Franchising A Realistic Business Expansion Option For Every Business?

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

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

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

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

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

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?

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!

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.

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.

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.

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)

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

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

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

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

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
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.

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

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

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

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

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

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Franchising A Realistic Business Expansion Option For Every Business?

by Triage Hospitality Ltd & Business Options on Nov 26, 2008

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Franchising A Realistic Business Expansion Option For Every Business? — Presentation Transcript