Franchising: Getting it right

Karl Sandall, chief executive of award-winning franchise TaxAssist Accountants, offers tips to help you negotiate the early stages of the franchising process

Buying into a franchise can be a great way to start your own business. With franchising, you’re buying into a proven system and business model, which can make it a much lower risk option than starting your own business from scratch. Consequently, the banks are often more willing to lend money to get a new franchise off the ground than they are to conventional start-ups.

But it’s not for everyone; nor is becoming a franchisee a guarantee of success. As with any new business, you’ll need to put in a lot of hard work to make your franchise work. You’ll also need to do thorough research and planning to ensure you’ve not only found the right type of franchise for you, but that you really are getting a good deal, that the franchisor’s claims can be substantiated, and that the business proposition is viable in the given area.

Having won the prestigious bfa Franchisor of the Year Awards no less than three times, claiming the ‘Gold’ award in 2010 following two ‘Silver’ wins, TaxAssist Accountants is setting the standards for franchising best practice – and of course, success.

Here, chief executive Karl Sandall tells us how to work out whether becoming a franchisee is right for you; how to research a prospective franchisor and how to get the relationship right from the outset.

What are the key questions and considerations our readers need to pose when weighing up whether or not to become a franchisee?

First of all, you need to ask yourself what you’re interested in. If you’re looking for a van-based franchise, for example, but you hate driving, is it right for you?

People also need to think about their own mindset. If you don’t enjoy following a specific system, franchising might not be right for you – after all, you’re following someone else’s model. Similarly, if a person can’t handle some of the key requirements of being a franchisee, such as managing staff and keeping up payments to the franchisor, they may find the franchise model doesn’t suit them.

Franchising is based on a long-term commitment – a franchise agreement can run from three to 20 years. While this gives franchisees security of tenure, they need to be truly committed to the business for at least this length of time.

While we have a clause in our agreement that says a franchisee can exit in the first year for a low fee if it’s not working out, not all franchisors are like that. If someone takes a job and doesn’t like it, they can start looking for a new one after six months; this is rarely the case with franchising.

Finally, you need to consider the seasonal nature of the franchise – the idea of running a garden maintenance business may seem appealing in June, but will it be so appealing on a wet and windy day in February? Franchisees need to be motivated to enjoy what they are doing throughout the year.

What are the strengths of franchising in the current climate?

The 2011 report on the franchising industry, compiled by NatWest and the British Franchise Association (BFA), shows that, of the 39,600 individual franchisees in the UK, 90% recorded a profit in 2011. With franchising, you’re buying into a proven model, which has worked elsewhere and shown demand. And of course you’ve got the support to do it.

At TaxAssist Accountants, everyone at the support centre is focused on supporting the franchisees.  From initial training through to ongoing business development and technical support, franchisees are number one – we only make money if they make money.

What are the key things to look for in a potential franchisor?

As a prospective franchisee, you should certainly find out whether the franchisor is a member of the BFA. The BFA requires that each member works to a code of ethical conduct and the accreditation process is very stringent – a franchisor has to submit audited accounts and other key info to demonstrate the business is viable. If the franchisor isn’t a member, that doesn’t mean you should stop your research, but you should certainly ask why the company isn’t a member.

You should also seek a report on the franchisor from your bank – the bank will provide as much information as they know about the company. If the banks are supportive, that suggests the business model is working.

It’s also essential to seek advice from a good franchise lawyer – not a general solicitor, but a specialist. The lawyer should have a lot of experience in this area, and they should be accredited on the British Franchise Association website.

Can you describe the business model a prospective franchisee should expect?

It’s crucial to look for a business format franchise. Under this, the franchisor has established the business and shown that it’s profitable. They’ve established a pilot operation, and shown the business can operate elsewhere.

Under this model, the franchisor will also have a standard franchise agreement in place, from five to 20 years, drawn up by a BFA-accredited lawyer. There must be an option to renew at the end of the fixed term.

What are the key things to look for in a franchise agreement?

This really is a question for a specialised lawyer, but for me it’s important to ask what the franchise fee will be used for, and what it will be invested in. All franchisors should offer ongoing support – remember you’re paying for comprehensive, ongoing assistance. Some of the support offered by the franchisor should be technical, but it should also include marketing and business development. It certainly isn’t a case of paying your money and not seeing the franchisor for five years.

As a potential franchisee, you should ask to see the franchise agreement you will be expected to sign, and run this past a lawyer. Look at things like the ongoing fee, and what happens at the end – there should always be an option to renew.

Accredited franchise lawyers are reasonable in their costs for a review service and in the scheme of things a small price to pay for advice that potentially saves you money and worry in the future.

What are the key things to look for in a franchisor’s brand?

This can vary – but if a potential franchisee looks at the franchisor, asks lawyers and banks for their interpretation and attends one of the franchisor’s discovery days, they should get a clear view.

Look at the internet, and think about how much work the franchisor has done on its organic search engine listings. It’s also good to go into one of the outlets to find out how much loyalty and trust people have, and do some research around the patch as well.

What sort of success rate should you look for in the franchisor’s existing network?

The franchise industry has an average failure rate of less than 5%, so I’d be using that as a benchmark. What are the tell-tale signs that the relationship might not be right?

Franchising is very much a people business, and if you can’t work with the franchisor’s representative, that’s an issue. So, during initial negotiations, you need to get a feel for the organisation – if the organisation wants to meet in a motorway service station, rather than going to head office, that should set alarm bells ringing. An invitation to their office shows that they are proud of their operation.

If a franchisor says they have 100 franchisees, but only gives you a list of five, that should also set alarm bells ringing too. Clarity and transparency are key from day one. At TaxAssist we’ve always run a fair, transparent system; we’ve been thorough in building the support networks, and we’ve always put the franchisee first.

Karl Sandall spent 26 years at a senior level with HSBC before joining TaxAssist Accountants in January 2000 as operations director – taking on the role of chief executive in 2002. A Fellow of the Chartered Institute of Bankers, a member of the Financial Industry Group and of the Committee of the IFS School of Finance for the East of England, Karl oversees the running of the company and the whole network on a day-to-day basis and ensures the company continues to expand.

If you’re considering buying into a franchise, check out our book, The Franchising Bible, published in association with the British Franchise Association. Now in its second edition, it’s a fully up-to-date guide to choosing and running a franchise business.

 

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