The British Franchise Exhibition: Invest in a licence to make money: More established companies are looking at franchising as the way to expand their tried and tested businesses

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The Independent Online
THE CAUTIOUS optimism of business about the economy is being hailed as good news by Britain's franchising industry.

Peter Stern, head of National Westminster Bank's franchise section, said business had not yet reached the peak seen before the recession. But levels of activity in recent months give cause for hope. Indeed, he believes that franchising - which was once tarnished by sharp practices - has matured in recent years.

''The recession has actually helped bankers, because the franchisors (the owners of the business concept) are taking a much more realistic attitude,' he said. In the past, they were looking for lending of up to 75 per cent of the finance, when the banks wanted to keep the level to two-thirds. Now, franchisors are realising that the extra gearing this entails can add to the pressures on a fledgling business. Loans now typically account for about 60 per cent, and in some cases as little as half, of the finance required, Mr Stern said.

He said he was prepared to offer two-thirds for the 'right deal' but added that he and his team have always resisted providing as much as 75 per cent. 'Perhaps that's why we have had very few cases where we've allowed them to overgear.'

Franchising enables people with as little as a few thousand pounds to set up in business, and at the same time allows established businesses to expand more cheaply than they would be able to otherwise.

Stationery operations, such as Kall Kwik, PDC Copyprint and Presto Print, are typical of the businesses that lend themselves to franchising. But even such well-established companies as McDonald's, Wimpy and Rover Cars are using it as a means of developing, though clearly such ventures would be beyond the reach of the archetype husband-and-wife franchise team.

Among the retailers that have recently joined the trend for expanding in just this way is Berketex Brides, a leading name in bridal gowns and accessories for more than 20 years. Berketex, a division of Bridal Fashions, which is itself a subsidiary of William Baird, already has 30 retail outlets around the country. It plans to use the franchise strategy to open about 20 more over the next three years.

In keeping with the professional approach increasingly being adopted by frachisors, the Lincolnshire-based company offers comprehensive assistance to help franchisees get started. As well as a full training programme carried out under the guidance of an experienced management team, they receive a complete manual and brochure to make sure they stick to the proven format.

For that is what franchising is all about. To succeed as a franchise, a business must have an identifiable image that can be repeated at various locations around the country and even abroad - as the McDonald's example amply demonstrates.

The original business gains by being able to use other people's money to fund its expansion, while the would-be entrepreneur is protected from the marketing problems and other difficulties associated with the establishment of a business by being involved in something that already has a track record.

The franchisee must stick to the business format - by having the right signs, uniforms, store layout and the like. The franchisor is obliged to provide adequate support. Indeed, if it does not supply support, it risks harming itself as much as the franchisee, since any failure would reflect badly on the image of the business.

The franchising industry has not been without its failures. But Mr Stern said the sector has performed no worse than the economy as a whole. According to the latest annual survey produced by NatWest in conjunction with the British Franchise Association, despite the continuing recession, the proportion of franchisees making a loss declined from 30 per cent in 1991 to 22.5 per cent in 1992. Moreover, those that can survive the difficult early years can expect a good return on their investment.

After five years, 49 per cent of franchisees surveyed were marginally profitable, 30 per cent quite profitable, and 5 per cent highly profitable.

In Mr Stern's view, this is largely because of the attempts at quality control by the British Franchise Association and the likes of his bank. Pointing out that there are still a few operations around that his team would not touch, and that there are failures in even the best systems, he says the key is sending managers out into the field and getting them to ask questions. 'You have to be genuinely satisfied that if you lend to any of the franchisees, you have got a reasonable chance of getting your money back from a large number of them.'

But if much of the finance comes from banks, where does the rest come from? It is widely assumed that franchising has particular appeal to people with large redundancy checks in the bank. However, the survey of the pounds 4.5bn industry suggests that is not the case. Although a decline in the proportion of franchisees seeking loans (from 81 per cent in 1991 to 69 per cent in 1992) indicates greater use of redundancy money in starting up, the figure is still not regarded as significant.

'Primarily, people go into franchising because they want to be in business for themselves, but perhaps don't want to take a giant step into the unknown,' said Mr Stern.

Many types of business appear to be tailor-made for franchising. Stationery and printing operations, for instance, have long been seen as attractive because they are comparatively simple to operate and clean. Furthermore, rather than competing with existing businesses, the likes of Kall Kwik and Presto Print, the largest independent printer which has recently moved into franchising, have essentially created a specialist market. By bringing printing out of the back streets into the high street, they have widened the overall market.

With an entry cost of about pounds 100,000, they provide a reasonable opportunity of making a good living, since healthy margins can be achieved by keeping costs low.

The same is broadly true of Signs Express, the Norwich-based computer sign-cutting service that is making its exhibition debut at Wembley. Set up four years ago with the specific intention of developing as a franchise operation, Signs Express already has 17 outlets and by 1996 aims to have 75 sign shops providing a full range of signs for buildings, public places and vehicles that can be created in a fraction of the time of traditional methods.

Would-be franchisees are required to make an initial personal investment of pounds 25,000 - most of which goes towards a training programme.

Indeed, the middle to lower end of the market appears to have held up well during the tough economic situation. It is thought that this is because the franchise operators have realised that they needed to devote more time to supporting existing franchisees rather than trying to improve turnover by attracting new investors. It could also be that vulnerable operations collapsed in the early stages of the recession.

Increasingly, observers are optimistic about the higher end of the market, where investments of several hundred thousand or even millions of pounds are required.

Having realised that franchising, which in its wide definition already accounts for about a third of UK retail sales, has held up well, many large organisations are considering signing up. It is a development that may pay dividends in a year or two, says Mr Stern.

(Photographs omitted)