Sharing the franchise vision and then making it work

Apr 8 2008 by jez Davison, Evening Gazette

IS a franchise the recipe for a happy business marriage or the backdrop to an inevitable battle of independent minds? JEZ DAVISON asks three Teesside business partners who said ‘I do’.

FORMER chef Derek Lancaster is one of the growing breed of Teesside workers who’ve ditched their day job to run a franchise. “Five years on, I can say I made the right choice,” he says.

Others obviously share Derek’s enthusiasm for the civil partnership of the business world because franchised businesses in the UK are growing five times faster than the overall economy. Although still a small sector, last year their turnover increased by a spectacular 15%, compared to UK Ltd’s compared with a relatively modest 3.1% rise in GDP. But then the 34,200 franchise operators include some of the biggest names in business who’ve stamped their brand across the UK on the back of a network of faceless, but often highly profitable, entrepreneurs.

For many of them, taking on a franchise offers a comfy alternative to the scary prospect of starting a business alone and from scratch. The opportunity to buy into an established brand with a proven business model and a ready-made order book seems much more attractive than getting your own idea off the ground.

But is it worth the hassle of signing up to a complex contractual agreement with a virtual stranger, who’ll dictate how your business is run and siphon off a hefty wedge of the profits? And if you’re a potential franchisor, do you really want to trust your business to someone who could trash your reputation in minutes? It’s a business marriage made in heaven or the partnership from hell and, just like a marriage, it all begins with a licence.

Essentially, franchising is the granting of a licence that enables the franchisee to use the trade name and business methods of the franchisor. Each business is owned and operated by the franchisee, with the caveat that the franchisor retains control over the company’s quality standards and the way in which products and services are marketed and sold.

Although accreditation body, the British Franchise Association (BFA) is regarded as the bible of franchising information, a good lawyer is essential to help both parties navigate the maze of restrictive clauses, renewal fees and terms contained in the licence to lessen the chance of a costly divorce.

Colin Walsh, assistant solicitor at Jacksons Solicitors in Stockton, says: “Franchise agreements are generally very onerous on the franchisee. The termination clause of the agreement needs to be reviewed to ensure that the franchisee is fully aware of what actions may give rise to this clause being invoked.”

The industry has been widely criticised for alienating potential franchisees by weighting licences too heavily in favour of the franchisor.

“Mutual trust is vital,” advises Middlesbrough’s Carol Price, who owns a Rhythm Time franchise offering music classes to babies and toddlers. “You need to build up a relationship before you sign the contract.”

Generally, a franchisee brings a dowry with them - a fee that’s payable at the outset - together with on-going management service fees, usually based on a percentage of annual turnover or mark-ups on supplies.

In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and a specialist range of management services.

It was this guarantee of support that persuaded David Graham to buy the Cleveland franchise of Driver Hire, which specialises in the recruitment and supply of permanent and contract driving staff.

David, who starts his venture next month, says: “Fees have to be weighed against the time and money saved on things like advertising and developing a client base. This acts as a safety net for franchisees who may otherwise have thought twice about going into the industry.”

With average start-up costs around £40,000, most franchisees need to raise capital to pay initial fees and get their venture up and running. But lenders are more likely to support a franchise model with proven money- making ability rather than a complete newcomer to the market with no track record and an untested idea.

Mark Scott, director, franchise development at NatWest, says: “Despite the economic conditions there has been no change in our lending strategy for franchise operations.

“In many cases we will lend up to 70% of the total costs, which covers stock purchases and advertising as well as the start-up fee.”

But even if the costs are covered, tieing the knot might not suit those who do not conform easily to someone else’s rules.

If the relationship falls apart, most franchise agreements provide an exit route for the franchisee (although the franchisor often exercises a right to approve the intended purchaser). But irretrievable breakdowns are few and far between and many franchisees have gone on to build their own franchise families, first extending the geographical boundaries of their operation before managing a team of franchisees within their own patch.

Is it a risk worth taking? Well, just ask those who passed up the chance to buy a stake in Coffee Republic.