No Pain,No Gain: Time to reap the benefit of the franchising boom

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The Independent Online

Franchising is booming. Not so many years ago only a handful of businesses adopted what was then regarded as the poor man's uncertain route to possible fame and fortune. Nowadays it is an established style of trading. Indeed it is said there are now more than 700 such operations in this country with yearly sales topping £9bn. And more franchise companies are expected to appear.

The No Pain, No Gain portfolio has got in on the act. Two constituents, MyHome International and Printing.com, have successful franchise spreads. Other quoted groups such as Domino's Pizza, currently adding its Swiss franchise company to the stock market, and chocolate chain Thornton's have latched on to the idea of localised managements being encouraged to invest and therefore collect a larger slice of the profits. It is all a far cry from those distant days when pub landlords running brewery-owned outlets were, in a sense, the only franchisees around.

They did not regard themselves as pioneers of a new breed of business entrepreneurs and it is ironic that as the franchise movement has grown, the brewer-publican relationship has slipped and is now much weaker than it used to be.

Perhaps it is not surprising that the current roll-out has prompted the creation and flotation of a company aimed at investing in franchising operations. Shares of Franchise Investment Strategies (FIS) arrived on the fringe Ofex market last month. They were placed at 4p and have since moved ahead to 5.125p.

Supporting this venture is St. Helen's Capital, a small finance house that is achieving a reputation as a shrewd Ofex participant. MyHome, the portfolio's only Ofex constituent, is also involved. It has a 27.4 per cent stake acquired by exchanging shares, representing 2.5 per cent of its capital.

The deal valued MyHome shares at 16p against the current 14.25p. Russell O'Connell, the man behind the development of the MyHome franchise network, is on the FIS board. Another director is Jonathan Jenkins, former head of Ofex. Australian Bruce Rowan, a serial investor, has a 29 per cent interest.

The arrival of FIS is yet another sign that Ofex is recovering from the traumas of last year which at one time appeared to threaten its continuing existence. It is attracting a steady flow of recruits although continuing to lose constituents to the more up-market Alternative Investment Market (AIM), the highly successful junior facility run by the Stock Exchange. AIM has nearly 1,300 companies; 166 of them based overseas.

In the past the City fund managers tended to shun Ofex. But they are now more interested and nibbling at some of the more attractive constituents. Last month MyHome raised £500,000, largely on the back of institutional interest.

Simon Brickles, a former head of AIM recruited to restore the fortunes of Ofex, has been quick to fill at least one gap created by AIM as it moves to make sure it does not obtain a "wild west" image. AIM decided to restrict the flood of little cash shells. Ofex, displaying astuteness, is prepared to entertain such companies and St. Helen's has been quick to take advantage of the fringe market's more relaxed attitude.

With one Ofex constituent in the portfolio I do not intend to recruit FIS. By its very nature the fringe market is quite speculative - although it does have some solid and long established members such as Arsenal FC and Britain's oldest brewer, Shepherd Neame.

I regard FIS as a fascinating investment and welcome the portfolio's indirect involvement via MyHome. It has already completed its first deal since flotation - paying £100,000 for a half share in DTT, running a franchise network offering training for drivers of large lorries. Other deals are expected to be clinched soon. FIS plans to realise its investments within a few years either through flotations or trade sales. Simon McNeill-Ritchie, the company's managing director, believes many established groups are looking at franchising. "It is the ideal way to provide an incentive for management," he says.

St. Helen's is related to no fewer than 20 Ofex companies out of the 138 currently inhabiting the fringe market. Among them are three cash shells with a fourth on the way. It plans to get more involved in AIM and six of its client companies are in various stages of preparing to join the junior market.

At the last count St. Helen's was in the red but it is expected to produce a profit when it next reports. Tony Drury and Mark Warde-Norbury run the group and account for about 40 per cent of the shares. The company itself is traded on Ofex, with the shares at 6.5p, capitalising the company at £1.2m.

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