Becoming a Franchisee

Reading Time: 16 minutes Buying into a franchise and becoming a franchisee. It's a unique and popular option for budding entrepreneurs in the UK. It’s a model that allows you to buy into an established business and benefit from systems, processes, and products that have already proven successful. That’s not to say it’s an easy option, however. For one thing, it requires significant personal investment. And, unlike those who become directors of their own limited company, franchisees are accountable to their franchisor. In this guide, we explain the process of buying into a franchise and take a closer look at the pros and cons of becoming a franchisee. Enjoy.

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Becoming a Franchisee

becoming a franchisee
Reading Time: 16 minutes

Buying into a franchise - and becoming a franchisee - is a unique and popular option for budding entrepreneurs in the UK. It’s a model that allows you to buy into an established business and benefit from systems, processes, and products that have already proven successful elsewhere. By becoming a franchisee, you can own your own business without necessarily coming up with an original concept, or going through the rigmarole of starting out from scratch. You’ll also have the advantage, in most cases at least, of feeding off the knowledge and support of an experienced franchisor.

That’s not to say it’s an easy option, however. For one thing, it requires significant personal investment from the outset. And, unlike those who become directors and CEOs of their own limited company, franchisees are somewhat limited by - and accountable to - their franchisor. Such restrictions can be off-putting for some. It, therefore, requires careful consideration before you decide whether to buy into a franchise.

So, in this guide, we’ll take a closer look at the pros and cons of becoming a franchisee. We’ll also hear from industry experts Neil Ormesher (Danbro Business’s Managing Director) and Lara Hodkinson (Head of Client Services) as they talk you through the intricacies of buying into a franchise. Let’s get started.

1. Buying into a franchise: How does it work?

The first thing to say from the outset is that it’s important you take the time to weigh up whether going into business for yourself suits your personality and your circumstances - financial or otherwise. It’s a big decision. And, if you’ve only ever been in a position of employment before, it's one that will change your life.

For the purposes of this article though, we’re going to assume that you’ve carefully considered the necessary pros and cons and are ready and raring to start your own business.

So, how do you become a franchisee; what’s the general process?

Here’s Danbro Business’s Managing Director, Neil Ormesher, to explain more. “A lot of people who start their own business have a clear idea of exactly what they want to do,” he says. “Other people, though, know they want to set up a business but they might not have a precise idea of what it is they want to do. Or, they may know what area they want to go into but don’t want to raise a new business from the ground up. Franchising is a great option for those people.”

“In terms of getting into it,” he continues, “I’d suggest you start by attending one of the many franchise shows that are around today. There are so many franchisors now and these events, both virtual and ‘in-person’, allow you to have a good look at what’s out there and assess what would be a good investment for you. Not to mention deciding which industry would suit you and your skillset best.”

As with any major purchase or investment, if you’re thinking of becoming a franchisee, you need to conduct comprehensive, evidence-based research and data gathering into both the specific franchise itself, as well as the industry more broadly. Proper due diligence is imperative. So, talk to as many trusted sources as possible. Obtain as much information from the franchisor as you can. You need to know the business and its key financials as strongly as if it were your own.

Good franchisors will be able to provide detailed statistics and information and conduct preliminary interviews for the benefit of themselves (from a suitability perspective) and the prospective franchisee (so you can decide whether it’s the right route for you).

It’s also useful to run the figures, and the concept as a whole, by your bank before making any major investments.

Latterly, you need to make sure you’ve checked thoroughly the terms of the franchise agreement. Things like how long the contract runs for, your rights as a franchisee, and what conditions you’ll be operating under.

Here’s Neil again. “When you talk about the process, it’s almost like a marriage. Once you’ve registered an interest, most franchisors will interview you as a potential franchisee. Depending on the stringency of their due diligence, you’ll either ‘pass or fail’ that initial interview.”

“As a prospective franchisee, you’ve got to appreciate that the franchisor will only ever be successful if their franchisees are successful. So, when we talk about why people should use a specialist accountant it’s because we understand that the franchisor business is only as successful as its franchisees. It’s not only about selling franchises, which many people think it is. It’s about managing people. After all, if the franchisees don’t turnover anything, the franchisor won't get any royalties or management fees.”

“I agree. And, it’s their brand that will suffer as a result of a bad branch,” adds Lara Hodkinson, our Head of Client Services.

2. How to find the right franchise to invest in

Once you’ve reached a decision on the type of industry you’d like to operate in and where you’d like to work, it’s prudent to draw up a shortlist of possible franchise opportunities within that sector. Sites like Which Franchise are really useful for helping you assess what’s out there.

After all, choosing the right franchise to buy into is crucial. You need to find a business that suits your skillset, experience, and ambition. Here are some of the key things you need to know:

  • The business and its concept.
  • The franchise’s history. Its origins, its growth pattern, when it became a franchisor, etc.
  • The products and services it offers as well as the systems and suppliers it uses (or, in some cases, mandates).
  • The people that head up the operation. I.e. who are they, what are their credentials, what experience do they have, what other businesses are they involved in?
  • The locations and regions the franchise currently operates in, as well as those it is placing up for sale and why.
  • Records of the franchise’s key financials, accounts, holdings, number of franchisees, acquisitions, and any forthcoming plans that could affect the company’s overall financial picture.
  • The franchise’s competitors (conduct competitor analysis), as well as the memberships and accreditations it’s associated with, such as the British Franchise Association.
  • Any ongoing problems - financial, cultural, legal, or institutional - that the franchise is currently experiencing. Franchisors should be willing to reveal and explain this information to you. Remember, transparency is key.
  • The prospects, outlook, demographic, and customer base for your local area - or the region you’re looking to buy into.
  • You also need to know how much official training and guidance the franchisor is going to provide to you in the early stages, as well as how effective the company’s support structure is should you find yourself in a sticky situation somewhere down the line. You’ll need to consider hiring new staff, particularly if a recruitment drive is integral to your franchisee’s growth.

Which Franchise also have some insightful tips on how to assess potential franchisee opportunities in their ‘step-by-step guide to becoming a franchisee’. Here’s a taste.

"If you're buying a franchise, you're going to be working, selling, and promoting the product or service for a long period of time. You can’t change or develop the product or service. So, make sure that the franchise has long-term appeal and its market is not threatened in any way."

It's important that the franchisor demonstrates a clear understanding of the future market for the product or service and that you both understand the following:

  • Is the market for this product/service expanding rapidly, growing slowly, static, or declining?
  • Does the product/service have special features which help it to sell? Does it warrant a premium price?
  • Who would your competitors be and how competitive would your product or service be in relation to them?
  • Having looked at the general market for your product, what do you know of the local market in which you’ll be operating?”

You also ought to familiarise yourself with the world you’re entering into. Exhibitions, seminars, forums, trade shows, franchise-focused media like specialist magazines and websites, social media groups, etc. The better acquainted you are with the industry at large the more advantageous it will be for you when it comes to launching your business.

3. How much does it cost to buy into a franchise?

How much does it cost to buy into a franchise and become a franchisee?

Well, first things first, you should expect to pay an initial fee when you buy into a franchise. That amount is set by the franchisor. It could be £5,000, £10,000, or £25,000 plus VAT. It’s at the franchisor’s discretion. Using the example of highly prized fast-food chains like McDonald’s and KFC though, that figure can be much, much higher depending on the franchise you’re buying into. Potentially into the millions.

On top of that, with most franchises, you’ll then pay a set, ongoing management fee to your franchisor. This could manifest itself as a percentage of your sales, also known as royalty payments. Any continuing payments will be outlined in the terms of your initial agreement.

You’ll need to factor in other costs such as any equipment, stocks, and supplies (whether purchased/hired from the franchisor or a third party), as well as any additional contributions towards training courses or investment into your premises. You might also have to sub-let the premises from which you operate.

In short, buying into a franchise doesn’t come cheap. Neither does turning a profit as a franchisee. It requires significant and careful investment and planning. In terms of measuring the value and justification of these expenditures - and whether it’s worth pursuing the franchise model as a result - you need to assess if the benefit of using the franchise’s name, connections, and products/services to launch a business is worth the extra charges. Or, if it would in fact suit you better to take a more conventional route into starting your own business.

Of course, you could also offer to buy an existing area direct from a franchisee. Whilst we haven’t got time to pour through the complexities of that scenario, it does lend itself nicely to our final point which is that, if you’re buying into a franchise, you ought to consult the advice of a legal professional. This is a big investment so, if nothing else, it’s prudent to have a solicitor look over the terms of your contract before you part with any cash.

4. Is becoming a franchisee the same as owning your own business?

Other than being accountable to a franchisor rather than, say, shareholders, being a franchisee works in a similar way to a more ‘typical’ type of business model. As a franchisee, you are essentially in business on your own account. It’s just that you’re also able to benefit from a solid, identifiable business and brand structure. Whereas, if you set up your own business, you have to come up with the name, the brand, the colour scheme, the website, and all your systems and controls, etc.

When you buy into a franchise, however, the model is pre-set and has been worked out for you in advance. The franchisor already knows how to run the business, the website, the brand, the pricing, the processes, and how to turn a profit.

“If you want to start a business and you’re a really hard worker, but don’t have that original idea or aren’t particularly interested in some of the things it takes to grow your own business, becoming a franchisee might be the right route for you,” says Neil.

“Most franchisees have to follow set and rigid processes, as well as payment and pricing structures. So, if you think of McDonald’s again, their franchisees are not introducing many (any) new ideas or saying, ‘I want to do x, y, z with this business or these premises’. As per their contract, they have to follow the franchisor’s processes down to a tee. It’s then down to the franchisee’s work ethic, business flair, and management of their ‘branch’ as to how well they apply what’s already in place.”

“It’s also worth saying here that the franchisor can get rid of you if you don’t follow those processes,” adds Lara. “We’ve seen a few examples of that over the years. You have to follow the processes, the branding, the marketing, and use the existing systems and structures, etc. It’s all in your contract when you first buy into the franchise. So, in that sense, it can be quite different to owning your own business.”

5. Is it profitable to become a franchisee?

How profitable is it to become a franchisee? Especially when compared to owning your own business. How do your long-term prospects differ? Are there notable tax differences that might influence your decision, for example?

Obviously, there are multiple mitigating factors at play when it comes to answering this question. So, instead, we’re going to run through the practice of making money as a franchisor and allow you to come to your own conclusions. Here’s Neil again to explain more. “The thing to bear in mind when you buy into a franchise is there’s an element of limitation as to how large you can eventually grow because you’re bound by only serving a particular area/s.”

“On the other hand, if you have, say, your own estate agency business and you have ambitions to build your brand nationally, or internationally, there are no such constraints. In fact, you could even franchise your business further down the line and become the franchisor in order to facilitate that expansion,” Neil says.

“As a franchisee, your earning potential depends in large part on what franchise you buy into. For instance, if you buy a McDonald’s franchise or a KFC franchise, to continue with that analogy, the entry costs will be well over a million pounds. So, you need a much bigger initial outlay to even get started. However, the returns are potentially a lot higher as well. Returns to scale tend to be in line with what you pay on entry.”

“One way you can grow as a franchisee,” Neil continues, “is by buying multiple franchise areas. However, this is a competitive sector. And, depending on the success of the franchise, spaces will get taken up fast. Giant fast-food chains like the ones we’ve mentioned are slightly different because they can keep popping up all over the place. Whereas, most franchises are location-based and limit themselves to defined regions.”

“It works differently with a Subway or a Burger King, say,” adds Lara, “because people don’t always just go to their local one all the time. They’ll visit different franchisees depending on where they are in the world. But, if you’re using a particular trade’s service as a consumer, like a loft conversion, for example, you’re far more likely to go local.”

6. Are there any downsides to buying into franchise?

The answer to this question of course depends on what you perceive as a ‘negative’. However, aside from the obvious cost implications, buying into a franchise means operating under a strict set of regulations. These parameters will be stipulated in your contract and initial meetings and, broadly speaking, will limit the franchisee’s ability to modify, create and innovate the way the business works. That’s not to say that franchisors don’t accept suggestions, or even criticism, many do, but you will never have that implicit level of autonomy that a ‘regular’ business owner enjoys.

Here are Neil and Lara again to explain further. “Some franchisees, when they join, think that it’s going to be all their own business, save for the name, the branding, and the concept. Not everyone appreciates that it’s a pre-existing franchise,” explains Lara.

“That’s right,” says Neil. “Those individuals may have their own ideas on how to do things and might want to go against the model. But you need to recognise that the franchisor has put a lot of time and effort into creating a model and a process and a business structure that works. Even with smaller decisions, like changing certain branding or colour schemes; it’s not really permissible. You need to see that as a benefit, though, because you don’t have to ‘make your own mistakes’ like a lot of new entrepreneurs do. It’s all been worked out for you in advance.”

“Oftentimes, the main reason a franchisee fails is because it’s not their own concept or idea, and they find running the business harder as a result,” Neil continues. “Furthermore, the franchisee may have gone into business thinking it’s an easier alternative to starting up their own company. They might have retired or been made redundant and want to give it a go running their own business. But, in business, you’ve got to be all or nothing, in my view.”

“So, when we see certain franchisees fail, frankly, it’s predominantly because they’re not putting enough time and energy into it. I don’t think everybody realises that it is very hard work. I sometimes hear of people, not clients of ours I hasten to add, buying into a franchise because they want a better work-life balance. When I hear that though I think, hmm, do you appreciate how hard it’s going to be to run your own business? Especially as you’ll also be accountable to the franchise at large. It’s a 24/7 job. So, before going into it, you need to realise that it’s going to be hard work.”

“Regulation is also an important consideration for prospective franchisees. Even things you wouldn’t necessarily think about, like the age and condition of your van or work vehicle, for instance, are often regulated by franchisors,” says Lara. “It’s the same with things like accepting cash payments, which lots of small businesses and tradespeople tend to do. If that procedure is not authorised by the franchisor - and it probably won’t be as they’ll want to account for the takings and take their percentage - then you can’t do it. When you sign up to become a franchisee, it’s often very heavily contracted, with manuals and mandatory training programmes as well. Whilst many will see this as being safer and more beneficial, it’s nonetheless another significant factor to consider if you’re someone for whom autonomy and authority is important.”

As well as being accountable to a senior party (i.e. your franchisor), you also need to be mindful that the success of your business is, at least in part, reliant on decisions and actions taken by your franchisor - and other franchisees for that matter. So, for example, it could be that the franchisor goes out of business or cuts funding for marketing or promotional budgets.

You also can’t legislate for any financial mismanagement or reputational damage at a more senior level. The residual harm that could cause for your business is something you need to seriously consider. In short, as a franchisee, you’re exposed to certain risks that many PSC and limited company owners are not.

Moreover, in the event that you want to opt out of the business, for whatever reason, it’s not as simple as selling up or closing the company down. You don’t have the authority to do that. Instead, it tends to be the case that you can only sell your franchise to a buyer that’s approved and ratified by the franchisor. Another potential complication.

For even more information about becoming a franchisee, and all the potential peaks and pitfalls that you should be mindful of, check out this useful guide from industry experts, Start-Up Donut.

7. What are the advantages of becoming a franchisee?

The potential rewards you gain from becoming a franchisee are ample. Even from the outset, when you buy into a franchise you sidestep the time and energy that's involved in coming up with an original idea, starting a new business, and driving growth from a standing start.

As a franchisee, all the groundwork's done for you. Your job is to simply make the most of a pre-existing product and/or service and manage the execution of strategies and processes that have already proved successful elsewhere. If you choose carefully, the franchise you’re buying into will have a proven and measurable track record. You’ve got a blueprint for your business, if you will. You’ll also have access to use any trademarks owned by the franchisor.

Further to this, you’ll be able to benefit from using a trusted and recognisable name within your sector, industry, or local area. Particularly with things like trade services and hospitality venues, this is a big advantage when compared with someone who starts out on their own. Using a name people know and trust will make it easier to sell to customers and connect with other businesses.

Research and development, at a corporate level at least, will also get taken care of by the franchisor. So, promotions, brand updates, system upgrades, and the introduction of new products, for example, are not something you’ll necessarily have to concern yourself with.

As we’ve detailed already, though, franchisees are beholden to their franchisors. Both from a financial perspective and in terms of the protection and advancement of their brand. That presents a distinctive set of pressures and parameters.

But, the better and more established the franchisor, the more high-quality support you’ll receive in return. This includes training and mentoring, as well as support setting up the business in the first place and a helping hand to get it off the ground. You’ll have an experienced sounding board who can provide tangible, real-world suggestions and strategies to help your business become successful. After all, they have a unique interest and ‘stake’ in your business. A high-performing franchisee is beneficial for all parties.

The franchisor may also have the requisite influence and professional relationships to help you access lending and other financial assistance. Not to mention the fact that it’s far easier to secure funding for a successful business than it is for a brand new start-up. This type of support should continue throughout your franchisee journey as you grow and develop.

At Danbro Business we have strong relationships with franchisors across the UK. So, it’s particularly beneficial for their franchisees - whether new or longstanding - if they choose to take advantage of our services.

8. Franchisee funding

As above, in most cases, it’s more straightforward to obtain funding as the franchisee of an established, well-structured franchise in a growth industry, as opposed to a first-time entrepreneur with a new start-up and no track record.

Most major banks have franchise experts and are willing to lend you the majority of your start-up costs, provided the franchise you’re joining meets the criteria and you are willing to meet the remaining start-up costs with actual funds. Your franchisor may be able to help you with this either themselves or through their contacts and existing relationships. That said, as with any investment or business venture, there are always financial risks attached.

As with any new business, you’ll need a solid business plan to secure any bank loans and you may have to put something up as collateral as well. Your business plan needs to outline your intentions. It’s standard practice for any new entrepreneurs, whether for your own start-up business or if you’re buying a franchise territory. For more information on starting a business, click here. You can also find out much more about financing a start-up business and the options available to you, here.

9. Get specialist franchisee support

Once you’re up and running as a franchisee, it’s important to research and invest in tools and services that will set your business up for success. A substantial element of that is making sure your business’s books are ship, shape and shiny, and structured in such a way to ensure you’re making the most of your franchise’s potential. Utilising an accountant with specialist expertise in franchises is even more beneficial.

At Danbro Business, our comprehensive packages of franchisee support provide everything you need to maximise your franchise. We want to help you improve your bottom line and exceed your franchisor’s expectations. What’s more, we’ll always keep you compliant and tax-efficient.

Our sophisticated benchmarking analysis allows you to identify what’s working and change or develop what’s not. From annual accounts, VAT, and corporation tax returns, to self-assessments and monthly payroll and submissions, you can rely on us to take care of business. What’s more, your bespoke service will be delivered by a dedicated, experienced Personal Accountant. To hear first-hand how we’ve helped franchisees like you, take a look at our interview with EweMove franchisee, Mark Holmes. Or, click below to get started now.

Blog written by
Sam Wright
Marketing Manager at The Danbro Group

Sam Wright is Danbro’s Marketing Manager. He produces regular content and feature articles on our digital and non-digital channels – and social platforms – for the Danbro Group and its subsidiaries, as well as having responsibility for the Company’s internal and external communications.

His background is in Journalism and Creative Writing, having previously contributed to publications such as The Daily Post, The Lancashire Evening Post, and The Blackpool Gazette.

He is a keen swimmer and avid Manchester United fan (but don’t hold that against him), and he lives in Lancashire with his wife, Sarah.

 

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