Should a business consider franchising in today's economic climate?

In the current economy, a business has many choices as to how it may successfully grow. In some cases, the route to expansion may well be served by franchising your business. In order to do this you will need to have a successful and profitable business, with at least two years of trading experience and a strong balance sheet, regardless of the economic climate. There are no shortcuts and the format must be proven. A potential franchisor must carry out market research to ensure that the products/services which they are offering are suitable to franchise and a marketable brand is established.

What are the potential risks and benefits franchisors face?

A franchisor can often achieve rapid business growth. If, for example, a business with outlets in one particular region wants to set up an additional presence across the country or in another county, it can lower its set-up costs by appointing franchisees to run the new outlets. This is for the reason that franchisees have to invest their own money and as a result are likely to be highly motivated and have good local knowledge.

However, developing a franchise network can be expensive in terms of management time and capital outlay. As franchisees ultimately operate  independently, they may sometimes disregard the franchisor’s contract terms or try to change the style of the franchisor’s business. One way to prevent this is to make sure that you recruit the right people in the first place, ensure that your proposed franchisee is well regulated under the franchise agreement and then make sure that you monitor and support them on a regular basis.

What types of businesses are most suited for franchising?

There must be a proven concept and solid brand for a business to be franchisable, regardless of the sector. The product/service being franchised must also provide sufficient margins to ensure profits for both parties.

Franchising is particularly suited to the services sector. As franchisees invest their own money, they are likely to go out of their way to serve customers and ensure that quality standards are maintained and the brand is marketed to its full potential.

How should a business go about franchising?

The first step is to take initial legal advice as to how to set up a pilot operation which replicates the franchised operation, to show that the business is viable and get a better idea of costs, break-even sales and the profits achievable.

The franchisor must also make sure that it chooses people with the right experience and attitudes to join the network. You can find franchisees by attending franchising exhibitions and advertising in local and national press, specialist franchise magazines and industry sector publications. A good internet presence is essential.

How should a business support its franchisees?

Franchisors must provide initial and continuing support services for their franchisees. This can include taking on responsibility for product and service development, national promotion and PR, purchasing financial and administrative services, quality control, good communications and discipline. A franchisor's ongoing commitment through training, product development, regular meetings and other support is vital to the success of the franchise network.

What sort of documentation needs to be put in place?

The most important document is the legal contract or franchise agreement as it is better known, which sets out the terms under which the franchisor agrees to sell the franchise and the obligations of both the franchisor and franchisee. It is strongly recommended that you use a specialist lawyer to draft this for you.

The franchisor should also prepare a prospectus to attract franchisees, draw up a training programme, establish sales areas or territories, manage advertising fees, as well as produce a comprehensive operations manual. It may also useful to prepare 'typical' cash flow forecasts and profit projections in order that both parties are clear from the outset as to what they are taking on.

Young & Lee can help. To talk to a specialist in this area, please contact Daniella Tarbuck-Halford on 0121 633 3233 or email her on d.tarbuck@younglee.co.uk