Self-employed with a running start

Business-format franchising is proving so successful for people who want to work for themselves that top corporations are exploring the methods as a way of expanding. Roger Trapp explains
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FOR ALL the oft-reported trials and tribulations of self-employment, there remains a general perception that working for yourself is better than working for someone else.

Last week, for instance, a survey by Midland Bank found that - given the money - more young adults would like to run their own business than do anything else.

The problem is that just as self- employment supposedly brings freedom, it also comes complete with risks. Many small firms fail almost before they have begun.

This is where franchising comes in. Proponents claim that it combines the advantages of working for yourself with the support associated with larger organisations. According to Roy Cheevers, business manager of the British Franchise Association, the sector has a failure rate today of just 0.5 per cent, and this makes it an attractive route for those wishing to start out on their own. "We are far more successful [than other approaches] at putting people in business, and keeping them there," he says.

By buying into what it calls a "recognised business-format franchising system" - the term for the BFA's approved schemes - an individual is becoming involved with something that is already established. He or she can see that the system is working in practice and can talk to others taking part - before they commit their investment, which runs anywhere from pounds 5,000 to pounds 500,000.

"That sort of process is not available to people setting up in business on their own," adds Mr Cheevers, pointing out that, in addition to the preparatory help, franchisors usually offer marketing assistance and opportunities to obtain advantageous deals on supplies.

A limiting factor, though, was that the sector had been associated with such businesses as fast foods, quick printing, car repairs and drainage services, and as such has not been especially attractive to frustrated self-starters in middle management positions. Instead, it had largely been the province of those looking to "buy a job" with their redundancy cheques. Recently this has begun to change.

Though there is a reluctance to reveal names, it is said that many blue- chip companies are looking at the franchise concept as a route to expansion.

If these companies go ahead, many executives who might otherwise have been stuck in large corporations might get the chance to have the best of both worlds - working on their own account in association with some of the business community's best-known names.

Chains of opticians, such as Dolland and Aitchison and Specsavers, are among the first businesses to franchise off many of their branches as a way of keeping within the organisation many qualified opthalmic or dispensing opticians who might otherwise be tempted to seek better positions with competitors or more likely to go out on their own. Stuart Brown, a senior consultant in the franchising and licensing advisory section of BDO Stoy Hayward, accountants, says: "It is a career step for them that allows them the comfort or strength of a brand as well as marketing activity far beyond their own resources."

Mr Brown, who has worked with Dolland and Aitchison on its programme, points out that the opticians are different from the norm, in that the people operating the outlets have prior experience of the business. On the other hand, those involved in another sector that is moving into franchising - recruitment - may have been in the business before, but equally they may just have general skills in selling and in dealing with "reasonably high-level executives". Select Appointments, a chain prominent in London and the South-east, and the US-based Humana International are among the recruitment consultancies that are taking this route to expansion.

At the same time, though, some of the more established franchise operations, such as the printing shops Prontprint and Kall-Kwik, are starting to realise that the difference between good and poor performance can be the presence of people dedicated to developing the business.

"It is a safe role, rather than doing the actual printing," Mr Brown explains, adding that there is an increasing need for franchise middle management.

More significant, perhaps, is the growing interest in the franchise concept that is being shown by large corporations, such as British Airways and some brewers. While the approach taken by some oil companies - with convenience stores now attached to their petrol stations - is not pure business-format franchising, the idea is inspiring companies in other businesses to view the idea as a possibly effective way of expanding beyond natural boundaries.

BA, for instance, has begun using it as a way of building up its Gatwick hub. Since granting its first franchise in July 1993 to CityFlier Express, a small airline (run by a former BA pilot) that used to be a feeder to the now-defunct Air Europe, it has formed relationships with about half a dozen small airlines, including Logan Air in Scotland and Manx Airlines, which serves the North-west.

Under the arrangements - a project that won a corporate strategy award for BA at the recent Paris Air Show - the airlines operate under the BA brand and to BA-defined systems, so that all but the most perceptive passengers think they are travelling on BA aircraft.

The advantage is that it gives the national airline access to other routes without the capital investment seen in the likes of the USAir deal. Another perceived advantage is that in using small concerns in this way, it raises service standards because it is believed that franchisors will outperform employees by being better motivated. However, there is also a danger of the larger organisation, or franchisor, losing control of the operation.

As Mr Cheevers of the BFA points out, it is not just a case of contracting out or outsourcing to reduce costs. "They have to give a bit away," he says. "There has to be some potential for the franchisees to make a return on their investment."

It is possible to argue, he says, that companies can cut costs through what is known as "convenience franchising" but they must also realise that in so doing they are exposing themselves to the market. It is essential that companies thinking of taking this route have the right culture in place - as well as the people to deal with it.

"Franchising is all about service," he says. "You can't drag people kicking and screaming into it."

Success stories still on the rise, survey shows

FRANCHISING has survived the recession and continues to present a positive outlook, according to the latest survey of the sector.

The 1994 survey for National Westminster Bank and the British Franchise Association shows that overall turnover for franchise businesses grew by 10 per cent to pounds 5.5bn, and that the number of recognised business-format franchising systems grew by 18 to 414, supporting 26,400 franchisees.

Peter Stern, head of NatWest's franchise section, said: "The fact that 87 per cent of franchisees are now reporting profitable results - up from 78 per cent in 1992 - is very good news. And 86 per cent are profitable within the first two years of operation."

Another encouraging sign in the survey was that the proportion of definitely loss-making franchisees had dropped to three out of 100 - less than half the rate in 1992.

Brian Smart, director of the British Franchise Association, added: "The franchising sector makes a vital contribution to the economy and provides employment for some 200,000 people. Franchising has proved to be the most successful way to start a new business, with each venture growing to take on an average seven or eight employees."

More than 80 per cent of both franchisors and franchisees in the survey forecast an improvement in business in the year ahead. Moreover, nearly half of the franchise systems plan to be setting up franchise operations in mainland Europe by 1999.

London, with 16 per cent of all UK franchise units, and the rest of the South-east (with 15 per cent) remain the main areas for franchising. However, the South-west region and the West Midlands (each with 12 per cent) and the North-west (with 10) are growing in importance.

The survey also indicated that relationships between franchisors and franchisees have been strengthening in recent years. Only one in 20 franchisees with three years or less to run on a contract said that they definitely would not renew.