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A franchise is simply a right or privilege granted to a person, or a corporation, to do something. That something could be vote in an election, sell something in a particular place, or provide some sort of service.
Originally the Crown granted franchises to do things such as operate street markets or toll roads, and it may be the latter that led to operating the railways these days being described as “franchises”. You also hear a series of films being described as, say, the Star Wars franchise, which simply refers to various licensing arrangements to use the name.
The Star Wars franchise, which simply refers to various licensing arrangements to use the name.
“Business Format Franchising” is an extension of the above, and is a far more detailed process. Certainly it starts with somebody allowing someone else to sell things in a particular place, and allowing them to use a particular name, but it is much more prescriptive as to how that selling should be done, and how the product or service should be delivered, as the purpose is to build a network operating to equally high standards in order to build a brand.
Most of the opportunities in this magazine will be business format franchises, and the franchisor will be very involved in training the franchisee how to operate the business format (not just how to sell the product or service) and will have systems in place to continually monitor the operation to ensure compliance with the system for the benefit of all concerned.
There are two situations in which the term conversion franchise may be used, often when the incoming franchisee is likely to be required to have some experience of working in the business sector which is the subject of the franchise.
In the first example a franchisor goes to someone who already has a business in, say, pizza delivery, estate agency or hairdressing (and who therefore already has some premises) and suggests they “convert” to the franchisor’s brand. The major benefit to the franchisor being that the increasingly elusive franchisee and location are found (and a competitor is taken out of the local market) all at the same time. The advantage to the franchisee comes from improving their business with better branding, better operating systems and ongoing support.
A franchisor goes to someone who already has a business[…] and suggests they convert to their brand.
The other example is when an existing business decides to “convert” all or some of their company-owned outlets (e.g. shops, offices, distribution centres) to franchising. Potential franchisees may be existing staff within the business, maybe even the incumbent branch managers, or they could be new entrants from outside the business. The franchisor sheds some overheads and gets motivated staff ; the franchisee gets the opportunity to run their branch in a slightly less managed atmosphere.
Many franchisors have converted a few people to franchising in this way, others have used it almost entirely, some have never done a conversion. Like everything in business there are pitfalls as well as benefits and professional consultancy advice should be sought by franchisors when considering it as an option.
This is a term which is normally used in a premises-based franchise when the franchisor undertakes all the tasks required to locate, acquire, convert or develop, fit-out and stock a property in order for it to be ready for the franchisee to be able to open up and start trading. The process is generally completed while the franchisee is undergoing training, at the end of which they are given the key to the premises and all they have to do is “turn” it one morning, and off they go. The Franchisor will charge a fee, on top of all the other upfront and training fees, for managing the “turnkey” process.
Having explained the term, it is worth pointing out that it is not a very common practice. More often the franchisee is left to look for appropriate premises in the agreed area, based on a profile provided by the franchisor, and to then submit that property for approval. Once approved, the franchisor will then provide plans which should be used to do the conversion and fit-out, but the franchisee is left to find, manage and pay the various contractors to do the work, although some may be recommended or specified by the franchisor.
Despite what you may have been told, it is very unlikely that every franchisee in a network will have the same contract simply because, if a network has been going for a number of years, various amendments will have been made in the light of experience and these will have been incorporated as new franchisees join the system or existing franchisees renew their previous agreements.
A franchisee doesn’t simply renew the agreement they already have, they renew on the “then current” franchise agreement
What should be the case however is that any franchisees joining at the same time will all join on the same terms and there is unlikely to be any negotiation of those terms. The same applies when renewal comes around – a franchisee doesn’t simply renew the agreement they already have, they renew on the “then current” franchise agreement, which will have the same terms as those for new franchisees.
The reason for this is simple – it makes management of the network easier for the franchisor and makes the relationship equal for all franchisees.
You may also have heard that franchisors should not do special deals for the early franchisees, such as appearing to offer discounts on the franchise fees, and nor should they. However that does not mean that later franchisees may not find themselves with less favourable terms than the early ones. That’s the because the early ones were able to secure the “then” deal, but current ones get the “now” deal. The latter may cost more, but that’s probably because the system is more proven.
The biggest difference is that, providing you do your research properly, you will know exactly what you are buying when you take on an existing franchised outlet and you will have the trading history of the actual outlet you will be running on which to base your business plan. When you buy a new franchise, however well the system may have performed elsewhere, there is always the slight doubt that it may not work in your town.
Depending on the reason that an existing unit has become available, you may think that you can improve its performance - and you will have an existing customer base with which to work. If the previous franchisee has “failed” then it may well have been that they just were not personally suited to that particular business. If more than one franchisee has previously done badly with that outlet, then you can start to ask questions as to whether the franchisor’s recruitment process is any good, or whether they just sign up anybody.
Sometimes a successful outlet is being sold, complete with all its equipment and a base of satisfied customers, but you can acquire it for much less than it would cost to set up a new one - simply because you are not paying top price for all the set-up costs. Bear in mind you may have to make some replacements sooner rather than later, but you can do that out of profits rather than borrowing for capital expenditure.
The more franchised outlets that a system has operating (in the country in which you are thinking about becoming one of its franchisees) and the more those franchisees are happy with their business, and achieving the performance claimed by the franchisor, the more proven is the franchise.
Get details from the franchisor of how many franchisees he has, and how long they have been operating.
That statement raises a few points. Don’t run away with the idea that because has a business has lots of company-owned stores operating successfully that it can be a successful franchise. Company stores prove the concept works, not that it works as a franchise.
Also, just because a business works in other countries, as a franchise or otherwise, doesn’t mean it will work here. Finally, just because there are lots of franchisees in a system here already doesn’t mean they are doing well - many franchises may have been mis-sold very quickly and the system could be failing.
So how do you find out whether the franchise you are considering is proven? Get details from the franchisor of how many franchisees he has, and how long they have been operating. Then contact as many of the franchisees on that list as you can and ask them how they are doing. Check with your bank – they are more likely to support well-established systems – and the BFA, whose Full members have to have been practising franchisors in the UK for a number of years.