Making a Franchise Work for You

Franchising enables people to work for themselves without working by themselves, and buy into a brand with a proven business model and good reputation. Here are some tips on making a franchise work for you.

David Killeen, Chairman of the Irish Franchise Association (IFA) and managing partner of franchise specialists Killeen & Associates, is predicting another strong year for the sector in Ireland.

While Ireland experiences almost full employment, Killeen is confident of growth in all respects, from more people deciding to become franchisees and franchisors, to more domestic companies following in the footsteps of Eddie Rocket’s, O’Briens Irish sandwich bars, Camile Thai and Freshly Chopped to take their brands overseas.

Why franchise?

It’s easy to see the appeal of business format franchising, both for buyers (franchisees) and sellers (franchisors). Broadly defined in IFA’s literature as the “granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade as their own business under the brand of the franchisor, following a proven business model”, it represents a relatively safe route for entrepreneurs to run their own enterprises and an excellent way for business owners to expand their operations and generate additional income.

“It’s an opportunity for people to work for themselves, but not by themselves,” says Killeen. “Compared with a standalone start-up, buying into a franchise is an easier way of being your own boss. Everything should be included in the franchise package, from access to the franchisor’s expertise and initial and ongoing training and support, to the signage and necessary marketing material required for the franchisee to launch their business successfully.

“Most importantly, franchisees also gain access to a proven business model, and something that can take years to build – a good reputation, which should bring in customers, and therefore income, from the start.”

 

What will this mean in financial terms?

Other advantages are that it can be easier to secure finance for a franchise and also cheaper to buy one than to start a business from scratch: IFA gives the average initial fee as €24,000, with licences costing from as little as €15,000 to close to €1m for a McDonald’s franchise.

There are additional expenses besides, which potential franchisees must also factor in before going ahead. These include initial set-up and running costs, and an ongoing royalty or management fee that’s payable to the franchisor. This is usually a percentage of the turnover – typically 8%, though it can be much more. McDonald’s franchisees, for example, have to pay monthly rent of between 10% and 18%; service fees of 5% for the use of the fast-food giant’s systems, and a 4.5% contribution towards marketing.

In addition, franchisees need to be aware of the working capital requirements needed to keep the business going before the business becomes cash positive. Many franchised businesses will not be cash positive from day one.

How do I choose a franchise?

Stiofan Mac Donncha, account manager at Franchise Direct, which connects potential franchisees with franchisors, says Ireland’s franchised businesses employ 43,000 people full-time and generate a combined turnover of €2.5bn.

“There are more than 300 franchised enterprises here. The industry has grown from being heavily food- and beverage-centred to accommodating a huge variety of businesses, including in health, fitness, home improvement, education, B2B services, care of the elderly and pet grooming. While people sometimes don’t look beyond food, we always recommend that they think about their personal interests, as there is bound to be a franchise in a field they want to work in.”

“There are more than 300 franchised enterprises [in Ireland]. The industry has grown from being heavily food- and beverage-centred to accommodating a huge variety of businesses, including in health, fitness, home improvement, education, B2B services, care of the elderly and pet grooming”

Stiofan Mac Donncha, Account Manager, Franchise Direct

Killeen agrees that that should be everyone’s starting point, and also urges potential franchisees to do thorough research before committing. Factors they should consider include the demographic of the area their outlet will be in (generally dictated by the franchisor); the number of similar businesses operating there; the long-term viability of the business model and the terms and provisions of their contract.

Franchises are typically licensed for between five and 10 years with an automatic right to renew for a further five or 10 years. The term forms part of the legally binding contract and an early termination is rarely possible – or at least not without the likelihood of the franchisee incurring heavy exit penalties.

Is a franchise right for me?

Another crucial consideration is whether the structure of a franchise fits with the way that you like to work – and your personality.

“Franchising might be better suited to those who are comfortable taking direction,” says Killeen. “The relationship between a franchisor and a franchisee can be highly regulated. The franchisor is the governor of the business – it is his or her responsibility to protect it and to ensure that all franchisees adhere to the brand’s identity, operational policies and procedure, and codes of practice as outlined in the operations manual; if you’re a rule breaker or overly innovative, then franchising probably isn’t for you.

You may think you have the best idea in the world for driving your outlet forward, for example, but if it’s not in keeping with the company’s ethos, business model or brand identity, then you’ll have to let it go. That said, good franchisors regularly encourage feedback from their franchisees as to how to improve the business model.”

Other factors that might undermine the relationship are when a franchisor’s projections fall far short of the franchisee’s actual returns – potential investors are well-advised to check the figures for themselves and prepare their own forecasts before committing, and to sound out other franchisees. If a franchisor seems reluctant to put interested buyers in contact with all existing franchisees then warning bells should ring.

The positives do, however, strongly outweigh the negatives. “If prospective franchisees do their research, conduct proper due diligence and buy into a good franchise, by which I mean one that has had proven success, has a well-honed operating manual, is easily replicated but not easily copied, and has growth potential in the long term, then they stand a very good chance of succeeding,” says Killeen.

Source: business-achievers.com