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Nine questions to ask when choosing a franchise

Franchising originated with Albert Singer in the 1850s who used the model as a way of distributing and servicing his sewing machines.

Since then, many successful franchises have operated in the UK including McDonalds, Costa Coffee, and Clarks Shoes.

There can be advantages to buying a franchise opens in new window (also known as a ‘business in a box’) over starting your own business from scratch including increased brand awareness opens in new window, a tried and tested business concept, and ongoing support but it can be tricky deciding what the right franchise is for you.

In this article we’ll take you through some helpful questions to ask both yourself and the franchisor that might help you decide if a franchise is right for you.

 

1)   Have you researched the franchise?

Here are some easy ways to research and get a real feel for the franchise before you make the decision to buy.

Start online by checking out reviews and feedback from current franchise owners.

This can give you a good idea of their experiences and what you might expect.

For a closer look, consider attending a “discovery day” if your franchise offers one.

This is a special event hosted by the franchise where you can visit their corporate office or an existing franchise location.

It’s a great way to understand how the business operates, learn about the company culture, and see what a typical day looks like.

Plus, it’s your chance to leave a positive impression with the people behind the franchise.

Lastly, trust your gut. If, after discovery day, the franchise doesn’t feel like the right fit for you, it’s okay to walk away.

There are plenty of profitable franchises out there, and finding one that aligns with your goals and values will be key to your success.

Remember, investing in a franchise is a big decision, so take your time and make sure it’s the right choice for you.

 

2)   How will I fund my franchise?

When purchasing a franchise, you’ll likely have to pay an upfront cost (known as a franchise fee).

These fees can be quite expensive and it’s not unusual for them to run into the tens of thousands of pounds.

Whilst some people may have savings or a redundancy payout opens in new window to use, others make use of other forms of business finance such as angel investment opens in new window or business loans opens in new window.

Another option to consider if you don’t have the funds ready to hand to afford the franchise fee is a Start Up loan.

A personal loan used for business purposes, a Start Up loan is designed specifically to help entrepreneurs found a business and offers the ability to borrow anywhere from £500 to £25,000 at a 6% interest rate, repayable over up to five years.

Unlike many business loans, you won’t need to offer any collateral to access the loan and the dedicated business advisors will help you develop your business plan opens in new window, cash flow forecast, and personal survival budget opens in new window to give your start-up the best chance of success.

What’s more, everyone taking out a Start Up loan can make use of a year’s worth of free mentoring opens in new window, helping you to meet any challenges you might face as a new business owner.

Finally, all owners or partners in your business can individually apply for up to £25,000.

If you’re working with partners, your business can get as much as £100,000 in total.

Learn more about the application process for a Start Up Loan opens in new window.

 

3)   What fees will a franchisee have to pay?

When looking to invest in a franchise, it’s very important you understand the different types of fees opens in new window you will need to pay.

In addition to any upfront costs (e.g. franchise fee), there can be layers of fees that follow on, sometimes as much as 15-20% of turnover for a franchise.

One of the biggest costs to a franchisee can be the Franchise royalty fee.

When you buy into a franchise, you pay something called a franchise royalty fee to the person who owns the whole franchise system.

Think of it as a regular payment for using their brand and getting to be part of their business family.

This money helps cover the costs of running the brand, like advertising opens in new window and support services.

How much you pay can depend on several things, such as how much money you put in at the start, where your business is located or how long it’s been trading.

Franchise royalty fees can come in a variety of different forms, such as a fixed percentage fee or variable percentage franchise fee, so it’s a very good idea to understand what those fees are and what influences them before agreeing to purchase a franchise.

Besides the royalty fee, there are other costs to think about if you’re opening a franchise, like paying for the right spot to set up shop opens in new window, building your store opens in new window, and getting everything ready to open.

It’s also a good idea to understand how ongoing fees could impact the cash flow of your business opens in new window.

Some franchisors retain control of funds and deduct fees before sending revenue onto the franchisee.

For example, if the franchisee owns a food delivery business but the franchisor owns the website that customers use to order food and pay for it.

The Franchisor may choose to only pass on the funds generated by the customer once they have deducted their fees, meaning there could be a delay between the franchisee providing the service or item, and the revenue from the sale ending up in the franchisee’s bank account.

 

4)   What support for my franchise can I expect from my franchisor?

The amount of support you can expect to receive from your franchisor can vary between franchises, so you need to be sure of where you stand prior to signing any agreement.

Some franchisors may only provide a starter pack to their new franchisees, whilst others may offer a far more in-depth level of support both for starting up the franchise but also ongoing support as the business grows.

The Franchise Agreement will outline the help you’ll get from the Franchisor to kick-start your new venture.

This could include guidance on picking the perfect spot, setting up your space, designing it, and crafting a marketing plan opens in new window to launch your franchise.

Additionally, the agreement will also detail the continuous support you’ll be entitled to.

This could include additional training sessions, industry conferences, tech help, and assistance with getting the supplies and equipment your franchise needs.

 

5)   What experience do I need to start a franchise?

One of the main benefits of starting a franchise is that you can take advantage of the experience accrued opens in new window by other franchisees by following the franchisor’s system.

The franchisor’s system will take the form of guidance on the various elements of the business you’ll need to put in place to get yourself up and running.

However, that doesn’t mean that having experience in the industry opens in new window your prospective franchise would operate in wouldn’t be very beneficial.

Whilst you can learn a lot as you go and many franchisors provide lots of training opens in new window and ongoing support, having worked in the sector previously in your career could be invaluable, at least during the initial stages of launching and running your business.

 

6)   What territory will my franchise cover?

When you purchase a franchise, you may be assigned a specific geographic area, known as a “territory”, in which your business will trade.

Often, this territory will be granted exclusively, meaning that you will be the only franchisee of your brand operating in that area and, therefore, free of any direct competition from other outlets of the same brand.

This setup helps the whole franchise network to make more money and maintain a stable customer base opens in new window without forcing two outlets of the same franchise to compete with each other.

When too many outlets of the same brand are close to each other, it can be bad for business.

Imagine if there were three coffee shops opens in new window from the same brand on one street.

They’d end up sharing the same group of customers, which means fewer people coming into each shop.

This competition can lead to less revenue for each outlet.

It’s like having too many cooks in the kitchen – instead of helping, it just makes things more complicated.

On the other hand, having a large area for your franchise might sound impressive, but it’s not always a guarantee of success.

Imagine having a territory as vast as the Gobi Desert. It’s huge, right?

But if there are no potential customers around, much like the desert’s lack of water, your franchise won’t thrive.

Therefore, choosing a location filled with people who are likely to be interested in what you’re offering is crucial.

In short, for any franchise owner, being where your target customers are opens in new window is key to success.

When evaluating whether a territory is right for you it’s also a good idea to understand which other competitors from other brands opens in new window are operating in that area.

Understanding how those businesses are performing could help you decide whether taking on that particular franchise in that particular territory is right for you.

It might also be a good idea to pay close attention to other franchisees of your brand operating in similar territories to give yourself an idea of the level of performance you can expect.

 

7)   Is the territory repurchased?

It’s important to understand if the territory you’ll be covering as a franchise owner is an expansion into a new area by the franchisor or is instead a repurchased territory.

A repurchased territory is an area that was previously operated by another franchisee who sold it back to the franchisor.

It’s a good idea to ask the Franchisor why the previous franchisee gave up the territory and also about the conversion rate the previous franchisee was able to achieve in that particular area.

In some instances, the previous franchisee may sell the franchise directly to you, but this could be after the franchisor has passed up the opportunity to buy the area back as first refusal clauses are common in franchise agreements.

Again, it’s a good idea to find out why this might be the case.

 

8)   What franchise clauses will I have to agree to?

When you sign a franchise agreement, you’ll be committing to a number of clauses that govern how you will run the franchise.

These clauses can impact every facet of your business and can be quite restrictive, from how you can use the franchise’s brand and where you can market your business, to whether you’ll need to employ particular contractors and use certain suppliers opens in new window.

The agreement may also stipulate what insurance coverage opens in new window you’ll need to have as well as any renewal, transfer, or termination clauses.

The agreement might also contain a non-compete clause, meaning, if you, at a later date, want to exit the franchise you may be prohibited from working in the same sector as the franchise for a particular period of time.

Given the wide-ranging impact of the franchise agreement, it’s imperative that you read and fully understand the implications of each clause between yourself and the franchisor before signing.

It’s a good idea to seek independent, specialist legal advice opens in new window before committing.

Since Franchisors often want consistency across agreements with all of their franchisees it can sometimes be difficult to negotiate changes after you’ve signed the agreement.

 

9)   Is your franchise part of the British Franchise Association?

Founded in 1977, the British Franchise Association (BFA) opens in new window is the sole voluntary self-accrediting organisation within the UK’s franchise sector.

Its mission is to advocate for ethical franchising practices across the UK, with a focus on fostering the industry’s credibility, influence, and conditions conducive to growth.

Membership of the BFA could be a sign of your Franchisor’s commitment to ethical standards-based business opens in new window as well as allowing you access to the association with a free franchisee membership.

To gain BFA accreditation a franchisor must submit a proven business model, have in place a strong support structure, and be able to point to a network of existing franchisees.

 

Alternatives to franchising

Whilst operating a franchise could be a great option for an entrepreneur, it’s by no means the only way to go.

Many people who have a desire to be their own boss and a business idea create their own start-up using a variety of different funding options including:

 

Learn more about how to finance your start-up, or how finance can support your business with our Making Business Finance Work For You opens in new window guide.

 

Learn with Start Up Loans and help get your business off the ground

Thinking of starting a business? Check out our free online courses in partnership with the Open University on being an entrepreneur.

Our free Learn with Start Up Loans courses opens in new window  include:

Plus free courses on finance and accounting, project management, and leadership.

 

Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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