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As a franchisee, you will be buying the rights to use the business system and name of your franchisor in a specified territory or location over the period of the franchise agreement. This is known as a business-format franchise and should not be confused with other types of franchises, such as those granted to TV stations and rail operators.
You will pay an up-front franchise fee for the rights to use your franchisor’s system, and cover the costs of your training and the help you will get from your franchisor in starting up your new business. You will then have to make on-going payments for the continuing services you receive from your franchisor. These payments are usually by way of royalties based on your turnover or, in a few cases,through a mark-up on the goods or services which the franchisor supplies.
Advantages
There is far less risk in setting up in business as a franchisee than in going it alone because you will be following the path of the earlier franchisees who have successfully cloned the business with the help of the franchisor.
The high success rate means it will be easier for you to raise the money to start-up your business. Banks recognise they face less risk in lending to franchisees and will often lend on a ratio of 2:1, rather than their normal start-up ratio of 1:1. In the case of the better franchises, they may also offer a finer interest rate.
You can talk to the existing franchisees before you buy to check what they think about the franchisor and whether they are making the money they had hoped.
You’ll benefit from the franchise’s bulk buying power and, if it has a well-known name, its valuable brand and reputation.
If it’s a retail business, you’ll benefit from the franchisor’s standing with landlords to get you into the property you’ll need - landlords are naturally hesistant to lease to people who are starting out on their own for the first time.
Running your own business can be lonely and in a franchise there is usually a lot of comraderie amongst the franchisor and the franchisees. This is neatly summed up in the most frequently-quoted franchise catchphrase, “you’re on your own, but not alone”.
Disadvantages
Although it is your business, you will not be free to run it as you would wish. You will have to do as the franchisor tells you and stick rigidly to the system as set out in the franchise manual and accept the changes which will come along from time-to-time.
You will have to continue paying royalties throughout the period of the franchise contract, regardless of whether you feel you’re getting value for money, or that your franchisor deserves them. Franchising has been described as “taxation without representation”.
Your franchisor will have access to your figures, and you will have to allow him to run regular security checks to see that you are not under-declaring your royalties and also quality checks to ensure you are meeting his operating standards.
You will be under contract to run the business for a specified number of years so you can’t quit without penalty, and if you did you would lose the money you had paid for the franchise.
"Franchising is not about new ideas that might work, but about operationally-proven, successful business know-how”
- Dick Crook, the franchise specialist who brought Budget Rent A Car to Britain and helped launch Kall Kwik.
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How to Evaluate a Franchise
By Martin Mendelsohn
You need to read this guide before signing any franchise document, or parting with money. It will help you to assess whether you are suitable for self-employment and in particular franchising, and tell you how to detect a suspect franchisor. There are no franchise laws in this country to protect you. The wrong decision could cost you your home and life savings, and leave you with considerable debt.
UK £12.95 (airmail £14.45) or £6,99 online. Order
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