- 5 mins read
With the British Franchise Association reporting record growth levels it seems that franchising has never been so popular, but what motivates a business to expand into the franchise market and what are the considerations it needs to have regard to? Andrew Perkins, a Partner in Ashfords' Franchising Team, takes a look.
There are a whole host of reasons why businesses choose to grow through a franchise model rather than through traditional expansion. Some are obvious and others more subtle:
Ability to expand business more rapidly
Growth through franchising is often easier and quicker to achieve than through self-funded and managed growth. A businesses' own resources are normally limited and access to funding is not always available. The management time expended on growing and opening new outlets is considerable. Under a franchise model capital is provided by a third party and the lion's share of the time invested in the growth, is the time of the franchisee and its staff.
Greater Reward for Effort
The reward from franchising is usually a share of the franchisor's turnover, but those limited rewards can often represent a proportionately greater return than time and money invested in the master business upon which the franchise is based.
Improvement of 'brand value'
The more visible a brand is, the more value it normally commands. The improvement of the brand position is of benefit to all involved in the network - but particularly useful if you are the brand holder.
Bulk buying power and creation of improved supply chains
If a business expands through a franchise system which provides for purchase through nominated supply chains, then the franchisor will normally be able to secure better deals by reason of its bulk buying power - this not only benefits the franchisees, but also the underlying businesses and/or further outlets operated by the franchisor. There might also be 'overriders' and other rebates available to the franchisor for directing purchases through the supply chain.
Economies of scale
In a similar way, economies of scale achieved through the collective network may allow certain costs to be shared and economies of scale to be achieved. This is particularly so of fixed price services shared across a wider and wider network e.g. sharing of Head Office costs, sharing of IT and HR support, marketing and web costs, etc.
Franchise premiums and income streams
Most significantly the franchisor benefits from new income streams in the form of franchise premiums (paid on the grant of new franchises) and management service fees payable on an ongoing basis during the period of the franchise. Other income sources can include commission payable upon the transfer of franchises and marketing levies.
Benefits of knowledge/development derived from franchisees
Franchising is a two way process. Often Franchisors will find that they benefit from ideas, development and improvements identified by members of the franchise network.
Increased value of core business
Most Franchisors will have an underlying 'core' business upon which the franchise concept is based. The value of that business will usually increase as a result of the growth of the franchise network and it may well prove easier to sell that business by reason of the brand strength of the franchise network.
Ability to re-acquire franchised outlets to develop core business
Often overlooked, but potentially very valuable, is the ability (in many franchise agreements) for the franchisor to acquire the franchisee's interests in their franchised businesses in the event that they decide to retire or sell. The incorporation of 'right to purchase' provisions in the franchise agreement can give the franchisee a long term ability to expand and grow the underlying core business.
However the challenges of franchising should not be overlooked:
The time commitment to set up and launch a franchise is often underestimated. Time and resource needs to be invested into the development of the franchise system, the documentation of policies and procedures and the preparation of manuals and handbooks - many potential franchisors choose to engage franchise consultants to assist them in this area. The interviewing, selection and training of new franchisees is also a time consuming process and eats into the time the Franchisor would otherwise spend within their own core business.
The work doesn't stop once the new franchise is launched. A commitment to ongoing training, support and guidance for the new franchisee is an important part of the 'package'. In the early stages of a new 'launch' franchisors can expect to spend a good deal of their time and resources to assisting the new franchisee and to providing day-to-day support to them.
Costs of launch
It will be necessary to engage professional input to establish a franchise offering. Lawyers will doubtless be employed to draft the franchise agreement, accountants may be commissioned to prepare forecasts and business models, there will likely be IT systems and structures to put in place as well as websites, printing and stationary, signage and clothing design, etc. The extent of input will depend very much on the state of the core business on which the franchisee is based. Many franchisors operate a 'pilot' franchise to 'iron out' difficulties at an early stage and to ensure that the franchise model can be delivered in a practical and smooth way.
Policing, management and collections
Once the franchise is up and running there is a need to police and manage performance and to collect income - whilst the collection of income is principally what the franchise is about, it will still require time and resource to achieve.
Above all the operation of a franchise network is a significant distraction from the core business. Franchisors who believe they can simply sell a franchise, walk away and enjoy an income stream are often disappointed. Successful franchising requires a good degree of commitment and support for the franchisees to flourish - however experience suggests that those franchisors who commit to a supportive and valuable collaboration are usually those who enjoy the most success.
The message to those considering franchising as an option is to think long and hard and to take good advice - franchising can be an excellent route to growth - but generally it is not a shortcut to it.
Andrew Perkins is a Litigation Partner at Ashfords LLP where he heads up the Dispute Team within the firm's Franchising Department.