If you are running a successful grab and go outlet, expansion is the next logical step and while opening new premises might make sense, any owner finds the pressure of overseeing extra outlets intense. Unsurprising then, that the franchise model of renting a brand and set-up to a standalone operator is so successful. But could it work for you?
“If you’re thinking of expanding then the obvious advantage of franchising is cost,” says consultant for the Franchising Centre and member of the British Franchising Association (BFA) Brian Duckett. “Say you’ve got a few successful outlets running and you’d like to open five more, usually you’d have to find five times whatever it costs to open a new outlet – fitting the shop, buying in stock and all the other extras. With the franchising model you essentially find five people willing to put up the cost of opening a new outlet, and they pay those costs for you.”
As an expansion model goes, it is a good way to get your name out quickly and without the headache of an enormous bank loan, not least in the current climate, when borrowing is both difficult and expensive. In addition, a franchisee normally pays a one-off fee to buy into the brand and delivers a percentage of profit – usually around 11% – annually.
“The franchise model helped us expand very fast,” explains part-owner of the fast-growing Baguette Express Billy Stenhouse. “A big factor in our decision to do it was cost: it meant we could get new outlets open far faster then if we were funding them completely ourselves. It has worked really well for us. In 2006, we had seven outlets in Scotland. Now we have 50-odd units and England is a key growth area for us.”
But franchising is not easy money, there is far more to the process than simply licensing your brand and having others foot the cost. The franchisor has to provide franchisees not just with a concept but with a working business model. This includes detailed information on operations and practices, as well as a training period in which they can learn about how the business runs. Franchisors should also expect to provide ongoing support to each of outlet.
“There are some unscrupulous operators out there,” says Brian Duckett. “A lot of what we do is to protect would-be franchisees from buying into a franchise which is really in name only.” According to the BFA, before you can offer an outlet up as a franchise, you should be in a strong enough position to prove that your brand and operations will confer some obvious advantages to a potential franchisee. Doing so is a prerequisite to becoming an established franchise and affiliated with British Franchising Association.
In order to be recognised as a viable franchise, grab and go outlets are expected either to have several units already in operation or to have conducted a pilot scheme for a minimum of 12 months to show that the business is viable in a different location. So while it may be a straightforward concept, almost as much hard work and capital is required from the franchisor out as the franchisee – at least in the initial stages.
Billy Stenhouse of Baguette Express confirms that much of his energy is spent recruiting the right people. “CVs don’t necessarily tell you anything,” he says. “A good franchisee will have determination to succeed.” Additionally, a good franchisee will be able to capitalise on the hard work and branding the brand owner has built up and respect their business model.
And keeping quality control and adherence to the original brand message is a task in its own right. “We send out mystery shoppers to check that outlets are meeting our standards and we have unannounced audits in place,” says Stenhouse.
Buying in
But the franchising process works both ways and smaller businesses may also look to buy in, merging with a larger brand. Large operators such as Subway confirm they will consider allowing an existing outlet to ‘convert’ to one of their sandwich outlets, pending location and premises approval, while those with the capital to invest might consider the security of a franchise rather than risking the perils of going it alone.
So, what will it cost a franchisee? Purchasing fees can vary widely but all will generally incur a one-off cost to purchase permission to use the brand, set up an outlet and begin trading with some working capital. Other costs will vary, depending on the franchise involved – the better known names will usually have considerably higher buy-in costs, as well as other expenses. McDonalds, for example, insists than franchisees fund a nine-month training programme, although this is quite unusual.
According to the BFA, the average cost of buying into a franchise is £20,000, although this is slightly skewed due to the high costs of a handful of well known brands, so the figure could be lower and a start-up franchisee could even be in a position to negotiate fees.
To give an idea of the costs of buying into a well known international chain, a 1,000sq.ft. store might include £45,000 on shopfitting, £38,000 on equipment, plus a £7,500 charge for each of the franchising fee and the licence. These, with associated legal costs, leaves a would-be franchisee in need of £126,400 start-up capital.
Subway, for example, estimates between £70,000 and £174,000, depending on location; while Baguette Express suggests franchisees figure £81,000 to £130,000. McDonalds franchisees pay up to £325,000. But this amount of capital could be considered modest in comparison with the costs involved to go it alone – and the security of your return on investment.
“Buying into a franchise meant that my investment was reduced to half what it could have been,” explains Subway franchisee Chris Scott, who opened his initial outlet back in 2004. Scott worked for KFC 15 years before deciding he wanted to go it alone and releasing equity in a property he owned to buy into Subway. Now, with six stores, he exemplifies Subway’s preferred model of franchising – to keep most new outlets with existing franchisees rather than buy-ins.
“The team from the Subway Development Office has been fantastic in helping us build and open each of our stores,” says Scott. “They can provide support on everything from lease negotiations to store design and equipment orders. And still – over seven years since opening my first store – on-going training and assistance is always available.”
Another franchising model is to assimilate a business into your own so, rather than buy into another brand outright, a franchisee might sell another party’s product with their signage, to mutual benefit. A recent example of this is Costa Coffee, which has famously resisted franchising in order to keep a strong hand on its branding roll-out, but has begun franchising its coffee to outlets such as pubs and cafes. So while it is not possible to own a Costa store as a franchisee, it is possible to sell its branded products.
For those still doubting the clout of the franchise model, the proof could hardly be more compelling than in an endorsement from those most legendary of cynics – business banks: those approaching a bank for a loan can expect to find some 20 per cent more money available to them if there aim is to become a franchisee.
For would-be franchisors, credit for expenses such as advertising and solicitors’ fees are more dependent on whether they already run a sound operation. So if your books are healthier than they might be in the current climate, it might be time roll out your well run services and have your franchisees foot the bill.