Franchising - Another expansion option?

Many family owned businesses look to expand and develop, particularly when new generations come into management.

 Franchising has always been an option for certain business types, but it has become particularly attractive in recent years with the franchising market more buoyant than ever before.

What is franchising?

Franchising is a shorthand for 'business concept licensing'. Essentially it involves the Franchisor licensing the use by others of an established business system and brand that it has developed, so that those third parties (Franchisees) can replicate the Franchisor's business in different locations. For a very famous example take McDonalds, one of the world's top-ten brands. McDonalds have developed a tried and tested formula for the promotion and sale of burgers and other fast food. A Franchisee does not just benefit from the use of the McDonalds name, but from the know-how and experience they have developed and a structure within which suitable premises are identified, fitted and equipped, through which staff are trained, produce supplied, products promoted, administrative functions resourced, etc. The franchise is the grant of rights (usually exclusively) to operate that system of work within a defined territory, with the Franchisor's support and input. The likelihood of success on the Franchisee's part is hugely increased by reason that it is following a tested formula.

What businesses can be franchised?

They don't all have to be like McDonalds, but it helps if the business has some brand presence. The key factor however is a uniqueness - either in what products or services are being offered or the way they are offered. The coffee shop boom highlights this well - ultimately the stores all sell coffee but the main players all do so in a slightly different way, be it the coffees they serve, the dcor of the stores, the complimentary goods on offer, the way in which they are offered and served and in the branding of the stores themselves. The branded restaurant chains are another good example - a customer can go to any Pizza Express outlet and know exactly what they are going to get. The supply chain, menus, training and fit-outs and other services provided by the Franchisor, ensures a similar offering and experience in each outlet.

And it's not just food outlets that are franchised - a whole range of businesses are represented in the franchise market from professional services (including architectural services, HR support, property letting, accountancy and bookkeeping), leisure (including swimming lessons, personal training, entertainment), education (tuition, languages, mentoring), motoring (smart repairs, windscreen repairs, valeting) and retail (everything from yacht brokerage through to mobile telephony, from form photocopiers through to sportswear).

The key is identifying what makes your business successful and understanding how that can be replicated, packaged and scaled.

What are the benefits?

Alternate income streams, Franchisors pay a 'Franchise Fee' when they are granted a franchise and then, during the lifespan of the Franchise, a 'Management Service Fee' (MSF) for the help support and benefit they receive from being a member of the franchise network. In many instances the income streams grow to outweigh the value of the original business making franchising extremely lucrative.

Franchising can also enable the expansion of business ideas far more rapidly than simple organic growth. Franchise networks are grown through the Franchisor's investment of capital, rather than the business owner having to finance - this can enable a novel concept to be taken from start-up to significant presence, in relatively short timeframes. Good and established franchises with proven track records are attractive to banks too, who through their franchising divisions will often have an appetite for financing new Franchisees who wish to take on a territory.

There are further benefits too in the form of growth and expansion of the brand, which can also have the effect of increasing the profile and worth of the original underlying business and the Franchisor's own retained outlets. Economies of scale created by the expanding networks often results in the reduction of the operating costs - which again will benefit the Franchisor's underlying business and owned outlets.

And ultimately on exit, well-structured Franchise networks are attractive to investors and business purchasers, interested in steady income streams and the ability to further exploit and develop business with an established critical mass.

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