Franchise Direct one of the leading franchise and business portals recently published a list of the top 100 global franchises. The list was compiled from “thousands of franchises that have invested in international expansion strategies and have been ranked using an objective and measurable criteria.
This criterion includes:
- System size based on numbers of units
- Sales revenue for the system
- Stability and growth
- Number of years in operation
- Market expansion
The ranking is also based on the implementation of:
- Best practice in the areas of franchisee support and training
- Environmental policy
- Social responsibility”
Interestly, only one UK franchisor — InterContinental Hotels Group – made the list which is dominated by North American brands. Not surprising is the number of fast food and hotel franchisors!
A few weeks ago at The Franchise Show, Rachel Elnaugh gave some brilliant advice to those considering a franchise business opportunity and those looking to expand their business through franchising. Specifically, Rachel recommended:
For franchisee candidates:
- Choose a franchise that you love the idea of running; not simply because of the money potential.
- Conduct due diligence. Research the company, its directors and be sure to speak to as many existing franchisees as possible.
- Make sure you’re a cultural fit to the ethics and values of the business.
- Conduct market research. You need to understand the competitive landscape for your local area.
- Temper expectations; while the franchisor will provide a wide variety of tools, you still need to work hard to make the business a success.
- Don’t fall into the blame game. Take absolute responsibility for the success of the business
For established businesses looking to grow network through franchising:
- Ensure your concept is absolutely proven before franchising. This would include a complete review of products/services, pricing strategy, marketing, systems, training, etc.
- Be very picky about the franchisees you select as if they aren’t successful, you won’t be successful.
- If someone isn’t working, develop a plan for improving. If that doesn’t work, exit them quickly and with good grace.
All very sensible advice if you ask me!
Many people who independently investigate franchising are often overwhelmed with the fees associated with franchising. Most people are familiar with the franchise fee. The franchise fee is a one time up front fee that franchisees pay to be part of the franchise. It is typically not a revenue generator for the franchisor as franchise fees are used to cover the cost associated with recruiting and training new franchisees.
Franchisors therefore makes money from collecting royalties from their franchise owners. Royalties generally fall into two categories: a flat fee or a percentage of gross sales collected monthly or weekly bases. It is in their best interest for the franchisees to be successful because the more money they make, the more money they make.
Many companies also have a marketing or advertising fee. This can be a small cost in a retail type business that has a sign that offers exposure to the potential customer, but in other types of businesses (those service based) the cost of finding customers can cost a significant amount.
There can be a separate fee called a territory fee. It is a fee franchisees pay for the protected rights for a specific geographic market. It can be based on pure population, by postcode or county or some division of population such as 50,000 people who have £50,000 incomes or better. In many instances, this fee is wrapped up into the franchise fee.
Either way, it is not the monthly percentages or pounds in fees that franchisees should be as concerned about, but rather at the end of the day (less fees paid to the franchise) are they putting the amount of money in their bank account that they desire. It is for this reason why I encourage all my franchisee candidates to stay with the investigation long enough to speak with existing owners and build a financial model. Only then will they truly
understand whether or not the business is truly financially viable.
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.