Franchise Direct's Pocket Guide to Franchising - Rackspace

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Franchise Direct UK Unit 106 / The Capel Building Dublin 7; Irland ©Copyright 2012 Franchise Direct. All Rights Reserved

Franchise Direct's Pocket Guide to Franchising

Thank you reading our pocket guide to franchising! The purpose of the guide is to provide an overview of franchising and help you as a prospective franchise buyer. We hope you find it to be a great resource as you explore the possibilities that franchising has to offer. The information contained in this publication is for informational purposes and general guidance only. Every effort has been made to ensure that its contents are accurate. Please note that no business method or industry sector can guarantee success, and franchising is no exception. The information contained in this booklet is designed to assist you in asking the right questions and seeking the right advice to make the right choice for you. However, ultimately, it is your investment that is at stake. The information and guidance contained, or referred to, in this publication are generic and, in likelihood, does not apply to all franchise systems. The specific circumstances of individual cases may differ, as may the correct course of action to take in those specific circumstances. Franchise Direct cannot accept responsibility for decisions taken as a result of the information contained within this booklet. For any investment listed on Franchise Direct or elsewhere, it is up to the prospective buyer and user to thoroughly investigate any listing or company, obtain the appropriate disclosure documents, and seek expert consultation prior to making any investment decisions.

All contents of this booklet are the copyright of Franchise Direct. All rights reserved. Any reproduction of any content without permission is strictly prohibited.

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Table of Contents A Look at the Popularity of Franchising.......................................................................................................3 Steps to Owning a Franchise........................................................................................................................4 Franchising 101............................................................................................................................................5 Franchises vs. Business Opportunities.........................................................................................................6 Why Buy A Franchise?.................................................................................................................................7 Assessing Yourself........................................................................................................................................8 Finding Franchise Opportunities..................................................................................................................9 Franchise Costs..........................................................................................................................................10 Initial Investment Costs.........................................................................................................10 Ongoing Costs........................................................................................................................11 Financing Your Franchise...........................................................................................................................12 Tips for a Successful Meeting with Lenders...............................................................................................13 Signing the Franchise Agreement..............................................................................................................14 Minorities and Franchising........................................................................................................................15 Women and Franchising............................................................................................................................15 Retirees and Franchising............................................................................................................................16 Home-based Franchises.............................................................................................................................17 Part-time Franchising.................................................................................................................................18 Alternative Modes of Franchising..............................................................................................................19 Final Advice................................................................................................................................................21 Common Franchise Terms..........................................................................................................................22

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A Look at the Popularity of Franchising Nationally Today, many of the UK’s popular brands have franchising at their core. It is estimated that there is approximately 1,000 franchisors operating within the UK. From big US franchisors like Subway and McDonalds to smaller British headed franchises like Greene King pubs, the industry is continuing to grow as more businesses adopt the franchise model. The estimated annual turnover of the business format franchise sector is £12.4 billion (£11.8bn in 2009). It is calculated that some 521,000 people are directly employed in the franchising sector, an all time high, according to the 2011 Natwest bfa Franchise Survey. With statistics like these, it’s not hard to see why numerous business leaders and government officials view franchising as one of the top ways to promote economic recovery through its job creation potential. So why is franchising such a popular business model? Part of the answer lies in the advantages gained by both parties of the franchise agreement. For the franchisor, franchising is a way to economically expand compared to adding additional companyowned outlets because the franchisee is responsible for a great deal of the financial investment. On the other side, by investing in a franchise, a franchisee gains the advantage of the knowledge and established systems that the franchisor is already entirely familiar with. In addition, the franchisee will also be provided training and support from the franchisor.

Abroad Going international is very attractive for franchisors because approximately 95 percent of potential consumers in the world are outside of the United States. Fifteen years ago, few franchisors beyond the large-scale ones were operating internationally. Nowadays, 32 percent of the franchise units operated by the top 200 franchisors in the United States are outside of the US. That number represents a 33 percent jump in the number of international units operated by those franchisors in the past 10 years. Franchise businesses have quite a bit to offer emerging markets because they are designed to be replicated. Thus, they require less experienced entrepreneurs and provide business-learning opportunities within a support structure. All of this can help emerging market countries further develop their economies. Additionally, within emerging markets there are hopeful entrepreneurs that are generally eager to learn business principles through the methods and procedures franchisors have to offer. Organisations such as the International Franchise Association and British Franchise Association offer many resources to franchisors who seek to operate internationally. 3



Steps to Owning a Franchise Below are 10 steps that provide a general overview of the steps involved on the path to franchise ownership: 1. Gain a deeper understanding of franchising by researching and familiarising yourself with franchising as a way of doing business. 2. Know what your own financial situation and objectives are to determine if franchise ownership is a workable option for you. 3. Examine your own motives, temperament, lifestyle preferences, health, family obligations, likes and dislikes to be sure you are realistic about undertaking a particular type of business. 4. Look for franchises that match your requirements and preferences, and then compare several similar opportunities to narrow down your choices. Talk with other franchisees to get a hands-on practical viewpoint on the pros and cons of the business. 5. Establish a business relationship with an accountant to review your finances, and a solicitor to review the legal obligations involved in franchising. 6. Contact the franchisor and request comprehensive details about the franchise. Carefully examine this with your accountant and solicitor to assess the business proposition and its earning potential. 7. Find an appropriate location based on your target market, the competition and capability to meet any site requirements. 8. Do the research on the industry, the market segment and competition in your specific area. 9. Write a credible business plan to present to the franchisor and potential financial lenders. 10. Carefully review the Franchise Agreement with your accountant and solicitor to ensure it matches the original information you recieved. Make sure you understand all the terms, and see if any of the terms can be altered and made more favourable for you as the franchisee.

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Franchising 101 The modern-day concept of franchising originated in the 1850s with Isaac Singer seeking to distribute his sewing machines outside of his immediate area. He also wanted to provide training to customers on the proper way of using them. As a result, he began selling licenses to entrepreneurs in different parts of the country – the predecessor of the current franchise agreement. Since then franchising has grown into a prominent feature of the American business landscape. Franchising can be defined in many different ways. For our purposes, we will use the definition for a franchise provided by the International Franchise Association (IFA), which is:

Franchising can be described as a pooling of resources and capabilities. The franchisor contributes the know-how and experience while the franchisee contributes the supplementary capital investment, motivated effort and operating experience in a variety of markets. Franchising is a comprehensive business relationship, not just a buyer-seller relationship. There is considerable interdependence between the franchisor and the franchisee. One of the most widely held misconceptions about the franchising industry is that it’s dominated by companies with large operations. While, it’s true that the most popular franchise businesses such as McDonald’s and Subway have outgrown their humble beginnings and are now huge entities – operating thousands of units in numerous countries – the vast majority of franchise businesses are truly small businesses, with most having fewer than 100 units. As a matter of fact, even the large-scale franchise operators are made up of smaller master franchisees who own several outlets individually, along with true small business owners who own one, or just a few, franchised businesses. Essentially, franchising is a time-proven pathway for small business development. An additional attribute of franchising is that it’s extremely diverse. Despite its association with fast food, franchising is not confined to a narrow range of business segments. Name an industry and it’s likely there’s a franchise in it.

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Franchises vs. Business Opportunities Business opportunities and franchises are two ways to start a business without having to start from scratch. While they are similar, they have distinct differences that should be acknowledged.

Business Opportunities A business opportunity is the sale or lease of any product, service, equipment, etc. that will enable the purchaser to begin a business. Business opportunities cover a broad spectrum of careers, and include the following:

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Turnkey Operations Distributorships Dealers Network/Multi-level Marketing

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Trademark/Product Licenses Rack Jobbers Vending Machine Routes Work from Home Opportunities

With the purchase of a business opportunity, the buyer owns the business outright and can customise virtually all aspects of the business to their tastes. When an entrepreneur contacts an entity selling a business opportunity, they are contracting with that licenser for a business system including training, equipment or a service method that the licenser has cultivated and made profitable. Traditionally, once the purchase is finalised, and training – if applicable – is completed, the relationship is over.

Franchises A franchise is defined as the right or license granted by a company (franchisor) to an individual or group (franchisee) to market its products or services in a specific territory. Three common types of franchises are:   

Product: The franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark and trade name. Manufacturing: The franchisor permits the franchisee to manufacture their products (i.e. food) and sell them using their trademark and name. Business Format: Probably the most popular form of franchising. The franchisor licenses their brand to a franchisee for use with a predetermined way of conducting business.

When the purchase of a franchise is made, the purchaser is required to comply with strict guidelines and rules regarding the operation of the business. These guidelines are in place to protect others within the system and maintain brand consistency. And unlike most business opportunities, costs paid to the franchisor don’t end with the initial sale. In exchange for these payments, the franchisee will receive continued support, such as marketing assistance and technical support.

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Picking the Right One for You Figuring out what kind of entrepreneur you are and what you’re looking for is important for deciding which kind of business you should pursue. Both are good for potential business owners that don’t have a unique product or service to bring to the marketplace, but still want to run a business. The big differentiator is how much support you want. If you’re simply looking for a jumpstart and desire more flexibility, a business opportunity is probably the route for you. If you’re looking for consistent support, and can handle restriction in the procedures of your business, a franchise might be the path for you.

Why Buy A Franchise? Many people want to be their own boss, but don’t want the task of reinventing the wheel. In franchising, someone has already done the work establishing the business, and has ironed out the wrinkles. Here are some common benefits of the franchise system:  The business has already been proven to work. The franchisor and the network of busily trading franchisees are testimony to that.  You are fully trained in all aspects of the business, and sometimes your business partner and/or key staff receive training too.  There is an operating system that can be learned and then implemented to the letter, or with a degree of flexibility.  The brand is established.  The franchisor helps with finding a good location that will deliver traffic if that’s what is needed (e.g. for retail or food outlets) or will be cost efficient if visibility is not paramount (e.g. for cleaning or home improvement businesses).  Marketing tools and ad campaigns are provided, both nationally for the brand and locally for individual franchisees. The majority of franchisors also help franchisees make a major local impact with a press launch of the business.  Franchisees receive ongoing support from good franchisors, delivered via toll-free numbers, a company intranet, newsletters, and regular visits by a representative from the corporate office, regional meetings and annual conventions.  Centralised purchasing is a feature of many franchises where the franchisee benefits from discounted pricing on goods for a retail store or ingredients for a restaurant and other supplies. There are many different types of franchise opportunities available, with various investment commitment levels that can range from minimal to more substantial. For those not ready to leave their day jobs, there are plenty of offerings that require only a part-time commitment that grows gradually. Ambitious entrepreneurs, who want to totally commit themselves to owning a business, have a vast range of choices. Like anything else in life, there are pros and cons involved. Conduct indepth research to ensure the benefits of franchising outweigh the disadvantages in your personal situation.

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Assessing Yourself To succeed as a franchise owner, you must be able to follow the rules and conduct of the business according to the provided instructions. If you find it hard to follow someone else’s rules, then a franchise probably does not suit you. Recognising your true abilities, natural preferences, and real limitations is the first step to success in any type of business. By having some clear direction as to your goals, personal commitments, and lifestyle choices, you’ll have a better idea of the most realistic way to achieve your ambitions, and eliminate wasting time on researching franchise choices not suited to your temperament and abilities. To help you with your self-assessment, grab a pen and paper, and consider these points to honestly evaluate yourself:

Your goals:    

Where do you want to be in five years? In ten years? Do you want to make a full-time commitment, or start out slowly? How important is money vs. job satisfaction? Are you motivated by personal challenge?

Your talents, abilities and temperament:       

What activities, such as sports, computers, decorating, etc., do you like to do? Are you better at physical or mental tasks? Are you good at interacting with people or organising things? Are you an outgoing people person or more introverted? Are you patient in the long term or eager for fast results? Do you prefer to wear business attire, a uniform or casual dress? Do you want to be outside and on the go, or work inside the same premises each day?

Demands on yourself and family:     

What about your physical endurance – can you work long hours on your feet or do you prefer sedentary work? What is your preferred work schedule – fixed hours or flexible? Do you want to have your weekends free? Are you a morning or night person? Is your family supportive of this venture? How will it impact their lives? What are your child care commitments? Do you want clear separation of your business interests from your home and personal life? What about leisure time -- do you want to be able to attend evening social gatherings or school events? Take time away for holidays?

Your financial situation:    

Do you have the resources to buy a franchise and survive the initial start-up phase? Can you cope with unexpected losses or setbacks? What is your risk tolerance? How much of your assets are you willing to put on the line? What is your credit history and can you raise financial backing? 8



Finding Franchise Opportunities Franchises exist just about everywhere, and offer many choices. With so many options, it can be hard to narrow your options to a short list of possibilities. The internet is a good place to start your research, as are print directories, tradeshows, business-specific publications, and franchise brokers. Here are a few resources and directories where you can start your initial search: http://www.franchise.org This is the official web site of the International Franchise Association. http://www.franchisedirect.co.uk This directory offers detailed descriptions of franchise opportunities in all types of industries, plus other information resources on franchising. http://www.thebfa.org The British Franchise Association’s official website http://www.franchise-update.com Here you’ll find several publications about the franchise industry. http://www.franchisetimes.com A monthly publication offering articles on different aspects of franchising.

Once you narrow it down to a few choices, you should consider:  Is it a genuine business format franchise vs. a product distributorship?  Does the franchisor belong to industry associations such as the IFA and BFA?  Has the franchised business been proven in practice?  Is there a strong trademark name or brand?  If it is a new business, is it a fad? How has it been tested?  What is the competition and how do prices of the product and services compare to competitors?  Are the products patented?  Will the source of products be guaranteed in the future?  Does the franchisor disclose financial information upfront? There are clues that should tip you off as to whether a franchise offering should be avoided. Remember, if it sounds too good to be true, then it probably is a misleading presentation. Other signs that signal questionable businesses are sloppy web sites with obvious grammar and spelling errors. If a web site seems like all hype, then it probably is just that. And don’t fall for overly aggressive marketing that bullies the prospective buyer into acting fast without time for careful examination of the business.

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Franchise Costs Franchises and independent small businesses for the most part share many of the costs associated with starting a business. However, franchises do have some special costs associated with them, which are profiled here. Franchise costs are commonly divided into two categories: initial (or upfront) costs and ongoing (or continuing) costs. Initial costs are the expenses that the franchisee will pay in order to begin operation of the franchised business while ongoing costs are the expenses involved in maintaining operation. Franchisors have various ways of presenting the costs associated with beginning and maintaining one of their franchised businesses so please consult the literature of a specific company for a complete breakdown of costs associated with investing in that franchise.

Initial Investment Costs The initial costs of a franchise can range from a few thousand pounds into the millions of pounds depending on the industry, building requirements, equipment needed, and several other factors. The most notable fee that varies from franchise businesses to non-franchise businesses is the franchise fee. This fee stems from the heart of the franchise model, and helps the franchisor ensure that their business system will be executed as consistently as possible across all of their units. Some common initial costs in beginning a franchise business across all industries are: ● ● ● ● ● ● ●

Franchise Fee Training Expenses Leasehold Improvements or Real Estate Costs Equipment Professional Fees Advertising/Marketing Working Capital

The range of investment between different industries can be large, as can the variation within a single industry.

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Ongoing Costs After the franchise business is up and running, there are a number of expenses required for the successful maintenance of the business as well as for being a part of the franchise system. Like the franchise fee, the royalty fee is a main differentiator between a franchise and a non-franchise business. Typically royalty fees are assessed as a consistent percentage or flat fee due weekly or monthly, and are predominately assessed for the franchisee to continue reaping the benefits that come with being a part of the franchisor’s business system. Common ongoing franchise fees include the following among others: ● ● ● ●

Royalty Payment Advertising/Marketing Fund Technology Fees Insurance

In addition to the regular fees, there are fees associated with the franchise system that aren’t assessed or collected regularly including: ● ● ● ● ● ●

Ongoing Training Transaction Fees Interest Audit Indemnification Renewal Fee

Due to the depth and variety of franchise businesses, the given fees illustrated in this booklet are only the most common and not a complete listing. Additional fees collected by franchisors along with ones that are specific to certain industries such as reservation fees for hotel franchises can be found within the literature franchisors are required to make available to prospective franchisees. Please note that there are also ongoing costs that are no less important to the continued operation of the franchise like employee wages.

As you have read, most of the costs of beginning a franchise are similar to beginning a non-franchise business with a few notable differences. Though no business venture can be a guaranteed success, the features given in exchange for the additional costs that come along with investing in a franchise can help bolster an entrepreneur’s chances of creating a successful business.

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Financing Your Franchise Items to Prepare Beforehand Gaining the necessary financing for your franchise venture can be an overwhelming task, but preparing all of your documents in advance can help tremendously speeding up the process. Different institutions will more than likely have varying forms and documents they want submitted. The following checklist will help you in gathering all of the paperwork that lenders may require to complete your application.  Personal background This includes educational and work history, criminal record, etc.  Business plan All lending programmes require a business plan that includes, among other things, projected financial statements, balance sheet, cash flow statement, and income statement.  Personal credit report The lender will access your credit report during the loan application process. Remember to request a credit report from the national credit-reporting bureaus before you send the loan request form so you can review them for accuracy.  Loan information Specify the amount of money you’re requesting, the type of loan, how the loan will be used, and the amounts of assets you currently have.  Business financial statements and income tax return statements for the past three years.  Bank statements Personal and business bank statements for the past 12 months.  Accounts receivable and accounts payable for the past 90 days.  Collateral Some loan packages do not require collateral. But, if collateral is required, describe what will be used to secure the loan.  Legal documents Lenders may require additional documents, such as franchise agreements, business license/registration, commercial lease, articles of incorporation, etc.

Financing Options There are several options available to obtain the amount of money obligated for the costs of the franchise. Here are the most common avenues of financing:        

Financing directly from the franchisor Commercial bank loan Credit union loan Personal savings/Retirement fund Angel investor Family/friends Grant(s) Credit card(s)

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Tips for a Successful Meeting with Lenders Do: 

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  

Know your figures inside out. Have them checked and double checked. Asking the potential lender for a pencil while working out percentages on the back of a supermarket receipt won’t showcase you as the thoughtful and organised business person you are. If possible, bring an accountant or well-versed liaison/representative from the potential franchisor. You still need to know your business plan and financial documents by rote, but they have years of experience dealing with figures and accounts. Sell yourself. Include your CV and a small personal history about yourself. Explain why you’re passionate about this business model, your experience and your motivation. Convince the manager that this is the right franchise for you. Use the bank’s planning templates and documents. You can download these from their websites, or pop into your local branch to pick some up. Research what start-up grants and (if any) are available from the government. How much are they, have you applied for them? If you’re not entitled to a grant, why not? Prepare a worst-case scenario projection along with the more positive ones. Be honest with the lender and with yourself. If things turn for the worst you may be liable for a large repayment.

Don’t:   

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Forget to bring ID, a utility bill and three months of personal bank statements if you need to open an account. Ask for the entire amount required to start your business. The Wall-Street Journal reports that entrepreneurs generally invest 20% of their own money into the franchise. Be late, impolite, impatient, dirty or disorganised. No-one wants to deal with unorganised people. These are an instant turn-off. Act like you would on a first date (avoid playing footsie however…) Leave without arranging another meeting with either the manager or someone else in the bank. Hearing “I’ll be in touch” can often be the last words you hear before possibly receiving an impersonal rejection letter weeks later. Convince the manager that this is a great idea, and if he has any misgivings that you are prepared to work through them to produce a solid business model. Give Up. It is far more difficult to get a penny out of the banks for start-ups at the moment, so don’t lose faith if you don’t receive funding straight away. If you are rejected, arrange a meeting to discuss where the pitfalls were. Go back to the drawing board and revisit your research.

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Signing the Franchise Agreement You and your solicitor have examined the Franchise Contract. You’ve done your research about the franchise, and the numbers add up. You’ve spoken with other franchisees in the business, and like what you’ve heard. You feel ready to sign the Franchise Agreement. The Franchise Agreement is a legally binding contract that should stipulate in exacting detail, the responsibilities and expectations for the franchisor and franchisee. Keep in mind that Franchise Agreements are written to be generally more advantageous toward the franchisor. Once signed, you are legally obligated to uphold all the provisions of the Agreement, so it is absolutely essential that your solicitor review this contract and have everything explained to you in plain English. Before signing, compare the Franchise Agreement to the initial information to make sure the franchise offering as outlined matches what is stipulated in the Agreement. If any verbal promises were made to you, be certain these are written into the Agreement. Once signed, the Franchise Agreement governs your relationship with the franchisor, and any disagreements or misunderstandings will be subject to the terms in the Agreement. Because it is a legally binding contract, there are certain critical elements typically found in all business contracts and some that are unique to franchises. You and your solicitor should carefully scrutinise every aspect of the Agreement to be sure you understand all the implications.

Some Negotiation Tips Many franchisors have rigid Franchise Agreements that all their franchisees must sign and adhere to. However, some franchisors may be more flexible about negotiating the terms in the Agreement. But, be careful – since franchises are all about proven systems and consistency, a franchisor that seems too eager to bend the rules may be a sign that the business is in a measure of trouble. Items that typically offer room for haggling include:  Territory rules about exclusivity, future expansion or changes in size  Grand opening support and resources provided to you  The training provided to you and possibly your staff  Rules about transferring the franchise to other franchisees  Fee schedules and payments  “Default cure” which governs how much time you have to correct a problem that keeps your franchise from operating properly before you are in default of the contract  The start-up date when you are expected to launch the business  How the price will be calculated for the franchisor to buy your business once you’ve reached the termination date  Your liability limits regarding franchise performance Your solicitor and your accountant are the most familiar with your individual situation, so seek their advice about which Franchise Agreement terms you should attempt to alter to make more favorable for you. 14



Minorities and Franchising Franchising opens up new opportunities for minority groups to learn new skills, grow and expand their businesses, or acquire a new business and in recent years, the IFA and other associations have set up programmes, to increase the number of minority owned franchise firms. With increasing numbers of franchise companies becoming active in the recruitment of minority franchisees, their commitment to diversity and multiculturalism in the industry, can help minorities achieve their dreams of franchise ownership.

Women and Franchising Women and Franchising: Top Franchise Characteristics According to Iain Murphy in his book (The Franchising Handbook: The Complete Guide to Choosing a Franchise), women are in some ways better suited to franchising and make a more attractive group as potential franchisees. Here are a number of interesting characteristics that make women in franchising a successful target group for franchisors:  Women are good at organising, at coordinating activities and people efficiently. This means women franchisees will be naturally inclined to organise and coordinate their franchise opportunity more productively and profitably.  Women are good at prioritising, at deciding which activities are more important than others. This particular skill works well in the franchising industry, when problems arise concerning planning, staffing, financing and people management.  Women enjoy working towards a common goal. Women operating a franchise will work to make that franchise a success, for all franchisees involved under the one franchise operation.  Women are good at networking, ensuring effective communications are created between franchisee and franchisor, and franchisee and all other internal and external bodies.  Franchising can offer women who are ambitious the opportunity to go into business and to be potentially successful and profitable on a personal and professional level.

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Advantages for women running their own franchise 





In franchising you get to be your own boss, and take control of your own life. Women franchisees are more successful because they enjoy the work/life balance franchising can offer, making it more appealing to be their own boss. With 20% of small businesses failing in the first year of business, the concept of franchising offers assurance for women, interested in minimising business start-up risks. The tried and tested formula helps reduce the risks by providing training, help and support. After a career break or pregnancy, women can often feel a lack of confidence in returning to the workplace. Franchising gives women the opportunity to rebuild their skills and knowledge in a supportive and successful environment.

Franchising offers a tremendous opportunity for ambitious women to start their own business. Women and franchising can make a very successful combination.

Retirees and Franchising Today’s 50+ population is reluctant to be “put out to pasture.” Instead many people in their 50s and beyond dream of owning a business when they leave the traditional workforce. And there is no reason that older people driven by the entrepreneurial spirit cannot achieve their dream. For example, Colonel Harland Sanders was 62 when he sold the first Kentucky Fried Chicken franchise in 1952. Twelve years later, KFC was a popular fast food restaurant with locations throughout the US. Franchise companies are recognising that older, experienced workers retiring from regular jobs are good candidates for franchise ownership. They have confidence from the wisdom gained over the years in the workforce. They know how to plan ahead and reliably persevere to reach goals. And their experience has refined and sharpened their interpersonal skills. But before rushing into franchise ownership, retirees must carefully consider just what it is they want do in this next phase of their lives. Quality of life should be the first priority, so that factors such as time commitment and physical endurance must be carefully weighed. The financial aspect is another major influence – as one approaches retirement age, it is unwise to bet the farm on any investment. Retirees are better off looking for franchises with lower up-front costs and minimal ongoing overhead.

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Home-based Franchises In recent years, home-based franchising has become more popular as a range of companies have discovered that working from home can be just as effective as having an established office elsewhere. Franchisors in several sectors such as consulting, children's services, financial services, computer training and repair, cleaning, pet care, photography and travel, are now actively offering potential franchisees opportunities to have their headquarters where they live. Potential home-based franchisees must check with their local authority to see if there are any rules restricting the commercial use of a property and then decide if it is still worth working from home. Some towns do not allow businesses to be run from home, or have restrictions on it. For instance, customer parking could cause a problem should special permits be required for spaces used commercially. If approved, this arrangement can save costs for both franchiser and franchisee, although specialist training will be needed to ensure that franchisees will be ready and able to run a successful franchise from home, as they will have to adapt to a unique working style. It is important that franchisees working from home have in place the right equipment. To make sure things are run efficiently, a desk, stationery, posting equipment, notebooks and other items should be in a set place. Establishing distinct boundaries between the office and living space will help to make the franchise more professional. It is advisable to have a separate business phone line to keep work and home life apart and if using a computer, it should operate at a fast speed so that more work can be done during a day. The same applies for an internet connection and email software. Franchisees at home must have their office or workspace in an area away from potential distractions such as roommates, children, pets and television. Having a schedule and sticking to it as closely as possible will also help, including regulated breaks, although franchisees should not fall into the trap of working too long because they do not have to travel to work, which can be counterproductive and have a negative impact on the business, as well as family and friends. Those who are self-motivated and can work to these conditions should do well as long as the franchise they choose is right for them and gives them sufficient training and support. However, it can be lonely at times so franchisees wanting to work at home are advised to develop a network with the company's other home working franchisees and business owners in their area. These groups can provide each other with useful ideas and vital support.

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Part-time Franchising Starting a part-time franchise is a great opportunity that can lead to the growth and development of a successful business. Parttime franchising is defined as any franchise in which the franchisee works on average between twelve and twenty hours a week. This work arrangement can be the ideal job for an entrepreneur who is looking to start a franchise and keep their work-life balance. Work-life balance attractions include family responsibilities and recreational and leisure activities. An individual’s civic responsibilities can also increase the need for reduced or more flexible working hours. These obligations can include volunteer work, community work such as local school positions and environmental protection jobs, or serving on a legal jury. Franchisees that are looking to work at their own pace, control their own schedule, or earn a supplemental income are frequently opting for the part-time franchise option. Part-time franchises are also good for workers who are changing from a corporate job who don’t want to leap directly into franchise ownership, but want to phase into their franchise lifestyle over a period of time. The motivation for starting part-time franchises can differ for males and females. Research shows that combining work with education or leisure time is the main goal for male franchisees. Female franchisees prefer part-time franchising as it helps balance work and family. In this way, part-time franchising is an attractive option for women returning from maternity leave, people with young families, or stay-at-home parents. With an increased focus on family-friendly work and the work-life balance, part-time franchising is a viable option for entrepreneurs and/or first time franchisees. 18



Alternative Modes of Franchising In most cases, entrepreneurs arriving fresh to franchising would invest in a new, single unit franchise. In this type of franchise, the franchisee is only responsible for running one unit where they are involved with all of the daily operations of the business. However, there are other ways to enter the franchising world.

Multi-Unit Ownership Multi-unit ownership is where the franchisor grants a franchisee the right to operate more than one outlet within a defined location. With this right comes the potential for serious money making as well as increased responsibilities in operating your businesses. Franchisors have high standards in regard to granting multi-unit rights. You must have a proven track record of successfully managing a business, with the ability to motivate your staff and continually seek performance improvement. If you already own a franchise, expect the possibility of having to make a convincing argument in support of your application to own multiple units. Exhaustive research about your market and competition for each unit must be done, along with a strict accounting of your own personal and professional finances. However, some franchisors do offer a discounted rate on the startup costs involved in the case of franchisees opening multiple units.

Resale Franchises You may have opportunities to buy existing franchises from either a franchisee or the franchisor. Often you can get a discount on these sales, and since it is an existing business, you can examine all the records for sales, costs, and profit margins to make an informed decision. A franchise unit that has changed hands repeatedly probably has problems, and you should take extreme care in reviewing its history for several preceding years.

Master Franchisee Licenses Another means of expansion in franchising is to acquire a Master Franchise license. This puts you in charge of other franchisees within an established territory, which could be as small as a county or as large as a country. A Master License requires a significant investment, but offers tremendous rewards in return. With the Master License, you have the power to appoint and train new franchisees, and the right to collect a portion of the fees these franchisees pay to the franchisor. As with buying an individual franchise, you will need to do extensive market research before making an investment in a Master License. And just as with the Franchise Agreement, you must carefully scrutinise all the terms so that you fully understand your obligations and rights as a Master Licensee. Be sure the territory is carefully defined. Consult an attorney experienced with licensing contracts. Expect some of the franchise units to flounder, and be prepared to step in to help run the operation.

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Area Developer Rights In addition to Master Licenses, one can also purchase the right to be an Area Developer. In this case, the franchisor enters into an agreement with an area developer to sell a specified number of franchises in the area within a specified time. Area Developer agreements are not common in the U.K., but tend to be used more for international expansion.

Make Sure Your Franchisor is Open With You We’ve put together some tips to learn the nitty gritty about the franchise business that may change your life.  If you are invited on a tour with a current franchisee and the current franchisor comes along, try to come back later so the franchisee won’t feel under pressure to present a perfect image of the business.  Be aware that the frachisors may give bonuses to current franchisees that help get newbies on board, so try to figure out if they are being totally truthful.  The more franchisees you talk to, the better the information you will get.  If the franchisor supplies you with a small pool of contact details, get out the phone book and ring around other franchisees. Use Google to research what news and events the franchise has been involved in.  Try to get in touch with a wide variety of franchisees, from the most successful, to the struggling. This way you can assess whether the business is flourishing or failing because of the business model or the franchisee themselves. Talk to the oldest franchises and the newest ones. The guy who is just scraping by six years in will be as valuable to talk to as the star new kid in town who has already broke his first million.  Use your gut, and try to get a feeling for the motivations of the franchisees you talk to. You should have your own questions for franchisees depending on which industry you’re investigating, but here is a checklist of must-ask things to quiz franchisees on: Franchisors Are There To Help You It might be useful to rate these questions on a scale of one to ten: 1. Are you happy with how the business is working out? If not, what issues are affecting you? 2. How is your experience different from what you expected? 3. Have you made your initial investment back yet? Did it take longer than you thought? 4. How many hours a week do you work? Has this impacted on your personal life? 5. Was the training what you expected it to be? Was it intensive or tailored to your own needs and abilities? 6. Does the franchisor put any restrictions on products/services you can supply? How has this affected you? 7. How would you rate marketing and advertising? Does the franchisor do all you expected or they promised? 8. What support do you receive now? When problems have arisen how responsive was the franchisor? 9. What did it cost you to build and start the franchise? Were there any hidden costs? 10. What are the best and worst moments since you started? If the average score of the franchise interviews is coming in at more than five out of ten, it could be an indication that this could be the right franchise for you! 20



Final Advice Here are five main points to remember when making your decision on which franchise system to invest in: 1. Find an outlet for what you’re passionate about. Virtually all of the franchisees we speak with mention how much they love the area they are working in. 2. Scout your area and match what you want to do with a need in your community. This will increase the likelihood of your franchised business being a success. Also, you will be able to take advantage of local contacts you’ve garnered over the years. 3. Finding financing in this economic climate can be difficult. Many traditional avenues of funding are either closed or very rough to navigate. As you look at franchise options, honestly audit yourself to determine how much you can afford. 4. Visit other franchisees. During the research process of learning about any franchise you have the opportunity to speak to existing franchisees to gain an even clearer idea of what to expect. Their names and locations should be provided by the franchisor. Take advantage of this opportunity to learn what happens when you open a franchise, in practical terms, from someone who has been there before. 5. Make sure you really want to be a part of the franchise system. Franchising is for people who want to own a business, but don’t want to do it alone. If you are an entrepreneur that values independence in making decisions, you will probably find franchising too confining. Franchising is a time-tested way for everyday people just like you who have made the decision to run their own business. When you’re ready to begin your journey to franchise ownership, browse through our listings on FranchiseDirect.co.uk and find a franchisor that suits you most.

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Common Franchise Terms Advertising levy The advertising levy covers the franchise system’s advertising and promotional activities. Agreement The franchise agreement is a legal written document that governs the relationship between the franchisor and franchisee. It specifies the terms of the franchise contract such as rights and responsibilities of the parties, fees and payments, territory and duration of agreement. Approved Franchise Association The AFA provides the Franchise Industry within the United Kingdom with a voluntary, self-regulatory body; serving it's members, potential new franchisees and the industry as a whole. Approved Site The approved site is the location that the franchisor chooses, for the franchisee’s set-up, which meets the criteria of the franchise unit. Area Franchisee An area franchisee purchases the right to open and operate a specified number of franchise locations, in a defined geographical area, during a defined period. British Franchise The British Franchise Association (bfa) is the voluntary self-regulatory body for the UK franchise sector, with a standards based approach to membership. Its aim is to promote ethical franchising practice in the UK and help the industry develop credibility, influence and favourable circumstance for growth. As a result one of the bfa's main jobs is to help potential franchisees recognise the good, the bad, and the ugly for what they are. Business Plan A business plan is a document prepared by a franchisee, which summarises its operational and financial goals and objectives for the franchise, and contains detailed plans and budgets showing how these objectives are to be achieved. Capital Capital is the wealth required by a franchisee. Human capital consists of the franchisees experience, leadership, and knowledge he/she will bring to the franchise. Collateral Collateral is a form of security that the borrower may offer the lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. Copyright Copyright is the exclusive right of a person to use, and to license others to use, works of art, music, or literature, and to protect these works from the unauthorised use. This statutory right prevents others from copying or exploiting a person’s work without permission.

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Earnings Claims Earning claims are the actual or forecasted franchise sales, profits, or earnings stated by the franchisors. Equity Equity is the total value or worth of an asset. It is an individual’s or company’s shares and ownership rights of an asset, and does not represent an obligation to pay in the future. Feasibility Study A company that is thinking about becoming a franchisor carries out a feasibility study. Franchise A franchise is an agreement in which a firm (franchisor) enters into a contract with other businesses (franchisees) granting them the authorisation to operate in the distribution of goods and services, under the franchisor's trade name and guidance, in exchange for a fee. Franchise Consultant A franchise consultant is a business guide with expertise in the franchising industry. They give advice on topics such as franchising operations, companies, and relationships. Franchise System A franchise system refers to the different franchises operating in the UK. Franchise Unit A franchise unit refers to each individual outlet, whether company owned or franchised. Franchisor A franchisor is an individual, partnership, or corporation who grants an investor (the franchisee), the right to conduct business under their trade name, using their operational methods and organisational systems. Franchisee A franchisee is an individual, partnership, or corporation who purchases the right from the franchisor to conduct business under their trade name. Initial Investment The total investment is the capital required to start the franchised business. Initial Franchise Fee The initial fee is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise agreement. International Franchise Association (IFA) The International Franchise Association (IFA) is a non-profit trade association of franchisors, franchisees, and suppliers. Founded in 1960, the IFA’s office is based in Washington, D.C. Licensing Licensing is the legal act of one party granting rights to another party to a legally protected property in exchange for a fee or royalty. 23



Master Franchisee A Master franchisee is the individual who negotiates the franchise rights for a defined territory (usually a country), and assumes the rights and obligations of the franchisor in that particular territory. Marketing Marketing is the process or technique of planning, pricing, promoting, selling and distributing products and services to create exchanges that satisfy both the customer and the organisation. Multi-unit franchisee A multi-unit franchisee is one that owns and operates more than one unit of the franchise, but does not have the rights to a defined territory. Operations Manual The manual contains instructions advising a franchisee how to operate the franchise. Pro Forma The Pro Forma document is a description of financial statements which rely on historical data to assume levels of revenue, expenditure, assets, liabilities, and net worth. Royalty Fee Also referred to as the “management service fee”, these fees are the continuous payments the franchisee gives the franchisor to stay part of the franchise system. Supplier A supplier is the authorised individual or company who has been approved by the franchisor, to supply products or services to the franchisee. Territory Territory is defined as a specific area in which the franchisee has the exclusive right to conduct business, without the threat of competition from fellow franchisees. Trademark A franchise trademark is a form of identification such as a brand name or logo, which is associated with the franchise.

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