Buying a business franchise

Franchises

Want to run a business but don’t have a business idea of your own, or just prefer the comfort of working with an established concept? Buying a business franchise may just be for you.

Franchising typically offers a lower risk of starting a business than just doing everything from scratch. There are more than 900 franchise operations in the UK, encompassing more than 40,000 outlets, and the annual industry turnover is £13.4 billion.

What is a franchise?

Franchising describes a type of business arrangement where the owner of a business (the franchisor) grants a license to another person or business (the franchisee) to sell their product or service under their brand name, often in a specific geographical area.

In return, the franchisee pays a fee for the license and then either an ongoing annual management service fee or a share of the profits. The franchisee owns the outlet they run, but the franchisor keeps control over how the products or services are marketed and sold and how their business idea is used. This means that the franchisee is not free to run the business as they choose, and must adhere to the rules and restrictions laid down by the franchisor. The extent of the restrictions varies from franchise to franchise.

Well-known franchises include McDonalds, Prontaprint and Kall Kwik.

What does a franchise cost?

The cost of buying a franchise varies from a few thousand pounds to a few hundred thousand pounds, depending on the size of the brand you are acquiring. The average cost of buying a franchise is £15,000, but new franchisees will also need an average of £68,000 to pay for premises, equipment, stock, and so on.

Advantages

1. You will be able to get your business franchise up and running far quicker because you can simply follow templates and pre-tested working methods, instead of spending months trying out different ideas.

2. You will be able to use a well-known established brand name and benefit from advertising and marketing carried out by the franchisor.

3. You will benefit from ongoing training and support provided by the franchisor.

4. As you are following a proven business model, the success rate for franchises is much higher than for regular startups.

5. You may find it easier to secure bank finance to fund your business than you would otherwise. Most high-street banks have dedicated franchise-lending teams.

Disadvantages

1. You cannot just run the business as you choose, and you may find it frustrating and restricting having to adhere to the rules laid down by the franchisor.

2. Buying a franchise can be more costly than you anticipate. As well as buying the license itself, you will need to fork out for the investment in equipment, premises, stock and so on. You may also have to agree to buy products from the franchisor. Plus, you either have to pay an annual management service fee or hand over a share of the profits.

3. Your business is at the mercy of how the overall brand performs and the image it has. If the brand gets tarnished, either by other franchisees or by the franchisor, there’s nothing you can do about it.

4. You might find it difficult to sell your franchise – you can only sell it to someone approved by the franchisor.

5. The franchisor might go out of business.

Things to consider

1. Find out how much support is on offer from the franchisor – it will vary widely.

2. Research thoroughly how successful the franchise operation you wish to buy really is – find out how many franchises there are, what their success rate is, how long they have been in business and how much profit they make.

3. Most importantly, talk to other franchisees, not just the ones the franchisor puts you in touch with. Pay a visit to franchisees in different types of locations and at different stages of growth, and ask them how their business is performing and what kind of support and services are being provided by the franchisor. You will soon find out how happy or otherwise they are with the situation at hand.

4. Look closely at how much freedom you’ll get to do things your own way, and decide whether you’ll be comfortable with the restrictions placed on you.

5. Research the market you’re getting into and find out whether it’s growing, particularly in the area you’ll be operating in.

The practicalities of buying a business franchise

Before buying a franchise, you will need to go through an interview and a selection process. Remember this is a two-way process, however; you are choosing them just as much as they are choosing you. Be suspicious of anyone willing to hand over their brand to you without accurately assessing your capabilities first – remember this is how they will be selecting other franchisees too.

Carry out due diligence and get professional advice from solicitors, surveyors and accountants before making any payments to make sure the business is sound.

Useful contacts

The British Franchise Association lists all its franchise members on its website

-Visit the National Franchise Exhibition: check out more details here.

-Read The Franchise Magazine

Top tip

Always check if the business offering the franchise opportunity is a member of the BFA. There are usually many untried, dishonest or even illegal schemes operating in the market.

Case study

Martin Gibson was made redundant in November from his job as the quality manager in a paper mill in Blackburn after working there for 23 years.

He decided to put his redundancy money of £70,000 towards buying a Subway franchise in Lancashire, where he lives with his wife and three children.

Gibson said: “After being made redundant I did have one interview for a job in a paper mill, but my heart wasn’t in it. It just didn’t feel right, and I would have been left thinking: ‘what if I had gone ahead with Subway, where I would be now?’ With Subway you have a tried and tested formula and brand, but you can do your own advertising and promotions on a local basis, and it was that little bit of freedom that was calling to me. I feel it is my destiny calling.”

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