May 2009 Archives

Despite the challenges in the economy, "2008 was a year of expansion for many franchises, with the total number of franchise systems now reaching 838 - an increase of 3.6% on the 809 systems recorded last year. " Furthermore, according to the 2009 BFA/NatWest Survey, "franchisors' expansion ambitions remain bullish, with an average of nine new franchise units planned over the next 12 months. The newer systems are looking to expand at a greater rate with an average of 14 new franchise units."

A few more finding from the survey include:

While the majority (60%) of franchisors and franchisees (66%) think that general economic conditions will become more difficult in the next 12 months, 82% of franchisors anticipate that that their business will improve or stay the same over this period, compared to 95% last year, while the remaining 18% expected business to become more difficult.

Franchisors and franchisees were taking positive action to protect their businesses against tough trading, with nearly a third increasing their advertising, a fifth improving productivity, 15% lowering prices and nearly a quarter increasing their existing client base.

Although the number of individuals employed in franchising has not risen over the last 12 months, the franchising sector still represents employment for 467,000 or 1.3% of the UK workforce.

Estimated start up costs have declined, and new entrants can expect to pay £50,400 in franchise fees and other associated costs to their franchisor, down from £64,900 last year.

It should be noted that this is the 25th annual research study among franchisors and franchisees by the British Franchise Association. The report concludes that overall, the Franchise industry in the UK continues to grow and is a key employer. Although recessionary pressures are being felt, the industry shows strong signs of resilience thus far. Brian Smart concluded, "It's clear from this survey that the franchise sector is proving resilient to the economic downturn by investing heavily in activities to drive business forward and ensure future success. It is a mark of the enthusiasm and commitment of franchisors and franchisees that they continue to drive new business and retain it with such vigour."

A master franchise opportunity requires a significant investment of time and money and choosing the right concept is extremely critical. You must choose not only a franchise you personally believe in but one that you feel is here to stay has a strong foundation and excellent management.

Here are some tips to consider when exploring master franchise opportunities as outlined at allbusiness.com.

1. Do Extensive Research
As a master franchise buyer, it's important for you to understand two entities: the franchise company and the master organization. Make sure, for instance, that the franchise system is based on a solid business model. Without a viable business model, it's unlikely that a master franchise could succeed. You will also need to research the market and territory demographics. Make sure that the territory has a population that can support your projected sales.

2. Know Your Role and Responsibilities
A master franchisee is generally responsible for recruiting individual franchisees. As a master franchise owner, you're also responsible for providing support and training on an as-needed basis.

3. Go See the Franchise and Franchisees
Your intelligence gathering should include actual visits to as many franchise locations as possible. If you detect any problems, cross this franchise off your list. Don't be tempted to rationalize red flags. If you sense trouble, regroup and consider another franchise system.

4. Choose A Franchise That Fits You
Even if the business model is solid, you'll want to make certain that the franchise suits your investment limitations and your goals. If you don't have the capital, then it's not a good match. If you're not interested in the business, then it's not a good match. Be prepared to walk away if the opportunity doesn't feel right.

5. Talk with Other Successful Master Franchisees
If possible, try to talk to other people in the master franchise field. Find out, for instance, what kinds of challenges they face, what kind of support is available, and if they had to do again, what they would do differently. If speaking with other master franchise company owners isn't possible, search the Internet, go to the library, and do whatever you can to immerse yourself in the language of a master franchise. The more you know the better off you'll be.

A few weeks ago, The Times published their 2009 Rich List. Via the interactive search feature, uncovered that 7 families on the list made their fortune through franchising.

Most of them gained entry by becoming a master franchisee. This involves the franchisor granting exclusive rights to offer and sell franchises within a particular territory using the franchisor's marks and system. This is what the Herbert family (worth £145million) did when they launched the KFC franchise in Ireland. Same for the Halpern family (worth £48million) who launched the Domino's Pizza franchisee in the UK & Ireland.

Even though the initial franchise fees are higher, a master franchise license can lead to greater growth than a single unit franchise. Particularly as the master franchisee keeps a good portion of the initial fees and royalties that the individual franchisees pay over time. To earn these fees, the master franchisee will most likely be responsible for providing a certain level of ongoing support (training, recruitment, marketing, operations, etc.) services to the franchisees within the designated territory. In addition, depending upon the agreement, the master franchisee may be required to open a certain number of units in a specific time frame or schedule, and may also be required to open and operate one or several units of their own.

In order to conduct an intelligent evaluation of any franchise - you need to "know the lingo." Every industry has its terminology, and franchising is certainly no different. Here are the 10 most important terms you will need to know before you buy.

Franchise: The legal rights (the surrounding trademarks, copyrights, franchise operating system, support, training, product or service) a Franchisee obtains from a Franchisor under a franchise agreement to operate within a designated contract period as their business.

Franchisee: The person, partnership or company who pays the Franchisor for the right to own and operate a business using the Franchisor's marks and system.

Franchisor: The person, partnership or company that controls the overall rights to the franchise.

Franchise Agreement: A non-negotiable contract between a Franchisor and a Franchisee in which the Franchisor grants the Franchisee certain legal rights to use the Franchisor's marks and system in connection with a business to be independently owned and operated by the Franchisee.

Franchise Fee: Often referred to as "initial franchise fee." This is a one-time, up-front payment by the Franchisee to the Franchisor for the rights to a franchise. This fee is due and paid once the Franchise Agreement is signed, is generally non-refundable, and precedes final payments.

Capital Required: The amount of money a Franchisee will need to ramp up their franchise business during the start-up phase (average 3 to 15 months) to the point of producing a profit.

Exclusive Territory: This is the region or area a Franchisee will have exclusive rights to operate within. It is generally defined and mapped in terms of targeted households or population.

Liquidity: The total cash available to a franchise owner for business operation or living expenses.

Net Worth: Your assets (i.e., the cash value of all you own) minus your liabilities (i.e., what you owe).

Royalty Fee: An ongoing fee paid to your Franchisor for support services received through the life of your contract - usually a percentage of gross income or a flat monthly fee.