Investing in a Franchise

Investing in a franchise means effectively using someone else's name in business - a name that has been established for years, is trusted and which should enable you to dispense with the hard work of a possible long slog towards earning a reputation.

If you feel sufficiently motivated to run your own business, then franchising should certainly be on your agenda to consider. It can reduce the pitfalls of starting up on your own and you'll usually have the benefit of being represented by a big name, leading to a share of the prestige and hopefully profits. But how easy is it to take this path and what are some of the potential pitfalls?

Do your homework

The first steps include deciding what type of franchise you are interested in and where you should locate your new business venture. It's a good idea to check whether your choice already has a niche in the area where you want to live and/or work. You must also assess the competition within this area. How many others - franchised or not - are operating in that market? You'll need to know that there are enough potential customers for you all, as you would if you were working on your own.

Next, approach your choice of franchise. Normally, a two-way vetting procedure takes place between prospective franchisee and franchiser whereby each of you will be interviewing the other to establish suitability and dedication to each other and the brand. At some point a big decision will have to be made - a franchise could cost you anything from £3,000 to £500,000.

But remember, if you decide that this way of running your own business is for you, don't expect to leave your current job one week and begin making money the next. The process from the initial steps to opening the doors to your first customers could take the best part of six months.

Long commitment

One of the differences between this way of earning a living and running your own business is that once training is over and the hard work of running the business begins, you can't just give up after a couple of months if you feel like it. Most franchises are, on average, five years long, although some can be longer. A big company such as McDonald's, for example, would be expecting 20 years of your time.

Naturally, those handing out the franchise want something back from you. So expect to repay them something between five and twelve per cent of your turnover. Again, this is an average, and the amount you pay depends on the type of business you have taken on.

When setting up any sort of business, large or small, you need to know what will happen if things go wrong. A good franchiser should have the infrastructure in place to help any franchisees by giving them training and support.

Start spending!

Once you've decided on the franchise, you usually have to pay an initial fee representing a reimbursement to the company granting the franchise for up-front costs, such as training, relevant materials, set-up, start-up and promotional launches. There will also be start-up costs for fittings, fixtures and stock. This will obviously vary considerably depending upon the type of franchise business.

Then add to your list the fact that you are also going to need cash to finance working capital over the next few months. You will have to replace stock, pay bills, and continue paying fees and wages, while many customers will also expect you to give them credit.

Protect your new business venture

Your business is your people. Its continued success may depend on the special contribution made by a small number of 'key' men and women. You, your fellow directors, shareholders or partners should also be regarded as key people.

The death or disability of any of you could threaten your company's future profitability and success. Indeed, its very survival could be at stake. So give consideration to protecting majority shareholders, minority shareholders and key staff. We can help you with this area of your business plan and all other corporate-related financial planning needs.

Increased odds!

Franchising, like anything else, does not guarantee success, but a survey carried out by the British Franchising Association (2001) found that 95 per cent of franchisees reported profitability. Whether profitability means you can make a living is another question, but when you consider that many small businesses fail to break even, it's well worth investigating.