Seizing opportunities and avoiding the pitfalls of franchising

Franchising is playing an increasingly important role in supporting enterprising individuals who are setting up their own business, as it provides them with the reassurance of a proven model.

The UK franchise market continues to display strong growth, despite the current economic conditions. With over 900 franchised brands operating in the UK there are many investment options available.

Well established franchises should be high on your shopping list. A franchise business should already have been tried and tested and when you add in initial training and ongoing support from the franchisor it is easy to understand why so many view franchising as an attractive alternative to setting up their own independent business.

Track Record
Belonging to a network of businesses has many benefits for franchisees, including brand recognition, greater buying power and proven marketing strategies. The opportunity to share best practice and to talk through your problems with other franchisees is a valuable resource which should not be overlooked. Independent business owners often find it a lonely existence with no-one to turn to when they need help. If you are thinking of investing in a franchise there are some key considerations that you need to make and pitfalls to avoid.

First decide whether franchising suits you. If you have a strong entrepreneurial spirit and want to re-invent the wheel, then you may not be suited to franchising which involves following a proven model.

Next, eliminate opportunities that are outside of your price range or those that will not offer you the financial return you need, then scrutinize a range of franchises to see which one is most suitable for you.

It is sensible to begin your research with the British Franchise Association (bfa) member franchise brands as they have passed a rigorous accreditation process and adhere to the standards laid down by the bfa. Whilst bfa membership is no guarantee of success, it is a good starting point. 

Brands that have a successful track record over several years and that have prospered through the ups and downs of the economic environment are well placed to offer you the opportunity to build a successful business of your own. A knowledgeable and experienced franchisor can share ideas and guide you through your business lifecycle.

The logical extension of that is to investigate the availability of buying an existing franchised business rather than setting up a new one – a franchise re-sale. More and more people are opting to do this.

A re-sale business has a trading history. There is a track record of how the business has developed since it started. There are accounts to show the costs involved and how much profit has been made. The franchisor can also demonstrate how you, as a new owner, would be able to grow the business further.

Because there is a trading business it means there will be an existing cashflow and so it is most likely that personal income can be able to be taken early in your new ownership which may not be possible in a new start up. The business will also be known within the local market and will have existing customers in place. This means there is a clear advantage in not having to start from scratch and launch a new venture into an uncertain market.   

Re-sale opportunities are however not for everyone. Many people would rather not take on a “second hand” business but would prefer to put their own stamp on their business from day one. That’s fine, but for others who would rather have the comfort and security of starting a business knowing how it has performed in the past and what the potential of it might be in the future I suggest the franchise re-sale opportunities from well established and proven brands may well be an option worthy of some consideration.

It is important to consider what you are good at and what you enjoy doing. Your existing skills and experience are an asset that should be taken into account. Your family life and personal circumstances are another important consideration. Ensure your loved ones are involved in the selection process from the outset.

Use the internet to fully research each individual business, the market it operates in and the history and track record of the chosen franchise brand. Speak to trade associations for their expert view of the type of business you are interested in. Remember it is a two way process - the franchisor will also be assessing you to decide whether you match what they are looking for.

Speak to people
Speak to as many existing franchisees as you can by asking the franchisor for a contact list of the entire network. Don’t let the franchisor cherry pick who you speak to. Carefully chosen questions will give you a good understanding of the business potential and whether it is the right franchise opportunity for you. Look for franchisees with a similar background to yours and speak to those at differing stages of development to give you a broad view of the business you are looking to enter into.

Before signing on the dotted line, ensure that there is a clear vision for developing the franchise and you are happy with the direction it is heading. Get the franchise legal agreement checked and explained to you by an experienced franchise solicitor before you make the commitment to invest.

It is essential that you receive the right professional guidance and support. One of the cornerstones of launching a franchise business is ensuring you have access to the necessary funding, which is where a strong relationship with your bank can be vital. And beyond funding, banks with specialist franchise departments will be able to give guidance to support your franchising research.

Before approaching a bank, you need to prepare a business plan. The importance of a good business plan cannot be overstated. People who have a strong plan and sound capital base are well placed to take advantage of available finance. The franchisor may provide some assistance with the plan and most banks can provide a template to guide you. 

The initial objective of the document is to help you raise finance, but it will also help you understand what you wish to achieve from the business and to review the performance against your projections, alerting you to anything that is not going according to plan as well as identifying opportunities within the business.

The presentation of the plan is also important to create maximum positive impact. You should practice delivery of your plan before speaking to a bank manager so that you can communicate your passion in a professional manner.

It is worth remembering that well established franchises generally have much higher success rates than stand alone start-ups, therefore some banks may be willing to consider lending a higher proportion of the total set up costs. Typically franchise specialist banks will consider financing up to 70 per cent of the total investment for people investing in a fully tried and tested franchise brand. 

People who have a sound capital base and strong business plan are well placed to take advantage of the available finance. We continue to approve 80 per cent of customers’ requests for loans and overdrafts. Lloyds TSB Commercial has made clear commitments not only to lend, but to encourage enterprise.

Security
Bank finance will be subject to status and a review of your business plan. The lender may require security to cover the finance which is usually a legal charge over a residential property with sufficient equity. The Government backed Enterprise Finance Guarantee scheme maybe available if you do not have adequate security to offer so it would be worthwhile speaking to the bank’s franchise department to get their view on the financial support that maybe made available to you.

It’s worth remembering that no franchise can offer you a guarantee of success. Some franchises provide better investment opportunities than others. Choosing a well established franchise model will give you a head start. Self-employment can be a daunting prospect however hard work, determination and a large amount of common sense will take you along way towards achieving your business goals. 

About the author
Richard Holden heads up the Lloyds Banking Group Franchise Unit and is an expert speaker at exhibitions and seminars. He also regularly contributes in the national and trade press. The Lloyds Banking Group has trained franchise managers based throughout the UK to offer support to prospective franchisees.

Lloyds TSB have 50 trained franchise managers located throughout the UK, ensuring a true ‘on the ground’ presence. Wherever you are in the country, there will be a franchise manager available to guide you. If you are attending The Franchise Show at Earls Court, London on the 7th and 8th September, you can speak to our franchise managers at the bank’s stand. For more information on how Lloyds TSB Commercial can help your franchise plans, please call us on 0800 681 6078 or visit www.lloydstsb.com/franchising

Lloyds TSB also sponsors a series of free evening educational seminars about the benefits and pitfalls of franchising, which are must attend events for people starting on their franchising journey. For further details and booking information, visit the www.franchise-seminars.biz website.