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Franchising: from Cash Converters to Kall Kwik, 94 per cent of franchise holders are in profit

What do McDonald's, the Body Shop, Greenalls Inns, Avis and Kall Kwik have in common? Each sells franchises, offering businesses a good chance of success through central marketing and training support, customer loyalty and quality control.

The growth of the franchise sector has been one of the features of British commerce, with an almost 20 per cent annual increase in the numbers of staff employed. There are now 27,000 franchisees in Britain and 550 corporations selling franchises.

One of the newer is Cash Converters, a chain of second-hand shops. The concept began in Australia and there are 350 across the world, with almost 100 opened in Britain in the six years it has operated here. Cash Converters aims to take the retailing of second-hand goods up-market, offering 60- day warranties on all products as well as guarantees that goods have not been stolen.

"Anybody who sells goods to one of our stores must prove their identity, address and that they are over 18," says Mark Foster, the marketing manager for the group. "That information we store on computer, and we video record on CCTV every transaction and have an open-door, open-book relationship with the police. Any complaints against our franchisees and a head-office team will investigate the franchise. The sale of stolen goods would lead someone to be defranchised quicker than anything though we have never had a problem with that. We even 'mystery shop' our stores to ensure they abide by our criteria."

Martyn Seaholme, who runs the franchise in Dunstable, Bedfordshire, is happy he entered into partnership with Cash Converters, despite the pounds 30,000 to buy a franchise and the need for a further pounds 95,000 for other start- up costs. "I was involved in setting-up the first UK shop in Gants Hill in Essex, and I set up here three years ago," says Mr Seaholme.

"There is strength in numbers, and I got a lot of back-up from head office. We have regular meetings where ideas are discussed. We get very good training support from the training centre at head office, with various courses that staff can go on, for example to develop buying and selling skills.

"The first year can be a bit difficult with cash flow, but that soon changes if you get your head down. We have a workshop and technician upstairs and a jeweller down the road for repairs. We have displays saying we give warranties, and it is a good selling point. We are here long-term, and we can build up a strong customer base."

This view is echoed by Gordon Cox, the Bradford franchisee, who was previously group managing director of ELS. "I chose Cash Converters for a number of reasons," recalls Mr Cox. "Its uniqueness - there is an obvious void in the market. The gross margins are so high, excellent net profits are almost guaranteed for top franchisees who operate their stores to the proven well thought out formula."

Although franchised businesses can fail statistics point to their phenomenal success. According to a survey last year by the National Westminster Bank and the British Franchise Association, 94 per cent of franchisees are trading profitably. Research conducted for Lloyds Bank points to banks being particularly supportive to franchises.

Perhaps the most famous franchise success is that of the Body Shop, which now has 1,500 outlets internationally. Expansion of the Body Shop empire is focused on South Korea and Japan, where chains of stores are opening.

Mark Hatcliffe, Lloyds Bank's national franchising manager, said that while franchising often offered good opportunities, it was not a short- cut to a successful business. "Franchising gives you the security of a proven system, but that security is only as good as the system," points out Mr Hatcliffe. "We know there are some good strong franchise systems in operation, but equally we know that there are some weaker ones. The franchise needs to be scrutinised not only by you but, at the earliest stage, by an independent legal expert."

Mr Hatcliffe advised potential franchise buyers to examine the track record of the franchisor and the quality of training and support on offer. This should involve visiting franchise outlets and talking to established franchisees. Contracts should be checked carefully, noting the territory covered, length of contract, what obligations are imposed on the franchisor and ensuring that the franchisee has the freedom to sell the business.

A franchisee will typically invest between pounds 10,000 and pounds 50,000. Before commitments of that level are entered into franchisors should be expected to offer some strong reassurance that the franchise will be viable.

q The British Franchise Exhibition, organised in association with the British Franchise Association and the Confederation of British Industries, takes place on 27 and 28 June, at the G-Mex Centre in Manchester.