sold your franchise, on the strength of the support you will provide, that support had better be there and it had better be good.

The first step towards mutual understanding is for each party to accept their individual and joint responsibilities.

Broadly speaking, the franchisor is responsible for marketing and developing the network and its products or services; assisting the franchisee to be profitable; and creating and maintaining standards. The franchisee is responsible for upholding the good name of the franchisor; operating in accordance with the agreement and manual; and maintaining and improving standards. Jointly, the responsibility of both parties is to build a network with a defined image and standards, under a recognised brand name.

Franchisees must be made to understand from the outset that they are being allowed the opportunity to operate a proven business system, using an established name. They are not opening a business in which they are free to do their own thing. The position of franchisees is, in fact, unique in the field of commercial relationships.

Franchisees are not employees, although they work to instructions and will hopefully have been recruited with as much, if not more, care. They are not customers, although they will have been, and continue to be, sold products or services. They are not, whatever the PR message may say, partners. Not legally, anyway.

They are, in fact, people who have trusted the promises made by the franchisor and his staff to the extent that they are prepared to devote probably their entire financial assets and most of the waking life to the pursuit of the promised opportunity. In return, as we have seen, they expect to receive the support that they have been promised in terms of marketing assistance, training, business planning, product development, and general business advice.

The franchisor’s support staff must realise that their role is to deliver what the franchise sales staff have promised. The recruiters for their part must be careful not to promise more than the franchisor is capable of delivering.

Becoming a franchisor

Franchising is about supporting franchisees in order that they can operate a proven system, and that support must be available to the very first franchisee who joins the network. It may not then be necessary to add to the initial support staff until there are 15 – 20 franchisees, but they all need to be there at the start. If the early franchisees are not supported, they will not succeed and it will then become increasingly difficult to sign up others.

Similarly, the operations manual and legal agreement must also be in place at the start, as must the systems for monitoring and managing the performance of franchisees. Franchising, therefore, requires considerable up-front investment by the franchisor before there is any income stream.

Agreement and manual

The agreement and manual are the documents which lay down the ground rules which govern the relationship. They are linked together through clauses in the agreement, and both need to be professionally prepared by recognised franchising experts.

There is a substantial cost to be met in preparing these documents, but over the life of the network this will appear negligible, and will usually be amortised from the fees of the first few franchisees. Both documents must be properly prepared. Cutting costs here will create problems down the line which will prove far more expensive than taking proper advice at the start.

Support staff

Having agreed that franchising has its particular skills, the staff involved in the franchise operation should either have, or quickly acquire, those skills. Basically there are two choices, either recruit experienced franchise managers from outside, or have your own staff trained in franchise management.

Formal training is available from the Franchise Training Centre via a series of modules covering marketing the franchise, recruiting franchisees, monitoring franchisee performance and motivating franchisees. Delegates who complete all modules can choose to go on to prepare a dissertation showing how what has been learned has been successfully transferred to the workplace. That results in the award of the diploma in franchise management, which in turn has been accredited by Middlesex University and provides academic credits towards an MA work based learning studies (franchising). Details are available at www.franchise-consultants.com

Prospective franchisees may soon be asking for evidence of such qualifications being held by the staff of the franchisor they are planning to join, and perhaps choosing to go with a different network which has more evidence of such a professional approach.

Whether there is just one manager doing it all, or a separate one for each of the support functions, staff need to be proficient at recruiting, training, monitoring and motivating franchisees, with all the technology, knowledge and inter-personal skills called for by such responsibilities.

Recruiting franchisees

A franchisor has two marketing responsibilities – one for continuing to market the product or service; the other for marketing the business opportunity and recruiting franchisees. These are not the same, and require different approaches. Presumably, if he has established the business, the franchisor already knows how to market his product or service.

The feasibility study and franchise plan will have established how many franchisees are needed and where they should be located. The manual will make it clear what is required of the franchisee in terms of duties, responsibilities, knowledge, skills and attitude.

The franchise marketing plan brings the two together, and the franchisor needs to choose people, or perhaps companies, who fit a pre-determined profile and have the ability to succeed. It usually proves disastrous to simply appoint anyone who has the money to buy the franchise and to locate them wherever there is a blank space on the map.

There are any number of ways of reaching potential franchisees, but no way that is right for every franchisor. Having established a clear idea of what a prospective franchisee looks like, it becomes easier to decide where to look for them.

Professional advice will help to ensure that the message is properly targeted, leads are handled effectively, and procedures are implemented to accept or reject applicants. The skills required by franchisee recruitment personnel include marketing, selling, business awareness, negotiation, and legal and financial understanding.

Business plans

Subject to the usual lending criteria, all the banks are keen to lend to franchisees of a properly-structured and proven franchise. Most franchisors present their opportunity to the franchise sections of the banks to clear the way for later applications by their prospects.

Naturally, the franchisee needs his own business plan, based on the experiences of other franchisees in the system and franchisors, or their approved third parties, can help with the preparation of these plans.

Agreeing business plans (both action plans and financial projections) with franchisees allows more sensible discussion of progress once the outlet is up and running, and most franchisors will insist on franchisees using a particular system of accounting. This can even be overseen by a professional adviser who monitors the performance of the entire network, rather than leaving it to in-house staff.

Once agreement to go ahead has been reached, the franchisor will commence his set-up and support procedure. This will vary according to the type of business and may include help with locating and acquiring a suitable site; converting and equipping premises or vehicles; preparing a marketing launch package; and providing initial stock.

Whatever the business, it will include training for the franchisee, and probably his staff, in every aspect of the business. This may be carried out either in classroom style, or hands-on at an existing unit, or in a mixture of the two.

Training is the very essence of franchising. It is how the franchisor passes on the proven format which he has developed and in which the franchisee has decided to invest. Having successfully completed initial training, franchisees should be able, or indeed required, to attend further training on a continuous basis.

On-going support

Franchisees expect and are entitled to continuing support in operating their business, whether this be concerned with new products or systems of operation, training, assistance with business development, encouragement during times of difficulty, and help in finding a purchaser for their business if they want to move on.

The franchisor must learn how to both motivate and monitor franchises – motivate to encourage them to do better, monitor them to ensure that they are maintaining standards, both for their own good and that of the network as a whole. There are numerous techniques to achieve these aims, and professional advisers can explain how to implement them.

Conclusion

A business can probably be franchised successfully if it is proven and successful in an established format; capable of being easily duplicated and easily learned; likely to be profitable for both franchisor and franchisees; and the management is prepared to accept considerable operational and cultural changes.

Franchising in the UK has come of age, and there is now a wealth of professional guidance available to prospective franchisors. To not take advantage of such advice may turn out to be not just remiss, but fatal to the businesses of the franchisor and his franchisees.

If it is operated properly, franchising is a superb way of building a business in which everybody wins – the franchisor, the franchisees, and through the franchisees’ personal commitment to the success of their local outlets, the customers.

1. How the franchisor obtains its income.

2. The pilot stage and related finance.

3. The development stage and the franchisor’s financial plan.

1. How the franchisor obtains his income

The franchisor derives its income from two principal sources – the initial franchise fee and on-going fees – and one of the most difficult problems at the planning stage is deciding at what level these fees should be pitched.

The franchisor has to gauge precisely what is a fair and reasonable financial balance between what it receives and what the franchisee retains. Such a balance is of paramount importance to achieving the ultimate objective of a partnership for profit.

The difficulty is in deciding just what is, and what is not, fair. Account has to be taken of the fact that the income to the franchisee needs to be at a level which is sufficient for it to live and pay its mortgage etc. and that the franchisor’s income is sufficient to cover its costs and make it a reasonable profit. The franchisor also needs to consider the fees in relation to other similar franchises. If they are more expensive this could put off a prospective franchisee.

In the final analysis, the franchise should be constructed to ensure that the franchisor receives an acceptable return on the capital employed, and the franchisee equally should be able to obtain a return on its investment, comparable with opportunities available elsewhere.

The fee structure which is imposed within any franchise should not be negotiable by the different franchisees. All of them must be recruited on the same basis and the franchisor must be completely open in explaining to the franchisee its exact sources of income. Failure to do so can only lead to subsequent suspicion and discontent.

Initial fees

In essence, the initial fee should take into account the cost of constructing the franchise concept, both initially and on a continuing basis. The amount should be apportioned among the number of franchisees which it is anticipated will be recruited over a start-up period of, say, 3-5 years.

Certainly, there should be no appreciable profit for the franchisor included in this initial fee, and the fee will also need to stand comparison with other franchise opportunities on the market.

In the course of time, it may be possible to increase the initial fee by modest proportions to reflect the growing strength and success of the franchise, and it would certainly be prudent to review the figure from time-to-time to ensure that it is increased in line with inflation. The franchisor, however, should remember that its prime task is to help its franchisees into business effectively, whilst keeping the investment level as modest as possible.

The franchisor must realise that it will be faced with expenses in the early stages which its income from the franchise will not cover at that time.

However, its income should grow faster than its expenses. For example, the number of staff required to cope with 15 franchisees may be the same number as that required to service as many as 35 and each franchisee will represent additional income to the franchisor. This factor should be reflected in the development plan.

On-going fees

It would be very unusual for the initial fee to be the only fee income which the franchisor will ever receive, otherwise it would have no capacity to finance the continuing relationship. On-going income is provided by the continuing franchise fee.

It is normal for the franchisor to charge a straight percentage fee on the gross sales achieved by its franchisees (known as the management services fee), but in some cases, particularly where trade marked goods are involved, the franchise agreement compels the franchisee to buy goods from the franchisor, or a nominated supplier of the franchisor.

Where there is a mark-up on goods, the franchisor is, in fact, receiving its franchise service fee by taking a larger gross profit on the goods. If a nominated supplier is used, the franchisor can obtain its income in the form of commission from the supplier.

In practice, from the financial point of view, the level of management services fee taken from the franchisee usually falls within the range of 25 – 35 per cent of the franchisee’s projected net profit figures, excluding service fees, personal drawings, tax, depreciation and finance charges. However, this is not a hard and fast rule.

With franchising we are not dealing with a precise science, nor a system with rigid guidelines. The key consideration in assessing the franchisor’s on-going income is the bottom-line figure available to the franchisee after the management services fee has been paid, or the mark-up applied to the goods purchased.

Whatever income method is adopted and, generally speaking the turnover based level is the most common, the franchisor should tell the franchisee clearly how it obtains its income. It should correctly calculate all initial and on-going fees and be able to demonstrate that it is capable of providing its franchisees with the level of support, guidance and expertise which will enable the development plans to be achieved.

Other sources of income

In theory, the franchisor does have the opportunity of deriving extra income from other sources, including the items in the start-up package which might include the lease of premises and/or equipment, and the sale of equipment.

In most cases, these items or services will be passed on at cost with the addition of modest handling charges or administrative costs which are perfectly legitimate. In those relatively exceptional cases where the franchisor is supplementing, or substituting income from other sources for traditional fee income, then it is essential that it is completely overt with its franchisees from the outset.

Fixed and minimum fees

In some instances, a franchisor may wish to impose a fixed level of management services fee. Where that fee is pitched at a set level, regardless of the turnover or the level of maturity of the business, then problems could arise.

Firstly, they may be caused by the franchisee having to struggle to meet the fixed fee in the early days when his turnover is relatively low and secondly, the franchisor will find that it is unable to benefit from the increased business as the franchise develops. In this latter case, the level of support the franchisor is able to give to the franchisee may suffer. On the other hand, with a cash business this method could be the only way of ensuring it receives what is due, as a franchisee may under declare its turnover and the franchisor will be unaware.

2. Pilot stage and related finance

New franchises principally come from two sources. Firstly, there are existing companies, which wish to expand. This may include overseas businesses that have decided to franchise in the UK. Secondly, there are individuals, partnerships or companies with an idea which, when proved, will be capable of being franchised.

The former is the more common and perhaps more likely to succeed. Either way, there are two principal stages in the franchise expansion programme – firstly, the pilot operation; and secondly, the development process. In this section we shall look at the pilot operation.

The main initial task of the franchisor is to develop a tried and tested formula which will be capable of creating a successful business for the franchisees. As I have indicated earlier, whilst the franchisor will derive some income from selling franchises, it will normally only be sufficient to repay it for setting-up the early franchisees in business.

The break-even performance and in time return on investment, will only come from successful franchisees contributing their on-going management services fee or, in the less common situation, the mark-up on goods.

To develop an idea into a franchise, it is essential, therefore, to prove that it can create a successful business and it is the responsibility of the potential franchisor to invest its own money to provide that proof to everyone’s satisfaction.

An existing company may need to open a new outlet or outlets to re-prove the system or, alternatively, designate an existing branch for this purpose.

The new company will need to start from scratch. It is essential that the pilot operation is a typical outlet as to size, market area, cost, etc. and one which can be cloned in due course when the franchise is ready to be launched.

Therefore, it is difficult to give guidance on the costs of a pilot operation as it will depend on how much expenditure is necessary to maximise the performance of the outlet to make it capable of being franchised. If the company has a sound existing business which needs little in the way of adaption, the costs can be relatively modest. Where the adaption required is greater, or much experimentation is needed, the costs will be higher, especially if a number of pilot operations have to be run.

In the case of the established business which is planning to launch into franchising, finance for the pilot operation should not create too many problems for the bank as it falls within the normal scope of business – financing a business with defined assets and a defined source of income.

In the case of a new venture, financial support is not so easy to obtain and the banks will take a more cautious attitude to both the size of the cash contribution and the security cover required.

The financial requirements of the pilot operation are often below the threshold levels of venture capitalists, but if conventional bank finance is not available, a possible alternative is to take advantage of the Government-backed Small Firms Loan Guarantee Scheme.

Whoever is providing the finance will, of course, need convincing that the product or service will be successful in the marketplace and over a long term.

What is it then that the pilot operation should set out to achieve?

Firstly, it must prove that the product or service will satisfy a continuing consumer demand. It must also demonstrate that the technology and expertise necessary to run the business can be transferred to a franchisee, who has little or no experience of the business. In financial terms, it must show that a typical outlet is capable of providing a return of the investment within a reasonable term, say 2 – 4 years, depending upon the basis of the calculation.

If such a financial performance cannot be achieved, the business opportunity will be unlikely to attract investors and will not be competitive with other such opportunities.

The franchisor from its experience with the pilot operation should be able to give a guide to would-be franchisees of the profit and loss profile of the business. Usually, Year 2 would show a possible growth pattern, based on the business becoming established in its particular locality.

3. Development stage and the franchisor’s financial plan

Having established and financed the concept and proven its viability, the next stage is the development plan leading to a possible need for franchisor funding.

From a financial point of view, the pilot operation and the on-going plan are two distinct and separate considerations. It may be necessary in some cases to have an early indication that finance will be forthcoming for the second stage, particularly if the business is totally dependent upon franchising for its progress.

Initial costs of a franchise

At this point it is worth looking at the costs which may be incurred by a franchisor in the initial stages, excluding the costs of the pilot unit/s and any additional staff required. Initial costs can generally be regarded as those costs incurred up to the point where the first franchisee is recruited.

The following illustration gives some indication of the order and nature of expenses which will be involved.

Professional fees, accountant, consultant, solicitor, agreements/ trade marks, BFA membership, etc. – £20,000

Training and operations manuals, research, compiling, printing – £15,000

Corporate identity, logos and prospectus (design/printing) – £10,000

Advertising for initial franchisees, interviewing costs, training (continuing at approximately £2,000 per franchisee per year) – £5,000

Total – £50,000

Of course, these costs vary widely depending on some key factors which include:

1. the type of business,
2. the degree of conversion required from the existing concept,
3. the availability of the time, resources and skills within the company which is franchising, and
4. the proposed approach to franchising.
5. franchisee investment level.

It is essential, however, that time and resources allocated by the franchisor to the franchise development should be included in these costings.

The latest NatWest/BFA franchise survey found that the average investment by a new franchisor in establishing its franchise was £170,000. However, there was a range in those questioned from £25,000 to over £250,000.

Franchisor’s financial plan

Just as it is difficult to generalise on the scale of the financial costs of a franchisor, it is equally difficult to give an accurate model of a ‘typical’ franchisor’s financial development plan.

The principal features will be:

• A large initial investment will be required which could result in a funding requirement in the region of £100,000. This could be even higher in larger-type franchises with the need for large-scale adaptation.
• A cumulative break-even position may not be achieved until Year 4 of trading.
• After break-even, the franchisor should be richly rewarded from the scale of its operations, and its return on capital is high.

Sources of finance

When it comes to finance for the development of a franchise, there are two principal avenues to consider.

Firstly, there is bank finance. Because the bank is being asked to finance a business idea as opposed to the actual acquisition of assets, it will need to look critically at the level of security cover and the viability of the projections which form the basis of the plan.

A company with a profitable mainstream business which is generating profits from a core business is at an advantage here and loan facilities over a period should be available, together with a measure of working capital as is necessary.

Secondly, there may be a case for looking for some element of equity finance if the proprietors are not able to raise the finance needed, or to provide a sufficient proportion of the risk capital themselves. It should be noted that such a source of finance may involve the provider taking a proportion of the equity, or an option to subscribe to the equity.

When seeking finance, the franchisor should support its financial development plan with very detailed budgets and cash flow forecasts. A bank would normally expect to see, as well as profit and loss projections, a three-year cash flow projection with the first year at least on a monthly detailed basis and Years 2 and 3 on, say, a quarterly basis.

The franchisor makes its profits from the eventual scale of its operation and it may be some time before it has sufficient franchisees of the right quality to produce these profits. Premises may be involved and finding suitable sites may be a problem. Invariably, in such cases the take-up rate by franchisees is not achieved within the expected time scale.

Often a subsidiary or separate company is formed to run the franchise and very often the company-owned outlets will be asked to pay an artificial service fee so that correct comparisons can be drawn between the trade and performance of company-owned and franchised outlets.

Summary

In summary, a franchisor should firstly be certain that it has a business which is capable of being franchised successfully. In view of the costs and time involved in establishing a franchising concept, it should take time to establish it on a proper basis and carefully prepare a business plan, ensuring that it is within the financial and managerial capabilities of the business. The pay-back will not be immediate, but when it comes the business can be extremely profitable.

If the prospective franchisor is then able to demonstrate its professionalism and the overall viability of the concept, it is likely to find the banks, particularly those with a long-term commitment to franchising, agreeably responsive to a request for financial support.

It is too simplistic to believe that those who say they want to run their own business have the confidence and ability to do so, or that you should recruit those who you find pleasant to talk to, or have (or can raise) the money to buy the franchise and set up their business.

The franchisee/franchisor relationship is long term with ramifications for both parties if things go wrong to say nothing of the effect such situations will have on your existing business.

Franchisee profile

Bearing this in mind how do we develop a franchisee profile? It is in two parts, the first being knowledge and experience. Whilst it is true that people take a franchise in the expectation that the franchisor will provide training, there are some basic skills that need to be present.

If yours is a management-type franchise then obviously some management experience is desirable which could involve staff motivation, operational experience, organisational abilities, customer relations and so on. If it is a van operation providing a service it may be that the prospective franchisee should have manual dexterity and be accustomed to working outside in all weather, etc. As far as salesmanship is concerned franchisees with sales orientation can be taught new selling techniques, but it is often difficult to teach people with no sales experience to be successful whilst also running their business. Above all, the candidate must have the financial capability to make the investment as without it both parties are wasting their time.

Having determined the skills required, construct a skills grid with the skills listed down the left-hand side and columns marked 1-5 along the top so you can weight each skill. This grid should be used when looking at application forms to select candidates for interview and also as an aide memoir when asking questions during the interview.

Just because someone has the necessary skills it doesn’t mean that they will make a success of a franchise.

Personal traits

The second part of the profile is more difficult to ascertain and this relates to personal characteristics. These are nothing to do with intelligence, education or knowledge, but are part of a person’s make-up.

It is not simply a subjective view of a person’s make-up and it needs to be determined by someone trained to do so. It is best done by a psychometric test designed to show up basic personality traits.

In the context of franchising, as opposed to testing for psychological investigation, the objective is primarily to give guidance as to whether the applicant would be a suitable type of person to operate under a franchise arrangement. It follows, therefore, that a test devised specifically for this purpose is preferable to a purely subjective judgment. Some examples are coping under pressure, sales orientation, working within a framework, and whether the person is a loner or team player.

The procedure is simple and straight forward. The candidate is asked to complete a questionnaire of “mostly-true, or mostly-false” questions. This takes no more than 20 minutes. The answers are then sent off for assessment. The whole procedure is under the control of the franchisor and no one outside knows the identity of the candidate.

The same people you have identified as successful in your own experience should be tested as this will then give you the overall identikit picture, and between your own assessment and the psychometric test, you will be in a very much better position to match the right people to your franchise opportunity.

You have now completed one of the most important steps in your recruitment strategy and can begin to prepare to recruit, safe in the knowledge that you know who you are targeting.

Selecting the media

Now you know the profile of who you are looking for the next question is where and how you should advertise your franchise. The sector has its own magazines, and the national press regularly run franchise sections with special franchise features.

There is also the regional press in larger towns and there may be trade/hobby magazines serving the market your franchise falls into and they may be read by the type of people you are hoping to attract.

It is best to contact the papers and franchise magazines to request a media pack which will provide data on the publication and its readership, such as social class, cost, coverage and circulation figures – all important factors that should influence your decision to advertise with them.

The latest media that many franchisors have found to be successful is the internet. If you have your own site you should include details of your franchise opportunity on the site together with an on-line application. In addition, there are some good sites that specialise in franchises on offer and for a monthly fee will advertise your franchise, along with others.

The three leading British Franchise Association (BFA) supported franchise exhibitions are in London, Birmingham and Manchester and are organised by the Venture Marketing Group. You will need to be accredited by the BFA to exhibit. As the cost of the stand space, the display, and the staff to man your stand could well take a hefty chunk from your media budget you will need to plan every detail carefully.

Many thousands of potential franchisees attend these exhibitions and you will be on show with many other franchise systems so the appearance of your stand and the presentation of your franchise opportunity have to be spot on.

Advertisements

The recruitment of franchisees is now a highly competitive business and thanks to the efforts of the BFA, the banks, and franchise sites, such as this one, potential franchisees are better informed than ever before.

Your advertisement must attract attention and avoid hype. When someone sees it they will within five seconds decide whether to read on, or move to a competitor. It is obviously important to grab their attention immediately so a well written advertisement should promote the unique selling points of your franchise clearly and simply. Avoid long sentences and very small print.

A potential franchisee wants to know in a nutshell what the business is, what support is available, the cost, and the likely income. Within those broad essentials are your major selling points, i.e. a long-established business, new product or service etc, and if appropriate BFA membership.

Media budget

You are now armed with the type of person you are looking for. You know the most suitable type of media and you have a well written advertisement.

Franchisee recruitment is a long-term process and short term success is a rarity – it takes time and money. Recruitment is a numbers game, as on average for every 100 responses 10 will be suitable for interview from which, according to the national average, you will recruit one or two franchisees. It, therefore, follows that providing your recruitment efforts are well targeted, the more you spend, the more enquiries and the higher the rate of recruitment you will achieve.

Keeping these numbers in mind the media budget should be planned for 12 months with reviews every month to see which media is producing the enquiries, the quality of those applicants, and the conversion rate.

We should at this point include PR, which as a rule generates more enquiries than straight advertising, but it is difficult to get material published unless it is written by a professional and it often has to be linked to advertisements.

Selection process

The selection process begins the minute an applicant call or writes for information and continues until the commencement of training. A structured selection process will build the applicants confidence in the franchise as it is a reflection of how the franchisor runs the business. Each stage of the process is important as you don’t want to waste time interviewing unsuitable candidates, or people who are just browsing. At some stage during the process a deposit should be sought to confirm the applicant’s commitment. There should be standard letters for situations such as sending out response packs, confidentiality agreements, and forwarding the franchise agreement to the applicant’s solicitor.

Interview

More than one interview is necessary and the applicant’s partner/spouse should always be invited as having the support of the family is essential, especially in the early days whilst the business is being established.

At the first interview, a common mistake is to talk about the franchise for 90 per cent of the time and ask questions of the applicant for 10 per cent when it should be the other way round. The first interview should last no longer than two hours. It often helps if you have a slide presentation on a laptop to show the key points of the franchise. At the end of it, judging from the response to your presentation, your questions, and the quality of the questions you are asked, you should have a fair idea of whether the application should be pursued further.

If both parties decide to proceed, it is at the second interview that the psychometric test should be given and, if satisfactory, hopefully both parties should then be ready to agree to enter into the franchise contract.

If you have been as careful as we have suggested, planned your recruitment strategy properly, dotted the ‘i’s and crossed the ‘t’s you should generally end up with a good franchisee, having avoided selling a dream and getting a nightmare in return.

It should be remembered that the franchisor’s income does not go straight into its coffers as profit. The initial franchise fee it charges to the franchisee will be the mechanism by which it recovers its own franchise development costs and the specific costs relating to setting-up each franchisee in business (of which, more later). Of the on-going franchise fees, only a small proportion may be profit with the rest going to pay for the support and back-up that the franchisor is contractually obliged to provide to its franchisees.

Firstly, we will examine the situation from the perspective of the franchisor. The setting-up of a franchised network, perhaps involving the conversion of a company-owned chain, can be a complex, time-consuming and costly business for the franchisor at least in the short term.

At the outset, a prospective franchisor will have to cover the costs associated with putting all the necessary elements of the franchise in place. This might include advice from franchise consultants, franchise-proficient lawyers, accountants, trademark agents, and territory mapping specialists, etc. The components will include the drafting of the franchise agreement, the operating manual, brochures, prospectus and other promotional materials. Other costs may include the recruitment of specialist staff to oversee the franchise network and perhaps additional premises from which they can operate.

Having created the franchise structure, the franchisor will then incur further costs in promoting its offering and advertising for franchisees. This may involve a mix of media, including franchise exhibitions, websites, and advertising in newspapers and magazines. Having generated the enquiries, the franchisor will then have the costly task (both in terms of time and resources) of sifting through the responses. This will usually be through a highly objective recruitment process involving the assessment of the original application, several interviews and, in some cases, credit checks and personality profiling.

It is only at the end of this process that the franchisor will offer franchises to the candidates who possess the right qualities and the right amount of capital. The recruitment stage can be the most expensive of the whole process whilst the fledgling franchisor tries to discover the most effective mix of media and the right budget required to generate the number of candidates it needs to grow its network at the desired rate.

Having selected its candidates, the franchisor will then need to devote a considerable amount of time and effort to ensure that they are adequately trained and prepared to successfully launch and operate their businesses. The franchisor will have to ensure that it has the resources within its organisation to handle the throughput and that its staff are skilled in both the day-to-day operations of the proposed franchise business and their ability to train the candidates.

In reality, it will probably be some time before the franchisor’s income, both in terms of initial franchise fees and on-going fees, reaches a level that provides it with a profit. Hence setting-up a franchised network must always be seen as a medium to long-term strategy. Similarly, whilst the benefits of franchising from a prospective franchisor’s standpoint are said to include the ability to expand its business using other people’s capital (i.e. the franchisees) it is clear that a franchised network cannot be established without (at least initially) some reasonably significant levels of capital investment.

Initial fee

The selection and recruitment of a new franchisee will hopefully be just the beginning of a long-term commercial relationship. As such, the franchisor should not view the initial fee as a mechanism for making large profits. The franchisor should, instead, aim to make the bulk of its income over a longer period from the income and profits generated by its franchisees. The initial fee should, therefore, be viewed as a joining, or entrance fee, that at the same time enables the franchisor to recover a proportion of its development costs, and the specific costs, in terms of the training and recruitment, of setting-up each specific franchisee in business.

The initial fee is usually paid as a lump sum at the time the franchise agreement is signed and before the franchisee has received training, a copy of the operations manual, or commenced trading. Whilst the size of the fee is intended to recover the franchisor’s costs, it makes sense to keep the fee at as low a level as possible as the number of prospective franchisees, who can afford a fee of, say, £30,000 will always be smaller than those who can afford £10,000. A franchisor must take care that it does not price itself out of the recruitment market.

Knowing at what level to set the initial fee will be a problem for a franchisor in its early days. There is no standard pattern, although there may be an observed similarity between the fees charged by different franchisors in the same line of business. Whilst this is perhaps only to be expected, given that these companies probably had similar development costs, this may also be evidence of benchmarking with franchisors not wishing to place themselves at a commercial disadvantage by charging a higher fee than their competitors.

A further consideration for keeping the initial fee at a low level, often over-looked by overseas franchisors looking to enter the UK marketplace, is that having paid a large up-front fee a franchisee may be left with insufficient capital to invest in the business to make it successful. In such circumstances, the franchisor does run the risk of handicapping the franchisee’s business from day one, whereas if it had charged a lower fee it would be more likely to have the franchisee in the position to generate greater levels of profit and over the longer term to pay more in on-going fees.

In the past commentators have suggested that the initial fee element should be set in the region of 10 per cent of the total start-up costs of the franchisee’s business. Such a relationship is less relevant in the modern market, given the boom in the number of relatively low-cost service industry franchises in which the franchise fee may be the largest single cost element.

Initial franchise fees generally remain modest in the UK and it is standard practice to have fees that don’t vary according to the territory or location. It is quite a common temptation for a new franchisor to want to charge a higher fee for a territory with a perceived greater-than-average opportunity. Such a temptation should, however, be avoided in favour of a level playing field. There will be time enough for the franchisor to earn from its stronger territories through its on-going franchise fees or product markups.

One situation where the initial fee may be reduced or waived is where, in the absence of a fully-piloted franchise concept, the franchisor offers a special deal to the first of its test or development franchisees. Such franchisees are accepting a higher level of risk and may find the franchise system changing as any wrinkles are ironed out. This arrangement should not over-ride the principle that the franchise agreement should be the same for all. In such cases, any discounts or variation of terms should be covered by a side letter.

When a franchise network has reached maturity, and its initial development costs have been met from the up-front fees paid by the early franchisees, then the franchisor may start to make significant profits from franchise sales. Indeed, after a franchisor’s brand has developed and gained market strength there may be a case for increasing the franchise fee to reflect such progress. Market forces may also come into play in situations where the demand for the franchise exceeds the number of territories that are available. This can lead to a progressive elevation in the franchise price. Nevertheless, the fee should never be elevated to a level that deters buyers. The franchisee must always feel that he or she is getting good value for money.

On occasions, a franchisor may have asked the prospective franchisee to pay a deposit, which may or may not be refundable in full or in part. Such a deposit may be sought if the franchisor will be spending time and resources on the prospective franchisee’s behalf in perhaps helping it to investigate the viability of an area or territory, or find suitable premises.

A positive factor for a franchisor is that whilst its early overheads may be high its income should from that point grow faster than its expenses. The staff initially required to service five franchisees may also be sufficient to service, say, 15. Each new franchisee coming on board represents additional income and as the turnover of each rises the franchisor’s income will grow proportionally.

A franchisee can generally be regarded as a long-term contracted source of income to the franchisor. A franchisee having perhaps invested heavily in its new venture (and therefore having his or her neck firmly on the block) will normally be more highly motivated than an equivalent company employee. As a result, they can generally be counted on to direct their efforts towards continually boosting their turnover and thereby the income of the franchisor.

Another issue to consider is the supply of initial equipment and any other items that are necessary for the running of the franchisee’s business. Often the franchisor will supply such items or arrange their supply. In this situation it is considered unethical for the franchisor to regard the supply function as a source of hidden profit. The franchisor will nearly always be found out, and the whole relationship and trust between the franchisee and franchisor will be jeopardised.

Often a franchisor may achieve discounts or economies of scale through its bulk purchasing arrangements and, unless the franchise is based on mark-ups, these discounts should be passed on to the franchisees. It is generally considered acceptable for the franchisor to retain a modest margin or handling fee for buying in supplies, but the underlying ethos must always be to give the franchisees the best possible value for money.

Similarly retained commissions, retrocessions, or other kick-backs from suppliers should be avoided and certainly not hidden. It is better to declare these amounts and demonstrate how they are used for the promotion of the business.

In situations where the franchisor provides the franchisee with a turnkey business and equips the outlets ready to trade similar principles should apply. The franchisor should make no hidden profits and be prepared to provide full details of the costs it has incurred including, where appropriate, invoices from suppliers.

Initial and on-going support

As stated earlier, the initial franchise fee should be regarded as covering the cost of the franchisee’s recruitment, selection and training. The on-going fees, whether received as a percentage of turnover or a mark-up on goods supplied by the franchisor, should be partially utilised to fund the cost of providing the essential back-up and support to the franchisee’s business.

Initial practical guidance and support might include advice on finding, acquiring, designing and fitting out suitable premises. The franchisor might also provide guidance on the equipment required and where to obtain it. There might also be advice on training, business development, generating sales leads, marketing and advertising.

Training is of particular importance as the whole ethos of franchising is that a newcomer to the business will be operationally trained to run its business in accordance with the franchisor’s proven operating system and methods. The content and duration of the training programme varies from franchisor to franchisor, although it may involve on-the-job training in an existing outlet, or in the field. It could include classroom modules, sales training, learning how to use equipment or processes, and familiarity with or preparing the products. The training must enable the franchisee, in a relatively short period of time, to become expert in all areas of the business prior to opening.

The franchisee may also have to learn how to operate a small business, perhaps for the first time in their life. They may, therefore, need to be instructed as to how to keep accounting records, how to manage cash and stock, and aspects of recruiting, managing, training and coaching staff, as well as the various legal and fiscal requirements and obligations associated with running a business.

The franchisor may be expected and, indeed, contractually obligated, to provide certain continuing support services which, depending on the type of business, may include:-

• Regular visits by the franchisor’s field support staff to assist in correcting, or preventing, problems and help the franchisee to develop their business.
• Liaison with the franchisor and other franchisees to exchange ideas and experiences.
• Continuing product research and development, including investigation of the marketability and compatibility of new products/services with the existing business.
• Training and re-training facilities for the franchisee and perhaps their staff.
• Market research.
• National and local advertising and promotions.
• Bulk purchasing opportunities.
• Management and accounting advice.
• The organisation of national conferences and regional meetings, and the publication of newsletters and other literature.

A franchise should be viewed as a long-term relationship in which the initial concept is being continually refined and developed over time with input coming from both the franchisor and the franchisees.

On-going fees

In return for its on-going support and as its primary source of profit, the franchisor will charge the franchisee an on-going fee. The most common method of doing this is to charge a management services fee which will be expressed as a percentage of the franchisee’s turnover. Alternatively, where the franchisor provides the products or materials that the franchisee sells or uses, it may take its return through mark-ups. Naturally, there are pros and cons with both methods.

Where the products can only be sourced through the franchisor and are competitively priced as a result of the franchisor achieving economies of scale then the franchisee may be quite happy with mark-ups. However, if the franchisee feels that the franchisor is making an excessive margin on the goods, or it discovers that the same or similar goods can be obtained more cheaply elsewhere, problems could easily arise.

Where a franchise involves a requirement or obligation to buy products from the franchisor – known as a product-tie – there could be competition law ramifications. Such product ties can, in certain circumstances, be deemed anti-competitive and so franchisors operating such arrangements will have normally made provision for them in their franchise agreements. The competition authorities will generally uphold product ties within a franchise environment, provided that the franchise agreement has a term, or break-clause, of no longer than five years.

However, the majority of franchisors derive their income through a management services fee, calculated as a percentage of turnover. To establish the rate of these fees, which again should be constant across the network, the franchisor needs to assess the financial performance of its pilot outlets in relation to the anticipated turnover, gross profit and costs of the franchised units. This gives rise to another careful balancing act. If the rate is set too high, the franchisees may well resent what they consider are excessive fees. Such a situation has led to disquiet in many franchise networks. On the other hand, if the franchisor sets the rate too low it could end up making insufficient profits and could lack the funds needed to adequately support its franchisees. It is of key importance that the fees are set at such a level as to allow the franchisor to afford to deliver the level of support which the franchisees need, and indeed deserve, without negatively impacting upon the franchisees’ operational profitability.

Based on the performance data available, or the performance expectations, for both company-owned and franchised outlets, the on-going fee should be set at a level that is long-term viable for both parties so that each may achieve a reasonable profit and return on capital. In setting the fee, it is also important to consider the percentage charged by other franchisors in the same sector. Unfortunately, would-be franchisees often simply look at the headline percentage figure and look no further to find out what this translates into in actual profit or the level of support services.

The range of management services fees that are charged varies enormously between different types of businesses, depending on their relative turnovers, profitability and margins. Convenience stores, for example, may have on-going fees of only a few percent because they operate with low margins, but high turnovers. Service businesses on the other hand, with wider margins, may be at the other end of the scale with fees as high as 25 per cent or more as they have very low direct costs.

The fee should, of course, also reflect the level and range of services provided by the franchisor. It should also be borne in mind that the higher the level of fee, the higher is the likelihood that franchisees will resent paying it, and the more they will expect in return.

The franchisor should recognise that it is likely to generate less income from a franchised outlet than it would from a company-owned one. This is a given since it is the franchisee’s capital that has established the unit and it is the franchisee who is exposed to all the day-to-day problems that occur.

When collecting the management services fee many franchisors ask their franchisees to complete a return showing daily sales and fee calculations. Some returns may also seek information as to sales by product or service type, and details regarding local marketing and sales activity. This not only provides the franchisor with information relating to the payment, but other data which can help the franchisor track what is going on in the network. At the individual franchisee level such data can be useful in identifying performance issues at an early stage.

Franchisors will also need to examine at some stage whether their franchisees are declaring all their income, particularly in franchises where some customers pay in cash. From a franchisor’s viewpoint, under-declaration of sales is the worst crime that a franchisee can commit. It will, of course, be a breach of the franchise agreement and technically grounds for termination. Most franchisors would forgive any accidental or inadvertent underdeclaration, whilst a tough line will be taken against any franchisees where substantial or repeated underdeclaration takes place. The onus is clearly on the franchisor not to rely totally on trust, but to build into the franchise some monitoring systems that make it harder, if not impossible, to hide turnover. Such fail-safe techniques include regular audits, mystery shoppers, spot-checks and modem-linked tills which feed details of all transactions electronically to the franchisor. Companies that fail to take such precautions are likely to be sowing the seeds for later difficulties.

Another means of taking on-going fees is by levying a fixed or a fixed minimum charge. Such a method is not recommended by franchising purists as it can be indicative of a franchisor who is happy with a minimum level of income, regardless of the success or otherwise of the franchisees. A system in which the franchisor is only successful if its franchisees are successful is clearly a more mutually beneficial approach.

Having different percentage management service fees for different franchisees within the same network is highly inadvisable. Differing fee levels encourage negotiation, lead to uncertainty, and breed discontent among franchisees. There are, however, examples of franchisors introducing tiered structures whereby franchisees are rewarded by having their fee percentages reduced for achieving targets or hitting turnover thresholds. The reduction tends to apply on the amount of turnover they achieve over the threshold, rather than on their entire turnover. Such structures can act as a good incentive to perform and are generally a positive tool when used sensibly. To work effectively, the thresholds need to be reviewed upwards from time to time as otherwise franchisees may achieve them simply due to inflationary trends without having achieved any actual increase in sales.

In conclusion, the on-going fee must be low enough so that the franchisee can pay it and still make a reasonable profit commensurate with the capital employed. The franchisee should also ideally continue to feel it is getting good value for money. On the other hand, the franchisor needs to cover the cost of the support services it provides and make a reasonable profit itself – a true balancing act.

Advertising levy

In addition to the on-going management services fee, or product mark-up, many franchisors take an additional, but generally smaller, percentage of turnover known as the advertising or marketing levy.

One of the principal advantages of becoming a franchisee is that you are part of a larger network, perhaps enjoying the benefits of strong brand recognition and national advertising. To assist the franchisor with the funding of this continuing brand development, franchisees are required to make a contribution in the form of a levy. By making it linked to each franchisee’s turnover, the more highly performing franchisees, which it could be argued have benefited most, make a larger contribution than the weaker performers.

It is important to get a degree of franchisee involvement in the control and expenditure of the money generated by the levy. Over time, the total of the contributions could be substantial and the franchisor should ensure that the fund is not only independently audited, but that there is a committee made up of franchisee representatives and the franchisor to budget and administer the fund. As the fund will ultimately benefit both the franchisor and the franchisees it makes sense for the former to also make a financial contribution. This should be on the same basis as that of the franchisees in recognition of the benefit being derived by the company-owned outlets. The franchisor might also top-up the fund with additional contributions, particularly in the early days.

Summary

Within the franchisee/franchisor relationship there are several financial transactions:-

• The initial franchise fee
• The on-going fees either calculated as a percentage of turnover, or taken (invisibly from the franchisee’s viewpoint) as a product mark-up.
• The advertising or marketing levy.

In return for the fees, the franchisee will expect their franchisor to train them, set them up in business and provide an on-going support service, as well as continue to develop the concept as a whole.

It is essential that the fee levels are seen to be fair by all, and provide an adequate financial return for both the franchisor and its franchisees from the outset and over the long term.

Why do I need a manual?

It will enable you to copyright your ideas, know-how and trade secrets and, assuming you have an ethical franchise, it will be one of your contractual obligations to provide each franchisee with a copy on loan for the duration of their contract.

The manual will also reinforce the terms of the agreement, establish – and enable you to maintain – quality standards, impose conformity and uniformity across your network, provide a means for monitoring and control, set benchmarks for continuous improvement, and provide you with the means by which you can update and introduce new systems.

How will the manual benefit my franchise?

If you are to have a strong brand, the business must be consistent in every way. You and your franchisees must live up to the brand values of the system and deliver your customers’ expectations. Superior quality in terms of knowledge, selling skills and all-round professionalism is vital in promoting brand values and products/services.

A well-written and produced manual will help you to achieve:- greater efficiency; new levels of customer satisfaction; greater customer loyalty; stronger links between you, your franchisees, and your customers; improved understanding of the business partnership between you and the franchisees, and of franchising as a system; better targeted help and advice from your franchise support office; and a reduction in the number of unnecessary enquiries.

When must I have the manual ready?

Your franchise agreement should require you to have the manual ready for your first franchisees. Ideally, it should be issued to franchisees when their induction training commences. Therefore, it makes sense to prepare your manual in such a way that it dovetails with the subjects covered in the induction programme and later in your development training programme.

How can I keep track of the number of manuals and amendments issued to franchisees?

You should issue a numbered copy of the manual on loan for use by the franchisee and his staff, but it remains your property for the duration of the agreement. When it terminates, the franchisee must return the manual to you, together with any other related documentation. By numbering each copy you will be able to keep track of all the copies. The numbering is particularly useful when it comes to issuing new editions of the manual and checking in returned obsolete copies.

Great care must be taken to ensure that no part of the manual falls into the hands of any unauthorised person because it contains information about your working methods and practices that you would not want generally disclosing. Franchisees and their employees should be asked to sign a confidentiality agreement before they are issued with a manual and this should be kept with it as a permanent record. Franchisees must not be allowed to make copies unless they have been given written permission.

Can I charge franchisees for copies of the manual?

It is part of your initial franchise package and the cost of producing it must be covered in your business plan. However, you can make a charge (probably anywhere between £200 and £1,000) to replace it, providing your franchisees have been made aware of the replacement cost.

Who owns the copyright of the manual?

You, as franchisor, own the copyright. The manual should be prefaced with a copyright notice and we recommend you incorporate the copyright symbol into every page. This can be printed on – or even watermarked into – each page.

Normally, we add a disclaimer to explain that, although the manual contains references to legislation and regulations affecting the franchisee’s business, they are only summaries of the position and should not be relied upon as full statements of rights and obligations.

My franchise is a relatively simple concept. Surely there can’t be many procedures to document?

Franchisors with simple concepts are often surprised when we begin to draw up the contents of their manual. For example, a manual for a home delivery franchise can run into several hundred A4 pages, supported by additional worked examples, and business forms for monitoring and controlling the business.

During the pilot stage of the franchise, it is our standard practice at Manual Writers to produce a pilot manual which can then be fine tuned to progress to the first full edition for publication just prior to the official launch. The final stage, perhaps 18 months after launch, would be to update the manual in line with your on-going obligations, such as development training.

An amendments sheet at the front of the manual is the usual method by which updates are recorded by the franchisee. You should make regular checks that your franchisees have been diligent in adding these amendments to their manuals and thus ensure the integrity. After all, it is vital that everyone sings from the same hymn sheet.

How can I maximise the value of the manual?

It should fulfil the following four main functions. It should be a comprehensive reference source, a training tool (for the franchisor at the induction training stage, or when training at arm’s length, and for the franchisee when training his own staff), a marketing tool, and a business development tool.

Therefore, the manual must underpin the franchise agreement, define your core values, describe precisely your definition of quality, identify your franchisees’ responsibilities, ensure franchisees and staff understand their role in attaining quality, document the main operating requirements and the main management requirements, dovetail with existing documentation (via cross-references), provide accurate franchise support office reference points for help and advice, set new standards in customer service, and benchmarks for further improvement.

How should I structure the manual?

Manuals should, of course, be tailored to the individual franchise, but the contents usually fall under three main headings – set up and support, day-to-day operating and management requirements, and business development. We will look at these in turn.

Set-up and support – Firstly, it will provide incoming franchisees with all the information they require at the planning stage prior to signing the franchise agreement – what precisely can be expected in terms of their input (financial and otherwise), a description of the pre-launch support and timing, and details of the obligations, risks and rewards.

Secondly, the franchise support staff by documenting the procedures for attracting, interviewing, recruiting, setting-up and supporting franchisees for the first 12 months will understand more precisely what support they must provide and the quality standards they must establish and maintain.

Here it is worth noting that where a prospective franchisee has not already signed the franchise agreement, he should have signed an undertaking of confidentiality prior to having sight of the manual.

Day-to-day requirements – These operating and management requirements form the core content of the manual and this section should deal in depth with every aspect of the day-to-day running of the business – product knowledge, the safe operation of the equipment and its maintenance, the pricing of the products/services, customer service, marketing and promotion, selling skills, staffing and the financial management and reporting requirements.

Business development – As part of your on-going obligations, you should equip your franchisees with the advanced skills that are necessary to grow the business by providing them with development training and on-going support.

This section of the manual should focus on the methods that can be employed to improve competitiveness, increase profitability, gain new markets, and set new benchmarks for improvement.

An important component here is a business and financial review procedure to monitor the financial health of the franchised unit and take remedial action where necessary. This will use traditional methods to evaluate the unit’s business performance – revenue, production costs, effective use of resources, return on investment, and cash-flow. Well-established franchise systems may also employ less traditional methods, such as customer focus research and attitude surveys, to determine how customers perceive the franchised unit, and whether or not the actions being taken are improving those perceptions.

What title should I give the manual?

The term ‘franchise manual’ is generic and covers all the written information that will be used to set-up, operate and develop a franchise. The title you use should mirror that in your franchise agreement – usually ‘operations manual’, ‘operating manual’, or ‘operational manual’ (the latter being a more accurate indication of its contents). However, some franchisors prefer to chose a title that reflects the importance of quality standards as evidenced by Unigate’s Franchisee Quality Manual.

What is the difference between operating and operational?

We often hear people asking for what they want in terms such as ‘good’, ‘the right size’, or ‘on time’. Obviously these words mean something to the person using them. They also mean something to the person hearing them. But will the two meanings be the same? Only the use of operational definitions can guarantee a correct interpretation.

A definition explains what something means. An operational definition does much more. It explains how something should be observed, measured, or decided. Without definitions, ambiguity can easily arise. Training seeks to qualify operational definitions and demonstrate that only the highest quality service and product standards are acceptable.

Generally speaking, operating definitions are set out as checklists. These are highly effective in themselves as aide memoires. An example would be a store standards checklist.

However, operational definitions are required to describe sufficiently all the steps necessary to complete a given task to the required quality standards.

In a food service franchise, for example, the easy option would be to tell the franchisees that cleaning must be carried out frequently. But this, in fact, tells them nothing. The franchisor would need to explain what must be cleaned (kitchen floor, equipment, surfaces), what must be used to clean them (list of approved cleaning solutions), how these solutions should be used, what are the logical steps in carrying out the work, how often cleaning will take place, and at what times.

We recommend that this information should be reinforced as a daily cleaning checklist to be used by the owner/manager to ensure that such jobs are completed. It would also be helpful to explain why this is a requirement (e.g. to prevent cross-contamination).

How can we make the manual user-friendly?

Here are some proven suggestions that will help to make it user-friendly and thereby likely to be referred to more frequently and enthusiastically.

• Develop an easy-to-follow, logical structure.
• Compile a comprehensive table of contents.
• Apply a good and consistent method of indexation.
• Provide a simple system of consecutive cross-referencing.
• Set a common style to run parallel with the corporate image.
• Adopt an appropriate viewpoint for communicating procedures in an unambiguous way to reinforce the terms of the franchise agreement.
• Use an appropriate medium for the type of user (i.e. hard copy, electronic format).
• Create a simple, easy-to-read visual presentation for the pages, making use of white space and a plain sans serif typeface of at least 10 point.
• Produce, say, a separate volume of worked examples, business forms work, etc. for easy reference.
• Adopt a format that makes it easy for you and the franchisees to update the manual.

Can I write my own manual, or should I use a specialist?

Many franchisors have produced their manuals in-house with varying degrees of success, but others have sought external help having recognised that they needed professional guidance, and/or specific authoring, editing and publishing skills.

Some people find it impossible to fit project managing and writing a manual into their busy schedule, whilst others find that they have priorities that are always more pressing or, indeed, preferable. Information provided by their colleagues often turns out to be operating rather than operational, listing the tasks that need to be undertaken, but failing to describe how they should be carried out and with what frequency.

In-house writers can often fail to approach their subject objectively and, because of familiarity, cannot describe the procedures precisely. Another problem is that they do not know how to ensure that their manual underpins the terms and conditions of their franchise agreement. At the initial stage, they keep re-writing, but find it difficult to complete the job because their franchise business system is continuously evolving and improving during the first year of the pilot operation.

In contrast, an external resource, such as Manual Writers, can quickly become part of the franchisor’s team, absorbing everything about the business.

Manuals do not lend themselves to an off-the-shelf database solution. They all need to be tailor-made for each specific franchise operation because in today’s competitive world it is the individual franchisor’s distinctive management style, know-how and business system that make the difference and this can only be reflected throughout the network by all the units working from an exhaustive professionally-produced operating manual.

This is important when a franchisor grants exclusive territorial rights because in so doing it is in effect selling its rights to that particular market. In such circumstances, the franchisor will naturally be keen to ensure that the franchisee exploits its area to its fullest potential. This can been done by imposing minimum performance targets, motivating the franchisee, or a combination of both.

So far as minimum performance targets are concerned, these can in practice be no more than fiction. There is little point in having a minimum

performance target unless it is capable of being achieved, and at the same time meaningful in a purely commercial context. A franchisee with a low comfort threshold (and who is, therefore, easily satisfied with its performance) will merely do the minimum and sit back. If minimum performance targets are not readily attainable but difficult to achieve, franchisees may not always attain them. In those circumstances what is the franchisor to do?

A franchisor’s ultimate sanction will always be termination. However, there may be very good reasons why a particular franchisee has failed to achieve its performance target and the franchisor may therefore be reluctant to terminate for that reason.

The franchisor may, however, not take the same view with another franchisee, who has had similar

problems in attempting to achieve its performance targets but for different reasons. The second franchisee and the franchisor may disagree as to the reasons why it failed to achieve its targets. In those circumstances, if the franchisor terminates the second franchisee and not the first, it may be storing up problems in the future. It may be accused of being capricious, or of discriminating between franchisees for personal, rather than purely business reasons. Multiply this by the number of franchised outlets and the problem becomes apparent.

It follows therefore, that if performance targets are to be meaningful they have to be enforced. Inconsistency can breed contempt. This is particularly true of individual franchisees, but less so of development and regional/master franchisees, because such franchisees are by their nature mature business people and are expected to some extent to rely on their business acumen.

The second problem with minimum performance targets is, how is a franchisor going to decide what the performance target should be for the first year, or indeed how is it to know what a minimum performance target should be in year two, year five, year seven, or year ten? The problem in trying to determine, with any degree of accuracy, a minimum performance target is made infinitely more difficult if the franchise concept is novel.

Kwik-Strip is a good example. Kwik-Strip is in the business of furniture stripping and restoration. At the time that the franchise was established, no such service was available to the public. If a customer had a Victorian pine dresser with six layers of paint that needed stripping, the only way he could get the job done professionally was to take it to a restorer. Generally the service was only available to the trade and was quite expensive. With the arrival of Kwik-Strip it became possible for a customer to take the dresser direct to a local Kwik-Strip outlet to have it stripped at a reasonable price.

In such circumstances, where the size of the market has yet to be determined, how does a franchisor begin to fix minimum performance targets (usually called development schedules in development and regional/master franchise agreements) in any meaningful sense?

For individual unit franchisees, the target tends to be a minimum level of turnover of the franchisee over a given period. In the case of a development franchisee, it is usually a combination of the number of outlets to be opened and their turnover. For a regional/master franchisee, the target is usually the number of sub-franchisees it is able to attract.

What both franchisors and franchisees have found to be unacceptable is an annual or periodic negotiation of minimum performance targets for the forthcoming year(s). This introduces an element of contention in the relationship and for that reason has seldom been successful. Moreover in such circumstances, complicated mechanisms need to be introduced into the contract to determine what happens if the parties cannot agree. No development or master/regional franchisee will accept a unilateral imposition of targets on a periodic basis by its franchisor.

Some would also argue that a franchisee who achieves a certain level of turnover simply because a piece of paper requires it to do so, does not necessarily make a good franchisee.

Motivation

If one looks at motivation, the problem of the comfort threshold becomes more apparent, particularly in the case of individual unit franchisees. Most individuals have different thresholds.

People work for different reasons. Some work all the God given hours because they wish to make lots of money, others because they are workaholics or because they wish to build an empire. Some work for pleasure, whilst others see their work as a means to an end.

Many people are content to do an honest day’s work for a reasonable return and spend the rest of their time with their families, playing golf or pursuing whatever other interests they may have.

There is absolutely nothing wrong with that, and as the owners of their own businesses, it is their prerogative. However, franchisors may resent the exercise of this prerogative because it has a direct impact upon their profitability.

A franchisor will be faced with a dilemma if the person to whom it has granted exclusive territorial rights (and it is rare in the case of the grant of development or regional/master franchisees for this not to be the case) is more easily satisfied than the franchisor. Having granted exclusive territorial rights to a franchisee, the franchisor has effectively locked itself out of that particular market. If the franchisee then performs only according to the minimum performance criteria, or to the level of its comfort threshold, what is the franchisor to do?

In an ideal world a franchisee should achieve the maximum turnover of business that is possible in the territory to which it has been granted exclusivity.

In granting the exclusive territory, the franchisor would expect its franchisee in the fullness of time to achieve, say, 100 units of business, whether it is from the sale of the franchised products or services by an individual unit franchisee, or the sale of franchises by a regional/master franchisee, or in the case of a development franchisee, the opening of new outlets and/or sale of the franchised products or services.

However, what if the franchisee hits its comfort threshold at 60 units and thereafter refuses to bust a gut to secure the other 40 units of business? The franchisee is essentially happy with its lot. That may be fine for the franchisee, but what about the franchisor? The franchisor sees 40 units of business going begging. It is missing its percentage of the turnover of the 40 units which would flow to it through the payment of continuing franchise fees.

In the case of a development or regional/master franchisee, the consequences for the franchisor are more serious because the franchisee will have created a demand which competitors may now step in to satisfy.

But it may be worse than that. Both the franchisor and franchisee will suffer in the long term because if there are 40 units of business going begging, then sure as eggs are eggs, a competitor, seeing the potential, will step in and in so doing will not only soak up the 40 units, but may well succeed in taking another 10 or 15 units from the franchisee as well, thereby leaving both franchisor and franchisee worse off.

It should not be forgotten that for the most part, franchisors are in business to make money for their shareholders, and as much of it as they possibly can whereas individual unit franchisees, as we have seen, go into franchising for a variety of reasons. Not all go in only to make as much money as they possibly can.

What seems on the face of it to be a straightforward argument in favour (from the franchisee’s point of view) of the granting of exclusive territories has turned out not to be necessarily so. The pattern of franchising in the UK now suggests that franchisees are more vociferous in their demands for exclusive territories and franchisors are more acquiescent.

Market forces

I can think of no transaction where the refusal by the franchisor to grant exclusivity to an individual unit franchisee has been a deal breaker, or where the business failure of either franchisor or franchisee has been attributed to the fact that either exclusive territorial rights were granted, or that they were not. In the UK at least, the invisible hand of market forces appears for the most part to have regulated franchising without the need to create artificial monopolies.

However, the same cannot be said of development and regional/master franchisees where it is common practice for franchisors to grant, and such franchisees to demand, exclusivity. Without the protection offered by exclusivity such franchisees will not commit the resources needed to develop the franchise within their territory. By the same token, such franchisees also accept that hand-in-hand with the grant of exclusivity go minimum performance targets. However, unlike individual unit franchisees, there is room for negotiating minimum performance targets in the case of development and regional/master franchisees.

Furthermore in my experience franchisors take greater care in selecting development and regional/ master franchisees. Where the relationship between the franchisor and this type of franchisee is a good one, franchisors are more amenable to revising minimum performance targets in favour of a franchisee who has under-achieved for a good reason, for example because retail premises in its territory have become difficult to acquire.

For franchisors, who have not yet gained the requisite experience, or lack the expertise to meet specific challenges, the word “resales” can set knees trembling (currently there is an upsurge of advice and professional assistance coming on to the market to help franchisors with their resales activities). There is, however, another phrase that often has the same effect – and that is “franchisee association”.

Such associations go under many names: franchise council, franchisee association, franchise committee, advisory group, consultative forum, advisory board, and probably several others as well.

There are as many descriptors as there are formats for these associations. Each describes a formal or informal grouping of franchisees that has an independent existence as a committee or council, and meets with the franchisor to discuss the business. There the similarities end. We shall now set about de-mystifying this phenomenon.

How do these associations come about?

Too often, a franchisee association is born out of conflict – whether that conflict is anticipated, planned, imagined or real. If the initiative to form the association comes from the franchisees, the likelihood is that they perceive a problem or a threat, and feel a need to respond to it with collective strength.

Seldom do franchisees gather together and say: “You know, I’ll bet if we had a franchisee association, it could be a force for good in our happy franchise, and improve this business for the benefit of both us and our franchisor. I’d like to give up some of my time for a cause like that to help our franchisor”.

Sadly the reality, if it is born from discontent, is more likely to be a case of: “Are you happy with everything about the franchisor, George? No, neither am I. If we all band together and gang up on our franchisor, we might be able to throw around sufficient weight and threaten to start changing a few things to make things more to our liking.”

If the franchisees get around to starting an association before the franchisor, the likelihood is that it is being motivated, to a greater or lesser extent, by negative perceptions. If for no other reason, that is why the franchisor who takes the initiative and facilitates the setting up of an association is in the driver’s seat. As well as heading off trouble before it arrives, such action will be seen as a progressive step and a very open gesture – both of which are, in fact, usually true.

You may well ask: why do we need a franchisee association at all? What is it for – what does it do? Should it be encouraged or discouraged? What would be its relationship with the franchisor? What are the expectations? Who should set it up – the franchisor, or the franchisees?

What is the reason behind it? Should it have rules? Should it have power? Who runs it? Who is on it? Are its members democratically elected, appointees, or a combination? And should the franchisor be worried by it?

Let’s start with the last question – should you be worried by it? The politician’s answer applies here: “yes and no.” Yes, if you adopt the ostrich position and stick your head in the sand; no, if you realise that it is a fact of business life and deserves to be treated as such, with confidence, professionalism and respect.

Franchisee associations are not an inevitable fact of life, like death and taxes, but nevertheless most franchise networks of any size have one.

What does a mature, integrated association look like?

Franchisee associations range from sophisticated structures, where the association might have its own written constitution, or even be a limited company in its own right, right down to a handful of people appointed by the franchisor to serve on a committee. Not surprisingly, the norm is somewhere in between.

Typically, the people who comprise the association’s committee or board will be elected – totally, or at least in the main – by franchisees. This gives the elected members a degree of acceptability and credibility with their peers that they would not gain were they to be mere appointees of the franchisor.

That is not to say that the franchisor should not have some say in who serves on the association’s committee. Input by the franchisor is highly desirable as the company does not want to find itself suddenly faced with a committee made up solely of under-achieving, moaning malcontents, who have no desire to work constructively for the betterment of the franchise.

Sometimes membership is regionally-based; sometimes there are minimum criteria to be eligible to be on the committee (e.g. not be in dispute with the franchisor, or have a minimum term of experience in the franchise). Sometimes the franchisor can help influence the selection, e.g. by specifying that it needs at least one marketing specialist on the team.

Some franchisors always host their regular meetings with the association at the company’s offices. Some pay the travel costs for members’ attendance. Some move the meetings around the country. Some prefer to hire a hotel meeting room, as it offers a neutral territory, and hence is not at anybody’s power base.

Harmonising the perceptions

On a bad day (and we all have them) franchisees can be perceived to be unreasonable, unrealistic and un-commercial, whilst on the other hand franchise managers or business development managers can be perceived to be interfering, always believing they are right, and often lacking the “street cred” of having been in the shoes of a franchisee – the “What do you know about my business – sat there at head office? I’m here at the sharp end” syndrome.

Taking these perceptions of individuals to a structural level, the franchisee/franchisor relationship will continually need attention at the interfaces. An association with a constructive and objective agenda can make its point with far more clout than an individual franchisee and yet, because it is speaking for a mass of franchisees, it can be expressed in a diplomatic manner whilst still getting the point across.

Striving towards a common goal

I recently heard the following from the chairman of a franchisee association: “Since neither party is going away, we should all be endeavouring to work together towards our common profit goal.” Wise words.

Some people like to say that the franchisor is interested only in turnover (in a franchise network based on a turnover-linked management service fee), whereas the franchisee is interested only in the profitability of his/her individual unit. This gives rise to the expression often used by franchisees: “Turnover is vanity; profit is sanity.” This is true as far as it goes, but it is redolent of short-termism.

Look at the bigger picture, take the longer view, and you will see that the interests of the franchisor and the franchisee are actually the same. Like parallel lines drawn in perspective, they in fact appear to meet in the distance.

Both parties are interested in the profitable well-being of the entire business. If the franchisees fail, the franchisor fails with them. If the franchisor fails, the franchisees are suddenly left high and dry.

Ongoing constructive dialogue and shared objectives, that are the product of properly-managed relationships between the franchisor and his/her franchisee association, can help in keeping the focus on the long-term goals that both can agree on, rather than the short-term tactics that would appear to divide them.

What powers should an association have?

This question is in danger of being redundant if the franchisees beat you to it and formed the association because they saw a need which could be addressed by “negotiating” with the franchisor from a position of strength. If this happens, the franchisor starts off on the back foot.

Invariably the newly-formed structure with which the franchisor is faced will be seeking greater influence than the latter will want to grant. Immediately, therefore, it is in the position of somebody who has fallen overboard from a boat, and is frantically swimming to the surface. This is not a good starting point.

Assuming you plan to take the initiative and recommend to your franchisees the forming of an association be clear with them what you expect it to do, what will be the extent of its influence, and be clear on who has the last word (and that has to be you – the franchisor).

You cannot abdicate the strategic direction of your franchise to a committee of franchisees and have the tail wagging the dog.

Every franchisor sees instantly that this is an anathema, but the opposite is also pretty unpalatable to franchisees: a committee made up of yes-men/ women who are there to tamely agree the dictates of the franchisor, thereby attempting to add a fig leaf of democracy and participation. In fact, it is more like the emperor’s clothes, and will quickly be seen as such.

The very act of helping the formation of a franchisee association means you are allowing some input to the decision-making process. You’re not so much giving power away as sharing it in certain clearly-defined areas. This may not come easily to you if it’s your own business which you have set up and built – so don’t give away critical powers.

Your association could be anything from a sounding board to something approaching a junior board. This is for you to decide, depending on what you want them to do, where you want their input, what areas are taboo, and your general management style.

The key is not to pass over the control of your franchise to the association. However, there are many areas in which the association can contribute in great strength to your franchise for everyone’s benefit. Obvious (and common) areas include: the choice of new technology for the business, and marketing plans.

It pays to remember that when your franchise network is up and running it is likely that the majority of good ideas – those that will drive the business forward, unleash more potential, attract more customers, or reduce operating costs – will very likely come from your franchisees.

There will also be a lot of unsuitable ideas. Using an association to screen, examine and debate all proposals in the areas that are open for discussion, sends a message to franchisees that you are prepared to listen to good ideas from wherever they come, and their views are valued. At the same time, providing common-sense prevails at the association meetings, the bad ideas will be rejected (with or without your need to be assertive about it) and the rejection will be far more easily accepted by your network if it comes from their peers, not you alone.

Whatever influence you want your association to have – from discussion forum to voting powers – you must have total clarity about the rules and the extent of their influence, and be firm if you see any attempt to gradually increase those powers. It’s your franchise, and you get to set the limit to which an association can be involved in the business.

Getting the best from your association

You will need to give careful thought to what matters (and at what level) you would like the association to deal with. This is closely linked with the powers you grant to the association.

If an association is not clear about its mandate, or if you exhibit weakness or indecision about it, you’ll probably find that it will start to make its own rules and it will decide the extent of its influence. So, to get the best out of your association – to ensure it’s a force for good – make sure it has a clearly-defined role.

There is energy and creativity amongst your franchisees: harness them. Give the association a clear mandate.

The franchisor should set the agenda for meetings (being sure to create the agenda in consultation with the chairman of the association, so that the items the members wish to discuss are on there, but in a managed way), and chair the meetings yourself. Make sure the association has plenty to do – or it will find things to do!

Examples might be to have a technology sub-group, or a sub-group to road-test new marketing ideas and report back. The old psychology applies: if franchisees have had a say in the decision, they will buy into it and help you sell it to the rest of the network. By the same token, if they are all opposed to an idea of yours, they could well be saving you from making a bad decision. A well-constituted association will not always be right, but it will always be worth listening to.

Structure

How formal should your franchisee association be? In large measure the degree of formality of the association should be a reflection of what you want it to achieve, which in turn is directly related to the powers you give it (or the powers it assumes for itself). Here are a couple of examples of the use and recognition of associations at a serious level.

In the case of the Independent Kall Kwik Franchise Owners’ Association (IKKFOA), senior managers from Kall Kwik meet with the franchisee members formally on a quarterly basis, and the subjects discussed provide serious input into the overall franchising direction and success of Kall Kwik. The franchisor supports the association’s AGM and its communications throughout the franchise. In addition, a number of user groups covering specialist areas meet and their reports are fed back and discussed with the association’s council.

At McDonald’s Restaurants, the National Leadership Group (NLG) represents the franchisee community at a strategic level in the company (comprising only franchisees voted onto the group by the franchisees as a whole).

The primary objective of the NLG is to ensure that system success is achieved through a mutually supportive relationship between franchisees and the company. These executive/NLG strategy meetings take place quarterly, to discuss the prevailing trading environment and agree priorities and actions to maximise business opportunities over the short to long-term. Additionally, franchisee priorities are discussed, providing the executive team with an opportunity to take these into account and agree actions.

There are also engagement sessions (regional communication sessions) with members of the executive and franchisees, marketing co-operative meetings involving members from both the company and franchisee community, and finance committee meetings, whose primary objective is to seek balance, fairness and flexibility to allow franchisees and the company to innovate, develop, compete and grow their businesses more profitably.

Unless you are in the McDonald’s or Kall Kwik league, you will probably kick off with more modest aspirations, but it just goes to show where you could end up.

Nobody said running a franchise network would be easy, and dealing with a franchisee association often isn’t. However, you don’t have to be all on your own in developing your business. In addition to the resources in your own company, you have the community of accumulated experience and best practice that exists within the BFA and its members, and you also have your own franchisees.

We all talk frequently about franchising being a partnership. Having a positive, active and focused franchisee association can be a very positive way of strengthening the partnership, and reaping benefits for the good of the entire franchise.

This is, of course, how it has to be because it is only with an established network that the franchisor can recoup the true benefits and economies of scale of operating a business in this fashion – hands off from the end user. That’s fine and just how it should be, but after a while, and sometimes a very short while, there will be the requirement to address the issue of franchisees wishing to sell on their businesses.

How then does this fit into the structured recruitment machine the franchisor has been operating? How does it advise its franchisee what to do? Should it even be bothered to become involved in the process, and does the franchisee have the right to sell to another individual anyway?

In the early days of franchising, this whole subject was fairly taboo with a certain amount of stigma attaching itself to the word “resales” as it seemed to imply a failure of some kind. Even as recently as five years ago there was only a handful of franchisors, who had in place a process that allowed their franchisees to sell on with any form of certainty about what they were doing.

These enlightened franchisors had documentation and systems in place so the franchisee could look to them for advice and support at this challenging time, just as they had always done on operational matters during their launch and lifetime as a franchisee.

We now have a franchise industry that is maturing and, whilst we see new franchised brands being established each year, there is a growing number of franchise systems approaching maturity and some whose networks are full as regards new recruits for new territories/locations.

For these, the selling of existing businesses is the only way forward for the particular brand. Either that, or they have to grow tangentially with the establishment of an additional brand, as opposed to expanding their current one, thus becoming a multi-brand operation.

Most established franchisors feel that to have a turnover of 10 per cent or so of their franchisees each year is vital to maintaining a healthy network as it constantly brings new blood and new energy into the business and allows the network to grow to the next level. This level of resales is considered the norm in franchise networks in the U.S. and so could also be considered as a healthy churn for a UK franchise.

Often in younger franchises and sometimes in the very early days, a franchisee will ask to sell and the franchisor is simply not geared up for this to happen. Here necessity and expediency drives the process and often causes the creation of hybrid systems that once they become embedded in a franchisor’s process can cause frustrations and problems in the future.

It matters not whether a franchise is young or mature, or still recruiting or full to capacity, the basic principles of ethical franchising mean franchisors should, as part of their operating processes, have a structured resale route available for their franchisees. This doesn’t have to be fully resourced in-house because, as with other specialist functions, it can be outsourced. It certainly doesn’t have to be a financial drain on the franchisor, nor does it have to be complicated or convoluted, it is simply a process that requires planning and implementing.

So where to start? Initially, the franchisor must ensure it has actually given its franchisees the right to be able to sell on their business; accrue a benefit from having operated the franchise; and realise the value of their efforts through a resale.

This means having a clause in the franchise agreement that specifically grants this right to sell on to a new franchisee. It is quite possible and indeed sensible to apply controls to the sale process and stipulate the hoops that both seller and purchaser need to jump through, but unless the right is there in the first place the process can become much more convoluted and even confrontational. Certainly for any franchisor, who entertains the thought of becoming a member of the BFA, it is essential to have such a clause in order to be granted accreditation.

The right to sell clause will set out the process the selling franchisee must follow; the fact that the franchisor will have the final say as to whether or not the proposed purchaser is acceptable to it as a franchisee; and will detail what charges, if any, the franchisor will make for this service and facilitating the change of ownership.

The charges and fees payable to the franchisor vary quite widely. Some use the resale process as an income stream and make it a profit centre in its own right, while others simply facilitate the process with little cost involved. I have seen all the following in various franchise agreements.

• A commission payment if the franchisor introduces the purchaser of either 2, 5, 10, 20 or even 25 per cent of the selling price.
• A transfer fee if the seller finds its own purchaser of either 1, 2, 5 or 10 per cent of the selling price, or sometimes a flat-fee structure, where the seller pays a fixed sum. This also varies widely depending on the type of franchise from around £2,000 to £10,000.
• Joining fees for the purchaser, charged in either of two ways, depending on the view of the franchisor. Some simply wish to cover their training and induction costs, while others levy the full joining fee, regardless of whether the new franchisee is buying a new business or a resale.

There are various views within the industry on these charges and different solicitors and consultants, and the BFA, will all have their own opinions, but whatever is to be charged should be enshrined in the franchise agreement. A key point here is that if the franchisor is making a charge in a resale, it should be proportionate to the value and the wealth-generating capability of the business being sold.

Having granted the right to sell, the franchisor also needs a system for the franchisee to follow when the latter decides that this is what it wants to do. Franchising is about providing a business operating system in return for a fee, and franchisors make great play about the support given to new franchisees acquiring a greenfield opportunity from them. Where they tend to fall down is by not having a structured and detailed process for when the franchisee wants to leave through a business sale.

If the franchisor doesn’t have a structured system, franchisees are left to sort out their own sales process and to a certain extent this is an abdication of the responsibilities of the franchisor. This is even more so when one can see how simple such a process could be and that it can be supported by external resources.

A well-structured resales process will include the following elements.

Guide to selling: This will describe the franchisor’s process in practical terms. It will contain notes on how the franchisee should notify the franchisor that it wishes to sell, describe the valuation process and give guidance, list the information the franchisee will need to prepare, set out the arrangements for the franchisor’s involvement, cover any fees that require paying and describe the legal completions process. There is no reason why such a document should not be included in the franchisor’s operations manuals as a permanent part of its franchise system.

Prospectus of sale or information memorandum: This is where the franchisee writes about its particular business. The franchisor can have a templated version of this with a pre-written introductory piece about the franchise. This is the franchisee’s sales document.

Independent valuation: This will allow the franchisee to get a realistic view of what it can expect to receive for its business because it will be based on the same information provided to purchasers and will be the basis used by the purchasers’ advisers for their own valuation.

By having the prospectus of sale prepared in advance, and obtaining a valuation that is independent of the both franchisor and franchisee, means that two of the biggest stumbling blocks to successful resales are reduced, if not totally removed. By having a detailed prospectus, the purchaser and its adviser will have all the necessary information at their fingertips. This saves the to-and-fro of initial discussions and will greatly add confidence that the proposed purchase is sound and all the information needed is available.

An independent valuation means that the initial asking price for the business will be broadly in the right ballpark. This avoids the gaping credibility gap which is the result of promoting a business for an inflated figure, when its actual value is considerably less. Overstated asking prices that bear no direct relationship to the true value of a business and are only set because the seller either needs the money, or has simply put a finger in the air are usually doomed to failure. This causes frustration in the franchisee who may turn to blame the franchisor for its failure to sell the business for them.

Businesses are valued on their ability to generate sustainable, transferable profits. Making an independent valuation part of the franchisor’s resale process will ensure its franchise network will come to understand these principles and franchisees will be able to plan for their eventual exit well in advance.

Naturally, large premises-based businesses where equipment is involved are more complex to value than simple van-based operations, but this doesn’t mean that the smaller ones should not be treated in a structured manner.

Sale and purchase agreement: This can also be structured or templated as part of a franchisor’s system. Once the seller and its purchaser have reached an agreement on price there is usually a legal sale and purchase process to go through. This may not be so onerous for the simple van-based franchise sale, but for most transactions there will need to be an agreement document of some sort. Here again the franchisor can add value to its offering of support by having its own solicitor hold a pre-drafted agreement that contains the key elements of the agreement already in place. This will save time and, therefore, costs because each seller’s solicitor will not have to produce a new sale and purchase agreement for each sale and the franchisor will also have retained a certain amount of control in the drafting. The form of the agreement would typically be as follows.

Part 1: This describes what is being sold, by whom, to whom, and for how much. Lots of blanks to be completed and totally non-contentious.

Part 2: This covers the sections pertaining to the franchisor’s interest in the sale, surrendering one agreement and granting another, and the use of the name, etc.This section should be non-negotiable and not changeable by either party

Part 3: This section sets out a best practice approach to the seller’s and buyer’s relationship and can to a certain extent be changed and tweaked to suit them but, given that the purpose of having a pro-forma document is to minimise cost, too many alterations should be discouraged by having an equitable approach when drafting the initial document.

The sale of a franchise is a three-party affair with the franchisor also agreeing to the purchase by countersigning the sale and purchase agreement, along with the purchaser and the seller. It is in everyone’s best interests that the document is well structured and drafted by suitably qualified BFA-affiliated solicitors.

Franchisees’ life cycles within a particular franchise will be of varying length, but all need encouraging and nurturing as they join, develop and become established within the network. So it is with their leaving. Systems, support and advice delivered internally, or via third parties, will ensure that both franchisees and franchisors mutually benefit from a structured and efficient resales process on this last step of the way.

Some of the world’s leading brands such as McDonald’s, Holiday Inn and Budget Rent A Car have established truly international networks building off the platform of their franchising know-how and techniques developed in their home markets. Others, including Marks & Spencer, Mothercare, Costa and River Island (all major company-run chains at home) recognise that franchising internationally offers the prospect of bringing their products and services to new consumer markets without the demands on capital, people resources, and risk which opening an owned and managed network overseas would entail.

What then are the basic keys to successful international expansion and what are the structure available? First, the structures.

The five basic structures

The basic strategies and techniques which can be used to enter a new market are: company run expansion, direct franchising, developmental franchising, master franchising, and joint venture franchising.

Company-run operations

Although the prospect of being in the position to control one’s self the establishment of the pilot outlets in a new market, and so the initial adaptation of the brand and system to local conditions is attractive, to do so oneself with a company-run operation overseas is fraught with a number of problems, particularly capital and people constraints.

It is very costly to dedicate sufficient resources to an overseas start-up, let alone tackle multiple markets. Who will staff and lead the overseas branches or subsidiary? Its business plans and budgets must be carefully considered. Organic growth using this approach will necessarily be slow – the world is a big place with many major markets to prioritise and choose between.

The locals know how to do business in their country, how much to pay for sites and construction, how to employ staff and generally get things done effectively. The learning curve for a foreign newcomer attempting to do this will be steep with many hard and expensive lessons to be learnt. Some major corporates have never recovered their enthusiasm for international expansion after disastrous and expensive initial attempts to do it themselves.

The franchising alternatives described below offer the prospect of more rapid expansion into more markets within a relatively shorter time frame, coupled with a requirement for far more limited resources and risk. The right overseas franchisee will provide both the resources and the market knowledge to drive forward and develop a new operation, insulating the home country franchisor from the risks and the mistakes which the local businessman or company will best know how to avoid.

Direct franchising

Direct franchising is really an extension of franchising in the domestic market. The UK franchisor will find and enter into franchise agreements directly with a number of individual franchisees in the overseas target market. The agreements will be very similar to those used domestically, but with a number of adjustments to deal with international issues, such as the deduction of withholding tax or service fees, currency conversion and other matters. The franchisor will need to provide the back-up and on-going support directly to its franchisees.

This technique is usually fairly limited in scope because the more overseas franchisees there are, and the further away geographically, the more difficult it is to provide the necessary support. Franchisees are consequently more likely to stray off the straight and narrow if the degree of supervision by the franchisor is reduced, as it will be, and the consistency with which the products and services, and the brand associated with them, are presented in the overseas market is likely to suffer. There is no local guiding hand on the tiller, no local country head office, and no local co-ordination of the overall country development, marketing, etc. There is a place for direct franchising, but usually on a fairly limited scale, for example perhaps for piloting in a new market relatively close to home.

Developmental franchising

Development franchising, often referred to as area development agreements, involves the franchisor granting the rights to an individual, company, or investor group to develop and operate themselves a number of outlets within a particular territory or region. A good example of this in the UK is Whitbread which was, until its recent sale of that business, a developmental franchisee of both Pizza Hut and TGI Fridays, rolling out the restaurants as company-owned and operated units, and, after many years and with the consent of its U.S. franchisor, also sub-franchising to third parties. This is the technique used by Starbucks internationally

The advantage for the franchisor is that it has only one franchisee in a region or country to liaise with, and such a franchisee is likely to be significantly resourced, experienced in operating businesses in its market, and consequently less likely to need significant support from the franchisor. Developmental franchising is typically used in the retail, hospitality and leisure sectors, where significant investment is needed to build and roll-out and run big ticket retail stores, restaurants or hotels.

The development agreement will typically require that a specific number of outlets must be opened within a prescribed period, say one store to be opened within the first 12 months, with a required openings schedule stipulated over the following years. In exchange for this level of commitment to invest in the market, the franchisee is usually granted territorial exclusivity, provided the openings schedule is met, and fairly long-term rights, typically between 10 and 25 years.

An up-front fee, sometimes significant and running into six figures, is typically paid to secure the development rights. The franchisor is after all parting with its rights to develop the territory in another way.

The operation of each unit will usually be regulated by an individual franchise agreement. There are a number of reasons for structuring arrangements in this way. An initial franchise fee will typically be paid for each new outlet which opens, as well as weekly, monthly or quarterly continuing fees based on sales. As in domestic franchising, there will inevitably be an obligation to spend a required amount on marketing and promotion, and perhaps an obligation to pay a small percentage to the franchisor for the global marketing of the brand.

Master franchising

Master franchising is most frequently seen in the service sectors, or where the nature of the business or service requires the cloning of multiple outlets, each with a hands-on owner/operator. Kall Kwik is an example in this country of a master franchisee of a U.S. franchisor.

To secure the rights to develop a territory, the master franchisee will, like the developmental franchisee, again usually have to put down a fairly significant sum up-front, with a commitment to pay to the home country franchisor both on-going percentage fees based on total network sales, and typically a slice of the initial fee charged for each outlet which opens.

The fundamental difference from the developmental franchisee is that the main business which the master franchisee, sometimes referred to as the sub franchisor, must establish and operate is the business of being the franchisor for the particular system in the territory for which rights have been granted, rather than just operating outlets itself.

Master franchising is usually done on a country basis whereas developmental agreements are just as likely to be regional within a country as for an entire country. Gowrings is an example in this country of a significant multi-unit Burger King developmental franchisee which now operates over 50 restaurants.

The master franchise agreement will, like the development agreement, inevitably impose a required schedule of numbers of outlets to be opened within a particular time frame. To fail to require this, exposes the franchisor to the risk that the target market will be under-developed and, notwithstanding the problems in restructuring the network which would ensue, the franchisor must reserve the right to terminate a master franchisee who is not adequately performing.

The parties will often agree that the master franchisee must open and operate a number of pilot operations itself to prove the system works in the culture, market and business environment of the overseas country; to allow for the almost invariable element of adaptation and tweaking of the business concept to best fit local conditions; and to provide a seedbed and training base for the franchising and support personnel which the master franchisee will need to support its network as it starts to recruit and grow local (sub)franchisees. Any company-run outlets will also provide a useful source of revenue as the business develops to the stage where its franchising operation and revenues themselves reach critical mass.

Besides the agreed fees and development schedule, other features of a master franchise agreement follow from the local franchising function which will become the primary business of the master franchisee. Issues will include the need to develop a local training function (using translations of the home country operations manuals), possibly a training centre and the need to follow the franchisor’s tried and tested methods of franchisee field support and motivation.

The franchisor will need to ensure that the form of sub franchisee agreement which the master franchisee will be entering into with its sub franchisees properly imposes the necessary controls and obligations needed to ensure that their businesses are operated in accordance with the system and the reputation of the brand maintained. The master franchisee will be contractually obliged to monitor sub franchisees’ performance and, ultimately, to enforce these sub-franchise agreements. Careful consideration needs to be given to whether the franchisor has a direct right to terminate sub-franchisees.

The term of the master franchisee’s agreement must be long enough to allow it to recoup its investment in building a proper country infrastructure, and to issue sub franchise agreements with a term long enough to attract sub franchisees and enable them to do the same, typically 25 – 50 years.

The size of the up-front and continuing fees charged by the home country franchisor for the master franchise is critical. They must be set at a level which both covers the expenses the franchisor will inevitably incur in finding, training and establishing the master franchisee in business, as well as permitting a reasonable long-term income stream to flow back to the home country. They must not, however, be set so high that the master franchisee will feel under pressure, either not to invest sufficiently in its support infrastructure – which is essential to develop and maintain the brand and the network – or to gouge its sub franchisees and charge them fees which are disproportionate to the scale of their businesses and the profits which they will need to generate to make the proposition attractive.

Generalisations are dangerous here. Each business must carefully evaluate its approach based on realistic business plans which take into account the needs of all parties, the costs of doing business in the new market and the level of profitability available, as well as the need to enhance and maintain the image of the system and the brand name.

In a master franchise arrangement it is also crucial to address carefully what will happen, as a matter of local law, if the master franchisee should fail and either want to sell its business, go bankrupt, or if the home country franchisor needs to terminate the relationship.

This is a very important subject which calls for the legal structures to be carefully planned up-front in both master franchise and developmental franchise agreements. The overseas franchisee may wish to sell its business, or bring in partners. It is crucial to the long-term focus to the local business and maintenance of the network’s image and reputation that the control and perspectives of the master franchisee, who was probably selected extremely carefully at the outset, do not change for the worse due to the influence of new shareholders.

The franchisor will therefore want a qualified right of approval of new owners, and certainly a veto over potential competitors becoming involved. It will also be sensible to include options and pre-emption rights to buy-out the master franchisee which will be triggered both by an impending sale or business failure, and on termination.

In a master franchise situation, it is also important to consider the fate of the sub franchisees if the master franchisee fails. Will the home country franchisor wish to step in? It will probably not want to be obliged to do so, but will certainly want to investigate how, as a matter of local law, the contracts should be set-up at the outset so as to have an enforceable option to do so itself, or through a replacement master franchisee, in order to protect the image and reputation of its network, and also so as not to put at risk its income stream from the country, which over time could become very substantial if a large network of sub franchisees is established.

Related to this, the franchisor will want to build in precautions to prevent the sub franchisees taking the opportunity to jump ship to a competing system, again with the risk of loss of a major income stream. Taking over in these circumstances is never easy, but the legal mechanisms usually exist, if carefully planned for in advance, to give the home country franchisor the rights and controls it needs.

Joint venture

A joint venture is created where the home country franchisor agrees to invest and become a shareholder partner in the overseas company to be established by the foreign franchisee. The joint venture company established in this way, in which the franchisor owns, say, a 50 per cent or perhaps 25 per cent share, itself then becomes the overseas country franchisee and is granted either developmental or master franchise rights for the territory by the home country franchisor.

There may be a number of reasons for doing this. The franchisor may wish to share in local profits, as well as receiving its income stream of continuing fees under the franchise agreement. Of course, there is likely to be a price to pay for investing in the capital of the overseas company with the risks which arms’ length franchising avoids, though the risk in this situation is, of course, being shared with the local partner.

Some countries’ legal environments, exchange control or foreign investment laws may make it difficult to repatriate the level of royalty fees which the franchisor would normally want. This may result in the restructuring of the arrangement into a joint venture with a right to receive dividends out of profits, as well as a reduced level of continuing fees. Developing countries’ investment approval regimes may insist on some inward investment.

Sometimes, the prospective franchisee may have all the other characteristics of the ideal local country franchisee, but insufficient funding, which may lead to the franchisor deciding to chip in.

A joint venture (or shareholders’) agreement will regulate the parties’ rights and obligations as shareholders in the new company. In addition, the new company will enter into a developmental or master franchise agreement with the franchisor. As a result, the franchisor ends up wearing two hats with different sets of rights and obligations both as franchisor, and separately as a shareholder in the franchisee company.

There are a number of issues and potential problems which can arise in joint venture company arrangements, basically flowing from the partnership relationship, such as the local partner’s authority, limits to authority, future funding, and what happens if things go wrong.

The franchisor is quite separately in the strong position of also controlling the joint venture company’s rights to operate the system through the franchise agreement which, depending on the facts, it might become entitled to terminate, enabling the franchisor to start again with another franchisee, even if the relationship in the joint venture company has broken down.

Key considerations

• Don’t take your eye off the ball at home. Plan for, and resource, the exploratory steps sensibly. Flights, accommodation, key management time away, and finding and evaluating potential partners all have a cost. Ensure that the domestic operation can bear it and budget for it realistically.
• Plan and implement a sensible trade mark protection programme in advance. The mark is the foundation of the rights you will be granting overseas. Even large companies have learnt to their eternal cost that (generally speaking) the first to register a particular trade mark in a country has the legal right to use it. Trade mark piracy does exist, and if you harbour international ambitions, plan to spend and budget for the fairly significant protection costs which a programme of international trade mark registrations will cost. Without the mark you may have much less to franchise! It is vital to develop a suitable strategy to do this before you attract the attention of those who might see the opportunity to steal your brand and exploit your reputation in this way. Stopping it after the event may be impossible, effectively preventing you from entering an overseas market at least under your usual brand name. At the least, conducting a fight is likely to be a protracted and very costly exercise.
• Getting the right country partner is critical, and a far more serious problem, if you get it wrong, than an occasional badly recruited franchisee at home. Take it very carefully!
• Spend some time analysing and prioritising overseas markets. The world is a big place and with limited resources where are you going to go in the next five years – specifically?
• Don’t rely on unsolicited contacts from overseas. Try to be proactive rather than just reacting to the inevitable enquiries you will receive, but don’t necessarily write them off either. Someone has had the wisdom and energy to identify you, and decide that your concept will work back home. Establish sensible criteria and characteristics for the ideal country or regional franchisee. Do some background enquiring and due diligence to check out the prospective franchisee.
• Most importantly – will your business concept actually work in your target country, or are there cultural, economic, or industry-competitive differences that are likely to present barriers? Eating habits may be significantly different; property, tax or import duty, or social costs may fatally skew the financial figures. In some cases, there may also be legal barriers. Increasingly, countries are adopting franchise-specific laws which must be addressed at a very early planning and prioritising stage, as failure to comply, for example with an obligation to provide certain information to a potential franchisee before entering into negotiations, can have serious consequences.
• Carefully work out your package in advance. Don’t negotiate on the hoof.
• Consider whether there are tax advantages of offshore holding structures; the use of branches and subsidiary companies overseas, or trade mark holding companies established at the right stage can result in greater after-tax resources, either to repatriate as profits, or from which to fund further international expansion.
• Get the best advice from those who have done it successfully before, and check out the credentials of those who claim they have. This really is an area where getting the best legal advice is (almost) worth its weight in gold! Remember the ‘ticking time bombs’ of gaps or poorly drafted provisions in agreements which have been done by those with insufficient experience of international transactions. You won’t necessarily realise this until something goes wrong down the line – then it may be too late.