A low-risk guide to franchising: Roger Trapp reports on a mutually beneficial arrangement that can lead to profit and growth

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The Independent Online
FRANCHISING has had a mixed press over the years. Lauded in some quarters as an ideal method of low-cost expansion, the concept has been criticised in others for attracting scam artists.

Nevertheless, last weekend saw several thousand people trooping around the national franchise exhibition at the NEC in Birmingham in search of a business opportunity. Many were undoubtedly there because at a time of recession people will investigate anything they perceive has a chance of making money. But some would have been people with successful businesses they were seeking to expand.

According to Andy Pollock of the accountants Rees Pollock, much of the confusion and suspicion surrounding franchises stems from their constant promotion as being businesses based on other people's money.

'That's true. But you need to spend money of your own,' he says. 'And any business like that is bound to attract the unscrupulous.' As a result, the British Franchise Association has set out a series of guidelines.

Additional confusion is caused by companies such as motor dealers which are thought to be franchises, but are in fact run under licence. The franchise system is meant to be a way of extending a tried and tested business format. Among the most successful examples are Pizza Hut, McDonald's and, for all its recent troubles, The Body Shop.

In these cases, the franchisee is buying into a business that has already won a significant place in the market. While the upfront fee will be correspondingly high, the risk should be relatively low.

In return for observing certain standards - so a customer cannot discern any difference between outlets - the franchisee obtains the right to trade under a company's name in a particular area, typically for several years, and also receives appropriate training.

The franchisee also pays all the set-up costs - historically a problem in the case of McDonald's, for instance, because these costs reflect the higher cost of property in Britain than in the US, and therefore make the concept less attractive - and once in business, pays an ongoing fee at weekly, monthly or quarterly intervals.

This is usually expressed as a percentage of turnover - generally 7 to 10 per cent, but sometimes as low as 1 per cent or as high as 40 per cent depending on the business. Alternatively, the franchiser can obtain his fee by adding it to the cost of the raw materials that the franchisee must buy. This approach is generally confined to businesses selling high-margin goods. The franchiser must get the balance right. 'If the franchiser can make money, you'll make money,' says Mr Pollock.

Another misconception he is keen to dispel is that franchising is a way out of trouble. 'You don't need as much as capital as for conventional expansion. But you do need to plan it. You can't do it if you can't afford it,' he says.

Once a franchise operation is going, progress must be monitored. It is possible with the aid of accountants to make projections, and if an outlet falls below these, investigations can be carried out. It will have happened either because the franchisee is swindling the franchiser or there are problems with the business.

The latter is generally due to over-optimistic forecasts by either side. It is here, says Mr Pollock, that the franchiser has responsibilities to let those seeking to enter the business make proper enquiries of those already involved: 'Franchisees are the best advertisement for the idea.'

Done properly, however, franchising can attract institutional backing, as in the case of Kall-Kwik, the high-street printing chain.

With companies likely to be reluctant to seek loans - and banks to offer them - for some time to come, franchising should do well over the next four to five years, Mr Pollock predicts.