BUYING A FRANCHISE OR BUSINESS PACKAGE

BUYING A FRANCHISE OR BUSINESS PACKAGE

CONTENTS

WHAT DO WE MEAN BY BUSINESS PACKAGE
WHAT IS A FRANCHISE?
COMMENTS AND ADVICE
AS WITH EVERY BUSINESS YOU MUST BE CAREFUL
FURTHER READING

WHAT DO WE MEAN BY ‘BUSINESS PACKAGE’?

There are some organisations which enable the budding entrepreneur to start in business by providing the necessary equipment, expertise, or training to do so within a package.

For example, a company offers all the equipment that you need to start a business manufacturing garden ornament. The kit includes several tools and modules, the materials and a day’s training to show you how to use them.

So, ‘Business packages’ are not ‘franchises.

WHAT IS A FRANCHISE?

The term ‘franchising’ is an arrangement/ contract between the buyer and the franchisor in the form of payment and or ongoing fees and to follow the rules and processes of the franchise, in return to offering the products or services or use of a brand of the franchise company.

This rest of this page refers particularly to ‘business format franchising’.

It is a method of buying and starting a business which minimises risk by emulating a proven business model. A contract is drawn up between the two parties ‘the franchisor’ – (the organisation providing the business model) and ‘the franchisee’ – (the individual or party buying the franchise).

The franchise package includes most of the things that one needs to run the business successfully: – training, licence to use franchise name, customer base, supplies and raw materials, equipment, promotional material etc.

In addition to a set-up fee, the franchisor may charge an ongoing fee based on the percentage of sales or profits of the business.

The critical point is that it should be a proven business system that is on offer – not merely the right to sell a product or service.

Business format franchises generally fall into one of two categories.

  • a ‘job franchise’ (in which the franchisees do the work that provides the service to the customers)
  • a ‘management franchise’ (in which the franchisee is mainly organising others to do this labour)

It is essential to appreciate the difference between the two categories because it will help you to understand and seek a franchise that suits your needs and skills.

In order to prevent franchisees within the same organisation competing for the same customer base, territorial limits are often stipulated within the franchise contract.

Also, the franchise contract may stipulate specific standards regarding the quality of service or products supplied by the franchisee, thus upholding the brand image.

When choices must be made, we tend to go for the ‘familiar’. Thus, a company can win business by ‘branding’ a product or service to make it more familiar to potential customers.

A franchise opportunity enables you to buy into this brand image and wins custom that would otherwise go elsewhere.

Read about things to consider before buying a franchise. The following article has some great advice on what you should consider including pros and cons and considering the franchise owner you would have an agreement with. https://www.startinbusiness.co.uk/finance/what-you-need-to-know-before-you-get-into-franchising/

COMMENTS AND ADVICE

For many people, franchising is an excellent way of starting up in business. It is in the franchisor’s long term interest for you to succeed and so there is often continuing support at hand, unlike buying an existing business or starting from scratch on your own.

You may feel that the restrictions stipulated in a franchise contract-with regards to your choice of suppliers, recruitment policy or products- contradict the ethos of ‘working for yourself’.

However, in most cases, these are in place to uphold the franchise brand name and are part of a successful business formula.

You may also find it painful to see a percentage of your hard-earned profits being diverted towards the franchisor. Again, in most cases, most of this money is spent on advertising/marketing and benefits the group.

When considering a franchise, try to understand why they are offering you the business in the first place. Very often, franchising is a rapid low-risk method of expanding a successful business across the world.

The franchisee has the local knowledge and takes on most of the financial risk. In return, the franchisor is offering a successful business formula that has proven to work. But before you go ahead, ask yourself whether the support, training, stock, experience, and brand name justifies the investment asked.

Watch out for companies that create franchises as an ‘end product’.

Be aware that some companies use the term ‘franchise’ to describe what is a commission agency, a network marketing opportunity, or other forms of a start-up.

Always thoroughly check the contract, you don’t want to discover three years down the line that your successful business has to be sold back to the franchisor after they increase the cost of your supplies to unreasonable levels. And at the same time forbid you to seek a more competitive price.

Seek independent specialised legal and financial advice from experts in the field. You may have to pay relatively high fees for such a service, but it could save a great deal of disappointment in the future.

Do not expect to be able to change the franchise contract; it is often a standardised format used across the network.

Before accepting the advice of a third-party franchise ‘broker’, be aware that they may not be entirely independent.

Be aware of the high level of investment or borrowing that you may need to succeed, but do not overstretch yourself.

AS WITH EVERY BUSINESS YOU MUST BE CAREFUL

Franchising used to have a bad name but regulation in recent years has improved the industry beyond recognition (in the UK at least). It is now an efficient method of starting up a successful long-term business.

Pros:

  • You are buying into a proven successful business tried and tested.
  • Your success rate is generally higher, and mistakes minimised due to the experience of the franchisor. You are spared many of the administrative headaches associated with setting up a business.
  • You are taking advantage of the brand built by the franchisor.
  • Training and ongoing support are typically managed in the franchise.
  • The franchisor would have already advertised, and any constant advertising and promotion would benefit your business.
  • Many high street banks see franchising a sound investment and are more likely to lend more, and on better terms than if you were starting your business from scratch.
  • A tested and well-structured franchise system, offered by a competent franchisor, provides less risk than starting in business independently.
  • You do not necessarily require direct experience in the chosen area, so this can open up access to many types of business models, which you may not have otherwise considered.
  • If you carry out your research correctly, you should have a clear idea of how you will be spending your time.
  • As with any form of self-employment, you will be working for your future and not someone else’s.
  • It is a well-known and respected method of starting up in business.

 Cons:

  • A specific portion of your profits goes to the franchisor.
  • You are not entirely your boss.
  • Your business practice may be restricted with regards to, choice of suppliers, employment policy, customer base and territory etc. You may find this frustrating.
  • A reasonable sized investment is required (ranging from about £5,000 to £250,000).
  • The failure of a franchisor can leave the franchisee with a business which is not as viable as an independent operation.
  • If the franchise changes hands, it may be better, but it could be for the worse to you.
  • The brand’s integrity is dependent on the franchisor and other franchisees and as such, is outside of your control. One bad apple can adversely affect the whole network.
  • In some cases, you may not be able to re-sell your franchise.
  • Franchising can be a complicated situation between the franchisor and franchisee, particularly regarding the terms of the contract and may lead to disagreements.

FURTHER READING

Further Reading: The Governments guide on franchising can be found here https://www.gov.uk/government/publications/franchises/practice-guide-18-franchises

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