Replicate to accumulate

Franchising a business can often lead to faster and cheaper expansion. But it's essential to do your homework, says Gareth Chadwick
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Franchising is big business. Surprisingly big business. In the UK it is a £9.65bn industry, with 695 franchise operations, almost 34,000 individual franchises and 330,000 people employed in the sector.

Franchising is big business. Surprisingly big business. In the UK it is a £9.65bn industry, with 695 franchise operations, almost 34,000 individual franchises and 330,000 people employed in the sector.

Its popularity has exploded over the past five years. But given the latest survey by the British Franchise Association (BFA) and NatWest, which reveals that 95 per cent of franchises succeed and are profitable after five years, compared to an average new business survival rate of around 10 per cent, perhaps the real surprise is that franchising isn't even more popular. It is no wonder that would-be franchisees have been to known to queue overnight to sign-up with successful franchise operators.

The term franchising is much used and widely abused. It is applied to everything from the National Lottery to the rail network. As far as most businesses are concerned however, franchising is granting an individual the right to use not only your business idea, but your brand name, your products, your research, your methods, your IT network, your systems. In short, to replicate your entire business format - and hopefully your success - in another location.

The main attractions of business format franchising, as it is called, are two-fold. First, it is a faster route to business growth than traditional expansion. The standard way to national coverage is through a business investing its own resources in a process of site acquisition and the development of wholly owned units, which can take many years to achieve national coverage. With a franchise, the franchisee is responsible for establishing and developing the business in a particular location.

The second benefit is that franchising is a cheaper route to business expansion. Rather than the business investing its own resources in acquiring new sites, it is the franchisee who invests in launching new units and then pays you a royalty fee for the privilege. The industry average is 12 per cent of annual gross sales.

"It is an extremely attractive way for a business to grow, as you are using other people's investment to grow the business," says Simon Wise, deputy director of the BFA. "Secondly, it can give you a much more effective presence on the ground at a national level than traditional growth models."

By its nature, franchising is a much more dynamic way to grow, too. The franchisees you sign up are themselves entrepreneurs with a significant investment in the business, not managers paid a salary to look after it on your behalf.

It was the dynamism of the model that convinced Joanne Freer, founder of the eco-friendly nappy manufacturer Cotton Bottoms, that franchising offered the best route for growing her business. "It allows for much more dynamic development. As a franchisor you are constantly challenged by your franchisees if thing aren't right or they need more support. It keeps the business moving forward and innovating. It does not allow any room for complacency," she says.

It isn't suitable for every business. Nor is it an escape route for one that is failing. Before it can be franchised, a business has to have a proven model of success. And more than that. It has to be a success that can be packaged up, which has logical systems and procedures and solid management, which can be explained in manuals and licensed to other entrepreneurs to replicate in different.

Getting to that stage is not cheap. The BFA estimates that it costs around £100,000 to establish a franchise network. And that's before you actually sign up any franchisees and start recouping some of those costs.

"You need to have all the efficient management systems, procedures, legal protection, supply chain and so on in place from day one. The kinds of things a normal business might invest in over several years, you must have in place on the first day. If you don't do that, the franchise will be dead in the water," says John Pratt, a franchising expert with solicitors Hamilton Pratt.

The initial investment will include the cost of setting up a pilot scheme. It demonstrates that the business format is viable and allows the franchisor to appreciate the needs of franchisees and refine the infrastructure and processes around which the relationship is based. Despite the hefty sums involved, in most cases it is still only a fraction of what it would cost to roll out a national network of wholly owned units.

"Some of the key issues are around knowing the level of support the franchisees will need, knowing what to put in an operations manual and which systems need refining. A pilot helps sort those out," says Simon Wise.

The precise details of how the franchise works are enshrined in the franchise agreement. It sets out the rights that the franchisor is licensing, for how long the licence lasts, the licence fee and continuing royalties, and the obligations of both franchisor and franchisee.

The agreement invariably includes tough termination provisions to enable franchisors to get rid of franchisees who are damaging their brand. Attracting the right calibre of franchisee is the principal challenge for would-be franchisors. It is tempting for a successful entrepreneur to believe that their business will be so attractive that top-quality franchisees will be fighting to sign-up. It is rarely the case.

The problem is that there are only a limited number of prospective franchisees out there with both the financial resources and, more importantly, the right attributes to successfully grow a business. And every franchisor is fishing in the same pool. There are plenty of people with the money, but how many of them could you trust to enhance your brand and help develop the business?

"If you just signed up the first 50 people with money to invest, you would never build a successful business. You have to be very selective and make sure that franchisees empathise with the brand, have the same values, understand the business model and share your goals. They need to be entrepreneurs, not managers. If the first one fails, it is much harder to find the second," says Joanne Freer.

And they do fail. In the late Nineties the Pierre Victoire chain of French bistros got into trouble, with the result that a group of franchisees got together and bought the more successful units off the company.

There have been several attempts at franchising in Britain by American frozen-yogurt companies keen to turn British consumers on to the delights of their product, a favourite in the US, which have had limited success.

But Simon Wise is confident that for a good franchise, the potential for success has never been better. "People are much more aware of the attractions," he says. "There are ever more brands and more businesses looking at franchising these days. The BFA represents 14 different industry sectors and the list is growing every year. It is not all about pizzas and burgers anymore."

'Franchising as a growth model is a brilliant concept'

The Hesters are living proof that franchising works. Originally from Huddersfield, Julie Hester and husband Gary now live in a luxury villa in Florida. They moved to the sunshine state in the summer of 2004 after selling their franchised business, the Property Search Group, for £12m.

It was a chance comment from a friend that set them on the path to millionaire's row. Julie Hester is a former policewoman who left school at 16. In 1997, she was looking to get back into the workplace after the birth of her fourth child when a solicitor friend mentioned how inefficient it was obtaining property searches for conveyancing clients.

Hester offered to help out and began doing the searches herself, cheaper and more quickly than the standard local authority service. Word spread among Huddersfield's legal community and within three months she was working 70 to 80 hours a week.

Such was the growth rate, that after six months Gary left his job and joined her. Although still based in Huddersfield, they were getting business referrals from across the country, but they were reluctant to invest in opening offices in other regions. Franchising was the obvious alternative.

"We didn't do it for financial reasons. Our priority was to expand the business and to win new clients. To make it work you need commitment and dedication, not to look at it as some kind of get-rich-quick scheme," says Julie.

In 1999 they launched the first franchise, a pilot scheme in Barnsley. In October 1999 they launched it nationally at a franchise exhibition. They were advised that they might get 20 or 30 enquiries, of which two or three might be solid. In fact they received 450 enquiries, of which 40 turned into franchises.

Julie says that whittling down the list of prospective franchisees was key. "We were lucky in that we had a lot of people to choose from, but we were very ruthless. We wanted people from white collar backgrounds who could present to solicitors and to whom we felt comfortable licensing our brand. You need to focus on the person you need, not just the ones with the money," she says.

In 2000, the Barnsley franchise alone turned over £750,000, of which they received a 10 per cent royalty fee. By the end of the year they had 102 franchisees. Turnover in 2004 reached £32m and when they received an offer for the company, they accepted and packed their bags for Florida.

"Franchising as a business growth model is a brilliant concept. It wasn't cheap to launch our franchise. It cost over £50,000 to get everything set up and ready to roll. But without franchising we would have struggled to expand a fraction as quickly as we did," says Julie.