First Step Marketing

In franchising, you copy someone else’s business, with their full approval and support, under a licence agreement called a franchise. In this the franchise-giver (the franchisor) allows you to use their trade name, provides training and back-up, and gives their expertise with all its benefits. In exchange, you as the franchisee have to pay the franchisor an initial fee, then ongoing royalties. The major advantage of this method is that you get into business more quickly and possibly with less risk.

The franchise you take on should be a well- proven business idea; unfortunately, the success of franchising has attracted many unscrupulous businesspeople who are offering franchises of dubious value. There is therefore a need for caution and independent professional advice. Franchising was developed in the US in the 1950s, and many of the well-known franchise names are still American.

HOW DOES FRANCHISING WORK?

Setting up any business takes money but with a franchise operation it costs you more, because you are also paying for the business experience and proven product or service of the franchisor. In return they may set up the whole business for you, including taking care of all the legal work, training you and any partners and staff, and helping you to select stock and/or tools. In some cases this hand-holding is very complete, but you need to decide if the extra cost of a franchise is worthwhile.

The franchisor provides an operations manual, which lays down the whole format of how to run the business. There is also a contract, which forms the basis of the close association between yourself and the franchisor. Check this document very carefully, no matter how well- known the franchisor. Read all of it and ensure you understand it. Ask questions about any part you do not understand. Before you sign it, consult a solicitor — some contracts have hostile clauses that, should you have a problem running the business, are likely to work in favour of the franchisor rather than you.

HOW TO ASSESS A FRANCHISE

Many franchisors are members of a national association, which you can contact for information, and there are a number of franchising magazines available. To meet franchisors, there are various franchise exhibitions held annually. When you have found several franchises that interest you, get their free information packs (also called prospectuses). Each should describe the franchise in detail. If your bank has a franchise unit, get their advice. The next step is to visit the franchisor’s head office.

If satisfied so far, ask to see a specimen contract and take it away to read carefully and show it to your solicitor. After the meeting, visit at least two of their franchisees (of your own choice) and get their viewpoint. Now do your own market research. You need to find out just how strong the market demand is for such products or services, what customers think of the franchise, and the strength of the competition in your area.

A common complaint is that franchisors understate the necessary capital to start the business. They sometimes entirely omit your living costs prior to the business making a profit, they may quote a low figure to purchase a second-hand van or other piece of essential equipment, and omit your own legal and accountancy fees. VAT is also often omitted: you will have to pay this and can claim it back only if you are going to be VAT-registered yourself.

Taking on a franchise does not guarantee success. Some franchises fail altogether, while others do not meet projected turnover figures.

QUESTIONS TO ASK A FRANCHISOR

When you visit a franchisor; ash probing questions — even if some are answered in their prospectus — and note down the answers.

When was the business established?

Are they members of the national franchise association? And, if not, why? How many outlets are there in the country?

How many outlets have ceased trading, and why?

What are the credentials of the people behind the franchise?

How good is the company’s financial performance?

What is the initial capital required? What are the addresses of franchisees you can visit?

How is the royalty calculated?

What do you get for your money?

What ongoing support do they give? Are there other charges, e.g. advertising? What are the long-term prospects for the franchise?

What is the length of the agreement and how can it be terminated?

Whois the competition?

Possibly related posts: (automatically generated)
Copy someone else’s business: Taking on a Franchise

This entry was posted on Sunday, November 29th, 2009 at 3:47 am and is filed under Advertising, Franchising, Legal, VAT, financial. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.