Franchisees beat the odds and do it for themselves

Aug 6 2008 by Karen Dent, The Journal

The downturn appears to be settling itself in for a lengthy stay but one business model looks to be reaping the rewards as the economy slows. Karen Dent looks at why franchising tends to thrive in a tough climate.

THE credit crunch may be forcing potential entrepreneurs to consider whether or not to take the plunge but one business entry route appears to be showing little signs of slowing down.

The idea of franchising – taking an established brand and licensing it to other people to run as a business – can traces its roots back to the Middle Ages but business franchising is generally thought to have started in the mid-19th Century in the United States.

Franchising contributed £12.4bn to the UK economy last year and the sector grew at a rate of 15%, according to the latest British Franchise Association (BFA) survey. And if the economic slowdown worsens and leads to high numbers of redundancies, franchising is expected to grow at an even faster rate.

Pip Wilkins, client services manager with the BFA, said: “Historically when we’ve had a recession, there are more people choosing to go into franchising. In the last recession, there were a lot of redundancies and people have a chunk of money to invest in a business.”

The BFA, which is run as a non-profitmaking trade association, offers advice to companies keen to franchise their idea. Its members have all been scrutinised; Wilkins says people looking to put money into a franchise would be wise to check whether the company they are interested in is a member.

Although not recession-proof, franchising is considered a safer bet for first-time business owners because it is a tried and tested idea that has already been replicated over and over. It can also be easier to raise finance to buy into a franchise because it is seen as less risky than investing in a brand new, untested enterprise.

“You have a proven business model. The banks love franchising in a recession as it is an industry in its own right. There are more than 1,000 franchise systems in the UK at the minute,” said Ben Smith, the Darlington-based head of Cartridge World’s franchising recruitment for the UK, who first became involved in franchising in the late 1970s with the Saks hairdressing chain.

“You are an independent business operating in a network of other independent businesses. You’ve got to want to work for your own reasons but with the common goal in mind,” he said.

“Usually people go into business related to what they’ve done all their lives. Franchising is almost like a supermarket of businesses – you can pick one that suits you.”

However, whereas a small firm can be started from a spare bedroom on a shoestring, a substantial amount of money is required up-front to initially buy the franchise and then to pay an ongoing percentage to the franchiser.

Chris Simpson, an account manager at Business Link North East, said: “You have to put more money in to set up a franchise – it’s more expensive than to set up your own business because obviously you are getting the extra support.

“You are also tied in usually to using their products, and paying a percentage to them either once a month or once a quarter, against how much you take in.”

These ongoing fees go towards what many franchisees say is one of the main benefits of this business model – the help available from the parent group and fellow franchisees. This can include ongoing training as well as marketing, such as local webpages or microsites as part of the franchiser’s main website, to having someone to ask about dealing with the nitty gritty of running a business on a daily basis.

“You’re not entirely on your own,” said Ben Smith. “But we can’t run the business for them, they are responsible for making their own decisions. People are responsible for their own future and their own destiny.”

Selling franchises is also used by established business seeking to grow their brand.

They receive an up-front payment and have the security of receiving regular remuneration from the franchisee.

“A lot of successful businesses, when they are looking at growth, can expand by getting people to buy in under a franchise,” said Business Link’s Chris Simpson. “So they sell a franchise and they are getting a monthly payment.”

Companies keen to expand are also viewing the franchise model as a safer method of growth in the current economic climate, according to Ken Rostron.

Former managing director of the Prontaprint Group, Rostron now uses his 30 years’ experience of franchising to advise businesses considering this route as a partner in Darlington-based The Franchise Company.

“There’s a lull in franchising in terms of franchisers coming into the market in the summer but this year it’s been noticeably busy. There’s a general recognition for the rest of this year, there will be a lot of people looking at self-employment,” he said.

“When people start to get concerned about the future, they tend to look at self-employment as a way of taking control.”

Rostron has helped businesses ranging from flooring and financial services to wine-tasting evening classes to expand through franchising. But he says not every enterprise is suitable.

“You can’t make a business suddenly suitable for franchising, it is or it isn’t,” he said. “The business has to be established and trading and profitable. In an ideal world it would be trading for a year but it could be six or nine months. The franchiser has to understand what he’s getting into.”

And he says the nature of the business owner is also key, because franchising works as a partnership between franchiser and franchisee.

“Occasionally, we come across a very good business that is capable of being franchised but the person who owns it is so autocratic.”

But for those that tick all the boxes, he believes franchising as an expansion method can have better results on a business’s bottom line than setting up additional branches run by employees.

“Where service is a very important aspect of the business’s success, then franchising does very well because of additional commitment you get from the franchisee,” he said.

“The reality is if someone invested their savings – often their life savings or redundancy – they will work all the hours God sends to get it established.”

If someone invested their savings they will work all the hours God sends to get it established