FRANCHISING

“A REALISTIC OPTION FOR EVERY BUSINES?”

Wednesday 26th November 2008

Kenneth Sharp

AGENDA

• Agenda• Introduction• What is it?• Industry overview• Suitability• Types• Revenue Streams

• Stages in Franchising• Costs• ROI• Other Models• HELP!• Is it a Good Time?• Summary• Questions & Answers

INTRODUCTION• About Business Options

– Set-up 5 years ago– Senior Business Adviser for Business Link London

• Created and ran their Franchise Department– British Franchise Association– Irish Franchise Association– Institute of Business ConsultingOnly company with all three accreditations– Offices covering London; South East & South West; Midlands;

East; North West, Wales; Northern Ireland; Ireland )• About Kenneth Sharp

– Director of own consultancy; Triage Hospitality– Partnership with Business Options– Set-up and run a number of businesses myself

WHAT IS IT

• Normally referred to as“Business Format Franchising”

• A contractual long-term relationship• Grant of a licence to franchisee • Franchisee gets:

– Tried and tested product/service– Profitable proven business model to follow– Experience and know-how of the franchisor– Entitlement to use the trade name / mark– Entire package

EXAMPLES

EXAMPLES

Industry Overview

At the end of 2007 in the UK:• Industry worth £12.4bn

• 806 franchise systems– Property services 202– Personal services 159– Business and commercial services 156– Hotels and catering 115– Store retailing 101– Transport and vehicle services 73

Industry Overview• Regional Distribution of Franchised Units (%), 2005 – 2007

– South East 20– South West 13– London 12– North West 10– East Midlands 8– Scotland 8– Yorkshire 8 – West Midlands 7 – North/North East 5– Wales 5– East Anglia 3– Northern Ireland 1

SUITABLE?

1. Is it a financially viable business? - Would it still be viable with an additional 15% costs?

2. Is there long-term and widespread demand for your product / service?

3. Can you prove that it can work in other parts of the country and without your skills and ability?

4. Are the business processes easily replicable?5. Can an unskilled person easily be trained

to run the business / sell the productor service?

NOT SUITABLE• A business that is failing• Low gross margins

– (e.g. newspaper delivery)

• Where product range has short life-cycle– (e.g. toy)

• Geographically defined market - no potential to repeat in other places

– (e.g. Tower of London gift shop)

• High technical skill levels required– (e.g. brain surgery)

• Not proven– (e.g. only been trading for 3 months old)

YET!

TYPES• Investment Franchise

Investment franchises are operated by the fast-food and restaurant chains, as well as by some well-known hotels.– The franchisee has overall control of the business– Employs his or her own senior management and staff.

• Executive Franchise– Involves the provision of professional services, – Financial advice, legal services or recruitment assistance.

TYPES• Retail Franchise

– The franchisee runs the outlet, employs staff and displays goods approved by the franchisor.

• Distribution Franchise– A distribution franchise permits the franchisee to operate from a depot or central office that is usually owned by the franchisor.

• Depot Franchise– The franchisee is the operator and sole occupant of the

depot. This type of franchise is generally available to courier companies and parts suppliers, for whom a depot is an essential part of the business.

TYPES• Job Franchise

– Usually a one-person business, operated by the franchisee from home. Home-delivery operations, such as lawn care, car repairs or furniture refurbishing, are examples of job franchises.

• Management Franchise– A management franchise is where the franchisee will be

responsible for both running the franchise and employing and managing a team of operatives.

REVENUE STREAMS• Initial Franchise Fee

– Average cost is £52,500 • On-going Fees

– Management Services Fee (Royalty) • Average 7.5% of Gross turnover (never profit)

– National Marketing Levy • Average 1.9% of Gross turnover

– Mark-up on Goods– Service Fees

• Training Fee• Others: e.g. re-sales (transfer fees)The franchisor should not be looking to make a profit from the initial fee.

Source: (Nat West Survey 2008)

STAGES IN FRANCHISING• Franchise Model Development (Feasibility Study)

– Assesses the viability for the franchisor and for their franchisees – Develop the Franchise Package (fees, services, support, territory criteria, minimum performance) “Blueprint”

• Infrastructure Development– Franchise Operating and Reporting Systems – Franchise Legal Documents– Trade Marking– Franchise Operations Manual– Franchise Detailed Territory Mapping

• Recruitment– Franchise Recruitment Strategy– Franchise Recruitment Material– Marketing the Franchise Opportunity– Franchise Enquiry Processing– Franchisee Interviewing– Franchisee Training

• Support– General Franchisee Support– Franchise Support Staff Recruitment– Franchise Support Staff Training– Franchise Network Meetings and Conferences

COSTS• £0

• £20,000 - £25,000 to be ready to take to market

• £1,500+ a month franchise recruitment budget

• Look to recoup costs from first few franchisees (upfront franchise fee)

• Funding options:• Banks look favourably on proven businesses that want to franchise

• Government: Small Firms Loan Guarantee, Local grant / support initiatives

• Private investors

R.O.I

Example Return on Investment - Smith & Jones Ltd

£0£5,000

£10,000£15,000£20,000£25,000

£30,000£35,000£40,000

£45,000£50,000

1 2 3 4 5 6 7 8 9 10 11 12

Costs

Income

COMMON FACTORS• Successful Franchises

– View franchising as a long term partnership– Provide comprehensive training– Undertake ongoing research & development– Franchisors income linked to the success of the

franchisees

COMMON FACTORS• Failed Franchises

– View franchising as an income stream to prop up a failing business

– The business is not proven– The business has limited longevity– After initial training, they leave the franchisee on their

own– Have little or no financial incentive in the success of their

franchisees– Do not undertake ongoing research & development

OTHER MODELS• Company owned expansion• Acquisitions• Licensing

• It is important to find the right expansion model for your business.

• Find / adapt a model to fit your business DON’T adapt your business to fit a preconceived model

• Quite often it can be a mixture of a number of expansion and indeed franchise models

COMPANY OWNED EXPANSION

• Most common form of expansion in the UK• Wait until you have made sufficient profits in the business to

fund or to allow you to borrow sufficient money to fund another outlet / office

• Pros:– You own the new unit totally so you keep all the profits it generates– You keep total control over the unit– Grows the brand name which benefits the existing business– Economies of scale

• Cons:– Time it takes to expand i.e. wait until you have sufficient funds– Cost of opening a unit – You have to recruit and manage staff in a remote unit(s)

ACQUISITIONS• You buy an existing business, rebrand it, and run it as a

company owned operation

PROS– Existing customer base: managed correctly should be able to maintain the existing

customer base. – Funding expansion: you borrow against the trading performance of the company you

are buying. – Profit potential: you own the new unit totally so you keep all the profits it generates– Control: you have total control over the unit– Corporate and product brand development: you develop both the companies name

and products

CONS– Staffing: you will be inheriting someone else's staff (TUPE) – Time: it can take along time to identify suitable companies, make an approach,

negotiate, complete the purchase – Customer reaction: customers will be used to the old brand and service offering; they

may not like any changes.

LICENSING• Someone pays you money and you grant them the right

(licence) to sell your product or service under their own company name

PROS– Time it takes to expand: you don’t have to wait until you have the funds to expand as the licensee

pays you– Cost of expansion: you have to develop the licensing model, have a licence agreement; and have to

advertise for licensees.– Income stream: you get an income from both the licence fee and the ongoing fee– Staffing: You don’t have the problem of recruiting and managing staff in a remote unit– Product brand development: However not company brand development as Licensees trading under

their own name

CONS– Profit potential: as it isn’t your business you don’t make as much profit as if it was company owned.– Corporate brand development: you do not grow the corporate brand as the licensee trades under

their own name– Control: you do not have much control over how the licensee runs their business however you can

control how they market and sell the licenced product– Focus: the Licensee will sell other products therefore they will not be focussed on selling your

product range

IS NOW A GOOD TIME?• People being made redundant, have a pay off and its difficult

to find new jobs• Businesses have less money to expand using company owned

expansion• The success rates are higher for both franchisors and

franchisees than for non franchise businesses• For Franchising to succeed still need to apply proper / sound

business practices

IS NOW A GOOD TIME?

Your Local Business with National Backing

45% of People would prefer to buy from a franchise businessSource: bfa Franchise Awareness Survey 2006

HELP AVAILABLE• Franchise Group For Northern Ireland• British Franchise Association & Irish Franchise Association• Banks – many have dedicated franchise departments• Franchise Publications

– Franchise World, Franchise Options

• Franchise Websites – whichfranchise.com/.ie, franinfo.com, franchiseoptions.ie

• Business Links and Enterprise Agencies• Existing franchisors

SUMMARY• A well established industry• Create a national or international brand

– Cost Effectively– Quickly

• A number of elements to developing a ‘successful’ franchise

• Other Expansion Models• Sources of Help and Advice

CONTACT DETAILS

Kenneth SharpSenior Business Expansion Consultant

Business Options70 Donaghadee Road, Bangor

Co. Down. BT20 4QX

Tel: 028 95 81 2006Mobile: 07720 297279

Email: kenneth.sharp@businessoptions.bizWeb: www.businessoptions.biz

Regional Offices Covering:London; South East & South West; Midlands; East;

North West, Wales; Northern Ireland; Ireland Registered NationalBusiness Link Consultant

Accredited member of the British Franchise Association

Accredited member of the Institute of Business Consulting

Accredited member of the Irish Franchise Association