FRANCHISE OR INDEPENDENT?
The term franchise covers a variety of arrangements in which the owner of a product, process, brand name, or service allows someone else to use it in exchange for some form of payment.
Nationally recognised brands include Prontaprint, Specsavers, Dominos Pizzas and Molly Maid to name just a few.
The franchisor is the person or company ‘selling’ the right to use their name or system.
The franchisee is the person or company ‘buying the rights to use the franchise name or system.
The franchisor is normally paid via a combination of the following:-
An upfront payment for a territory and associated systems and training
An ongoing charge normally paid monthly and based on a percentage of the turnover as stipulated in the franchise agreement.
An ongoing monthly, quarterly or annual charge towards a franchise marketing budget. Sometimes a fixed fee, but often again based on a percentage of turnover
Advantages of franchising
- Access to tried and tested pricing, marketing, pricing, training and systems
- Use of existing brand and association with being part of something ‘larger’
- An experienced ‘partner’ to turn to for advice during any difficult events – such as issues with staff, landlords etc
- If you have little business experience it may be difficult for you to satisfy landlords in prime retail areas that you are a safe bet to take on the responsibilities of taking on their property; Your association with the franchise brand is likely to help and in many cases the franchise may take on the head lease allowing you to rent from them.
- Statistically higher probability of success for a new start up franchise than an independent start up.
Disadvantages of franchising
- You will have to share a level of your turnover or profits with the franchisor
- Most franchises are pretty prescriptive, you are expected to present your business in a certain way, provide a set service or retail offering usually from the franchisors own range and operated the business within fairly tight parameters. This can be extremely frustrating for those with entrepreneurial flair who wish to be creative.
- Limited expansion – a franchise normally comes with a defined territory or catchment area. If your business proves to be a massive hit, you will have to buy another territory or if they are all taken, you may have to wait for another franchisee to sell up. Most franchise agreement also precludes you from running any other business – the franchisor wants to ensure that you focus your efforts on their business to provide them with a maximum return.
- Your business reputation could be tarnished by the activities of the franchisor or other franchisees
- A change of ownership of the franchise rights (e.g. the franchisor sells up to a venture capitalist or there is a management buy out) could impact on the culture of the business. Your margins could be squeezed by a new owner seeking to increase the franchise fees to increase the profits of their new acquisition
- In addition to the core franchise fee, It is common for franchise agreements to include a charge (often a percentage of a franchises turnover) towards a national marketing budget. Franchisees usually have no say on how this is spent and there may be a temptation by the franchisor to concentrate on attracting additional franchisees rather than promoting the business to the general public.
- Franchise fees are normally paid on the basis of a percentage of turnover. This means that a franchisee has to pay the franchisor even if the business is making a loss.
Making a decision
Both options have many pros and cons and the best route depends upon the individual concerned. Franchises come in many shapes and size some which may suit you, others which may not.
Many first time buyers cut their teeth via the franchise route and having gained an understanding of how businesses work and of their own strengths and weaknesses, sell their franchise and open or acquire their own independent business.
For those struggling to make a decision, we would recommend initially looking at both franchise and independent opportunities until you get a better understanding and can then refine your search, or until you find the right business to purchase.
