FRANCHISING “A REALISTIC OPTION FOR EVERY BUSINES?” Wednesday 26 th November 2008 Kenneth Sharp

AGENDA Agenda Introduction What is it? Industry overview Suitability Types Revenue Streams Stages in Franchising Costs ROI Other Models HELP! Is it a Good Time? Summary Questions & Answers

Agenda

Introduction

What is it?

Industry overview

Suitability

Types

Revenue Streams

Stages in Franchising

Costs

ROI

Other Models

HELP!

Is it a Good Time?

Summary

Questions & Answers

INTRODUCTION About Business Options Set-up 5 years ago Senior Business Adviser for Business Link London Created and ran their Franchise Department British Franchise Association Irish Franchise Association Institute of Business Consulting Only company with all three accreditations Offices covering London; South East & South West; Midlands; East; North West, Wales; Northern Ireland; Ireland ) About Kenneth Sharp Director of own consultancy; Triage Hospitality Partnership with Business Options Set-up and run a number of businesses myself

About Business Options

Set-up 5 years ago

Senior Business Adviser for Business Link London

Created and ran their Franchise Department

British Franchise Association

Irish Franchise Association

Institute of Business Consulting

Only company with all three accreditations

Offices covering London; South East & South West; Midlands; East; North West, Wales; Northern Ireland; Ireland )

About Kenneth Sharp

Director of own consultancy; Triage Hospitality

Partnership with Business Options

Set-up and run a number of businesses myself

WHAT IS IT Normally referred to as “ Business Format Franchising” A contractual long-term relationship Grant of a licence to franchisee Franchisee gets: Tried and tested product/service Profitable proven business model to follow Experience and know-how of the franchisor Entitlement to use the trade name / mark Entire package

Normally referred to as

“ Business Format Franchising”

A contractual long-term relationship

Grant of a licence to franchisee

Franchisee gets:

Tried and tested product/service

Profitable proven business model to follow

Experience and know-how of the franchisor

Entitlement to use the trade name / mark

Entire package

EXAMPLES

EXAMPLES

Industry Overview At the end of 2007 in the UK: Industry worth £12.4bn 806 franchise systems Property services 202 Personal services 159 Business and commercial services 156 Hotels and catering 115 Store retailing 101 Transport and vehicle services 73

At the end of 2007 in the UK:

Industry worth £12.4bn

806 franchise systems

Property services 202

Personal services 159

Business and commercial services 156

Hotels and catering 115

Store retailing 101

Transport and vehicle services 73

Industry Overview Regional Distribution of Franchised Units (%), 2005 – 2007 South East 20 South West 13 London 12 North West 10 East Midlands 8 Scotland 8 Yorkshire 8 West Midlands 7 North/North East 5 Wales 5 East Anglia 3 Northern Ireland 1

Regional Distribution of Franchised Units (%), 2005 – 2007

South East 20

South West 13

London 12

North West 10

East Midlands 8

Scotland 8

Yorkshire 8

West Midlands 7

North/North East 5

Wales 5

East Anglia 3

Northern Ireland 1

SUITABLE? Is it a financially viable business? - Would it still be viable with an additional 15% costs? Is there long-term and widespread demand for your product / service? Can you prove that it can work in other parts of the country and without your skills and ability? Are the business processes easily replicable? Can an unskilled person easily be trained to run the business / sell the product or service?

Is it a financially viable business?

- Would it still be viable with an additional 15% costs?

Is there long-term and widespread demand for your product / service?

Can you prove that it can work in other parts of the country and without your skills and ability?

Are the business processes easily replicable?

Can an unskilled person easily be trained to run the business / sell the product or service?

NOT SUITABLE A business that is failing Low gross margins (e.g. newspaper delivery) Where product range has short life-cycle (e.g. toy) Geographically defined market - no potential to repeat in other places (e.g. Tower of London gift shop) High technical skill levels required (e.g. brain surgery) Not proven (e.g. only been trading for 3 months old) YET!

A business that is failing

Low gross margins

(e.g. newspaper delivery)

Where product range has short life-cycle

(e.g. toy)

Geographically defined market - no potential to repeat in other places

(e.g. Tower of London gift shop)

High technical skill levels required

(e.g. brain surgery)

Not proven

(e.g. only been trading for 3 months old)

TYPES Investment Franchise Investment franchises are operated by the fast-food and restaurant chains, as well as by some well-known hotels. The franchisee has overall control of the business Employs his or her own senior management and staff. Executive Franchise Involves the provision of professional services, Financial advice, legal services or recruitment assistance.

Investment Franchise

Investment franchises are operated by

the fast-food and restaurant chains,

as well as by some well-known hotels.

The franchisee has overall control of the business

Employs his or her own senior management and staff.

Executive Franchise

Involves the provision of professional services,

Financial advice, legal services or recruitment assistance.

TYPES Retail Franchise The franchisee runs the outlet, employs staff and displays goods approved by the franchisor. Distribution Franchise A distribution franchise permits the franchisee to operate from a depot or central office that is usually owned by the franchisor. Depot Franchise The franchisee is the operator and sole occupant of the depot. This type of franchise is generally available to courier companies and parts suppliers, for whom a depot is an essential part of the business.

Retail Franchise

The franchisee runs the outlet, employs staff

and displays goods approved by the franchisor.

Distribution Franchise

A distribution franchise permits the

franchisee to operate from a depot or

central office that is usually owned by the franchisor.

Depot Franchise

The franchisee is the operator and sole occupant of the depot. This type of franchise is generally available to courier companies and parts suppliers, for whom a depot is an essential part of the business.

TYPES Job Franchise Usually a one-person business, operated by the franchisee from home. Home-delivery operations, such as lawn care, car repairs or furniture refurbishing, are examples of job franchises. Management Franchise A management franchise is where the franchisee will be responsible for both running the franchise and employing and managing a team of operatives.

Job Franchise

Usually a one-person business, operated by the franchisee from home. Home-delivery operations, such as lawn care, car repairs or furniture refurbishing, are examples of job franchises.

Management Franchise

A management franchise is where the franchisee will be responsible for both running the franchise and employing and managing a team of operatives.

REVENUE STREAMS Initial Franchise Fee Average cost is £52,500 On-going Fees Management Services Fee (Royalty) Average 7.5% of Gross turnover ( never profit ) National Marketing Levy Average 1.9% of Gross turnover Mark-up on Goods Service Fees Training Fee Others: e.g. re-sales (transfer fees) The franchisor should not be looking to make a profit from the initial fee. Source: (Nat West Survey 2008)

Initial Franchise Fee

Average cost is £52,500

On-going Fees

Management Services Fee (Royalty)

Average 7.5% of Gross turnover ( never profit )

National Marketing Levy

Average 1.9% of Gross turnover

Mark-up on Goods

Service Fees

Training Fee

Others: e.g. re-sales (transfer fees)

The franchisor should not be looking to make a profit from the initial fee.

Source: (Nat West Survey 2008)

STAGES IN FRANCHISING Franchise Model Development ( Feasibility Study ) Assesses the viability for the franchisor and for their franchisees Develop the Franchise Package (fees, services, support, territory criteria, minimum performance) “Blueprint” Infrastructure Development Franchise Operating and Reporting Systems Franchise Legal Documents Trade Marking Franchise Operations Manual Franchise Detailed Territory Mapping Recruitment Franchise Recruitment Strategy Franchise Recruitment Material Marketing the Franchise Opportunity Franchise Enquiry Processing Franchisee Interviewing Franchisee Training Support General Franchisee Support Franchise Support Staff Recruitment Franchise Support Staff Training Franchise Network Meetings and Conferences

Franchise Model Development ( Feasibility Study )

Assesses the viability for the franchisor and for their franchisees

Develop the Franchise Package (fees, services, support, territory criteria, minimum performance) “Blueprint”

Infrastructure Development

Franchise Operating and Reporting Systems

Franchise Legal Documents

Trade Marking

Franchise Operations Manual

Franchise Detailed Territory Mapping

Recruitment

Franchise Recruitment Strategy

Franchise Recruitment Material

Marketing the Franchise Opportunity

Franchise Enquiry Processing

Franchisee Interviewing

Franchisee Training

Support

General Franchisee Support

Franchise Support Staff Recruitment

Franchise Support Staff Training

Franchise Network Meetings and Conferences

COSTS £0 £20,000 - £25,000 to be ready to take to market £1,500+ a month franchise recruitment budget Look to recoup costs from first few franchisees (upfront franchise fee) Funding options: Banks look favourably on proven businesses that want to franchise Government: Small Firms Loan Guarantee, Local grant / support initiatives Private investors

£0

£20,000 - £25,000 to be ready to take to market

£1,500+ a month franchise recruitment budget

Look to recoup costs from first few franchisees (upfront franchise fee)

Funding options:

Banks look favourably on proven businesses that want to franchise

Government: Small Firms Loan Guarantee, Local grant / support initiatives

Private investors

R.O.I

COMMON FACTORS Successful Franchises View franchising as a long term partnership Provide comprehensive training Undertake ongoing research & development Franchisors income linked to the success of the franchisees

Successful Franchises

View franchising as a long term partnership

Provide comprehensive training

Undertake ongoing research & development

Franchisors income linked to the success of the franchisees

COMMON FACTORS Failed Franchises View franchising as an income stream to prop up a failing business The business is not proven The business has limited longevity After initial training, they leave the franchisee on their own Have little or no financial incentive in the success of their franchisees Do not undertake ongoing research & development

Failed Franchises

View franchising as an income stream to prop up a failing business

The business is not proven

The business has limited longevity

After initial training, they leave the franchisee on their own

Have little or no financial incentive in the success of their franchisees

Do not undertake ongoing research & development

OTHER MODELS Company owned expansion Acquisitions Licensing It is important to find the right expansion model for your business. Find / adapt a model to fit your business DON’T adapt your business to fit a preconceived model Quite often it can be a mixture of a number of expansion and indeed franchise models

Company owned expansion

Acquisitions

Licensing

It is important to find the right expansion model for your business.

Find / adapt a model to fit your business DON’T adapt your business to fit a preconceived model

Quite often it can be a mixture of a number of expansion and indeed franchise models

COMPANY OWNED EXPANSION Most common form of expansion in the UK Wait until you have made sufficient profits in the business to fund or to allow you to borrow sufficient money to fund another outlet / office Pros: You own the new unit totally so you keep all the profits it generates You keep total control over the unit Grows the brand name which benefits the existing business Economies of scale Cons: Time it takes to expand i.e. wait until you have sufficient funds Cost of opening a unit You have to recruit and manage staff in a remote unit(s)

Most common form of expansion in the UK

Wait until you have made sufficient profits in the business to fund or to allow you to borrow sufficient money to fund another outlet / office

Pros:

You own the new unit totally so you keep all the profits it generates

You keep total control over the unit

Grows the brand name which benefits the existing business

Economies of scale

Cons:

Time it takes to expand i.e. wait until you have sufficient funds

Cost of opening a unit

You have to recruit and manage staff in a remote unit(s)

ACQUISITIONS You buy an existing business, rebrand it, and run it as a company owned operation PROS Existing customer base: managed correctly should be able to maintain the existing customer base. Funding expansion: you borrow against the trading performance of the company you are buying. Profit potential: you own the new unit totally so you keep all the profits it generates Control: you have total control over the unit Corporate and product brand development: you develop both the companies name and products CONS Staffing: you will be inheriting someone else's staff (TUPE) Time: it can take along time to identify suitable companies, make an approach, negotiate, complete the purchase Customer reaction: customers will be used to the old brand and service offering; they may not like any changes.

You buy an existing business, rebrand it, and run it as a company owned operation

PROS

Existing customer base: managed correctly should be able to maintain the existing customer base.

Funding expansion: you borrow against the trading performance of the company you are buying.

Profit potential: you own the new unit totally so you keep all the profits it generates

Control: you have total control over the unit

Corporate and product brand development: you develop both the companies name and products

CONS

Staffing: you will be inheriting someone else's staff (TUPE)

Time: it can take along time to identify suitable companies, make an approach, negotiate, complete the purchase

Customer reaction: customers will be used to the old brand and service offering; they may not like any changes.

LICENSING Someone pays you money and you grant them the right (licence) to sell your product or service under their own company name PROS Time it takes to expand: you don’t have to wait until you have the funds to expand as the licensee pays you Cost of expansion: you have to develop the licensing model, have a licence agreement; and have to advertise for licensees. Income stream: you get an income from both the licence fee and the ongoing fee Staffing: You don’t have the problem of recruiting and managing staff in a remote unit Product brand development: However not company brand development as Licensees trading under their own name CONS Profit potential: as it isn’t your business you don’t make as much profit as if it was company owned. Corporate brand development: you do not grow the corporate brand as the licensee trades under their own name Control: you do not have much control over how the licensee runs their business however you can control how they market and sell the licenced product Focus: the Licensee will sell other products therefore they will not be focussed on selling your product range

Someone pays you money and you grant them the right (licence) to sell your product or service under their own company name

PROS

Time it takes to expand: you don’t have to wait until you have the funds to expand as the licensee pays you

Cost of expansion: you have to develop the licensing model, have a licence agreement; and have to advertise for licensees.

Income stream: you get an income from both the licence fee and the ongoing fee

Staffing: You don’t have the problem of recruiting and managing staff in a remote unit

Product brand development: However not company brand development as Licensees trading under their own name

CONS

Profit potential: as it isn’t your business you don’t make as much profit as if it was company owned.

Corporate brand development: you do not grow the corporate brand as the licensee trades under their own name

Control: you do not have much control over how the licensee runs their business however you can control how they market and sell the licenced product

Focus: the Licensee will sell other products therefore they will not be focussed on selling your product range

IS NOW A GOOD TIME? People being made redundant, have a pay off and its difficult to find new jobs Businesses have less money to expand using company owned expansion The success rates are higher for both franchisors and franchisees than for non franchise businesses For Franchising to succeed still need to apply proper / sound business practices

People being made redundant, have a pay off and its difficult to find new jobs

Businesses have less money to expand using company owned expansion

The success rates are higher for both franchisors and franchisees than for non franchise businesses

For Franchising to succeed still need to apply proper / sound business practices

IS NOW A GOOD TIME? Your Local Business with National Backing 45% of People would prefer to buy from a franchise business Source: bfa Franchise Awareness Survey 2006

HELP AVAILABLE Franchise Group For Northern Ireland British Franchise Association & Irish Franchise Association Banks – many have dedicated franchise departments Franchise Publications Franchise World, Franchise Options Franchise Websites whichfranchise.com/.ie, franinfo.com, franchiseoptions.ie Business Links and Enterprise Agencies Existing franchisors

Franchise Group For Northern Ireland

British Franchise Association & Irish Franchise Association

Banks – many have dedicated franchise departments

Franchise Publications

Franchise World, Franchise Options

Franchise Websites

whichfranchise.com/.ie, franinfo.com, franchiseoptions.ie

Business Links and Enterprise Agencies

Existing franchisors

SUMMARY A well established industry Create a national or international brand Cost Effectively Quickly A number of elements to developing a ‘successful’ franchise Other Expansion Models Sources of Help and Advice

A well established industry

Create a national or international brand

Cost Effectively

Quickly

A number of elements to developing a ‘successful’ franchise

Other Expansion Models

Sources of Help and Advice

CONTACT DETAILS Kenneth Sharp Senior Business Expansion Consultant Business Options 70 Donaghadee Road, Bangor Co. Down. BT20 4QX Tel: 028 95 81 2006 Mobile: 07720 297279 Email: [email_address] Web: www.businessoptions.biz Regional Offices Covering: London; South East & South West; Midlands; East; North West, Wales; Northern Ireland; Ireland Registered National Business Link Consultant Accredited member of the British Franchise Association Accredited member of the Irish Franchise Association

Kenneth Sharp

Senior Business Expansion Consultant

Business Options

70 Donaghadee Road, Bangor

Co. Down. BT20 4QX

Tel: 028 95 81 2006

Mobile: 07720 297279

Email: [email_address]

Web: www.businessoptions.biz

Regional Offices Covering:

London; South East & South West; Midlands; East;

North West, Wales; Northern Ireland; Ireland