What is franchising?
What is franchising? Franchising is essentially a relationship between a brand owner (the franchisor) and a (usually small) business (the franchisee).
The franchisee trades under the brand of the franchisor, but operate as their own business. Examples of successful franchises include Subway, McDonald’s, Domino’s Pizza and Burger King, where the smaller units cover a specific territory, making profit not just for the individual unit owner, but for the franchisor as well.
It’s no coincidence that these examples are all fast-food chains. The ‘ready-to-go’ business model that these successful brands employ means that they can be rolled out nationwide and even internationally, to great effect. Outside of the fast food industry, The Body Shop, Vodafone and Anytime Fitness are all also thriving examples of the franchise model in action.
What kinds of businesses is franchising suited to?
Franchising can be successfully used in a range of different business types. As above, fast food is perhaps the most prominent on the high street. However business types such as: taxi companies, hairdressers, tattooists, bars and trades people can benefit massively from a unified branded identity and business model that comes from franchising.
As with Pimlico Plumbers, the reputation of the established brand and recognised way of working is of massive benefit to the plumbers who buy into the franchise. On their own, these plumbers would have to generate their own brand reputation and trust with a customer base – which can take a lot of time and effort. Here there is a clear mutual benefit, and the arrangement has also helped Pimlico Plumbers become the largest plumbing company in the UK.
Franchising Driving Schools: An Example
An example of a business that might be effectively franchised is a driving school:
Jeremy has been a driving instructor for 15 years in Newcastle. He started off on his own, after being made redundant from his office job. He became particularly known for going above and beyond what other driving instructors do – providing a range of new services.
These included things such as hazard perception classes, 1-2-1 theory sessions, and social events where learner drivers could meet up and share their experiences. This led to massive success in his area.
After some success, he brought in his brother and eldest daughter, and branded up – they called the company “The Extra Mile Driving School”. This new way of learning to drive started to get attention nationwide, with other companies beginning to use some of Jeremy’s ideas.
So Jeremy build a brand manual and operations manual, putting everything anyone would need to know to run an “Extra Mile” school onto paper. He then sought other instructors like him who might want to be part of this new vision for driving schools. There was a lot of interest – especially after the first new franchisees saw early success.
After having them sign a franchise agreement – Jeremy negotiated that he would receive 30% of the profits these other “Extra Mile” instructors would make. Within 2 years he had 30 more instructors operating under the brand, and the business had nationwide reach.
Is franchising the same as licencing?
Conceptually, yes, but practically, no.
With a franchise, the franchisor often provides substantial operational and business systems and procedures for the franchisee. This does not happen with licensing typically – as licensors are usually more independent in how they operate. So, the main difference with franchising is that it is prescriptive.
In your franchise, you as the franchisor can determine everything that will happen within the franchise and how it will operate. From the packaging that your franchisees can use on the products to the training of the staff and even the layout and location of the shops, you can set out specifically how you want the franchise to operate and retain control over your brand identity and reputation.
This is why when you go to a McDonald’s in Australia, you get a very similar experience to if you went to one in the UK. McDonald’s go out of their way to prescribe a certain “formula” about how a McDonald’s should be – which all franchisors have to adhere to.
Why would I franchise my business instead of just granting a licence?
Licensing is a good starting point for businesses to make some profit out of their brand.
A licence is essentially permission to use. You give permission for another business to use, for example, your trade marks. There are certain constraints which you can put in place, but essentially it is a very flexible agreement which can be applied to all kinds of situations.
With franchising the relationship is different. Another business is becoming a vessel for the continued growth and success of your brand, actively working to generate profit for the business, rather than just a vehicle for the sale or distribution of your brand, along with its other offerings. The franchisee gets to harness all the experience, operational procedures and trades on the existing success of the franchisor’s business.
Is franchising worth it – what are the benefits to me?
The primary benefit of becoming a franchisor is expansion. Franchising allows you to secure distribution of your products or services far quicker than if you were to start from scratch with your own employees and satellite offices.
The onus is on the franchisee to provide the capital investment and not the franchisor, keeping the costs of start-up low for the franchisor. It also provides the opportunity to increase the profitability of small units, thereby reducing overall business overheads. There is also evidence to suggest that franchisors may be more likely to survive in a recession than non-franchised businesses, precisely due to the spreading of the risk over these smaller units.
This all sounds good – where do I start?
Before you can contemplate dipping a toe into the franchising pool, you need to ask yourself one question:
Do I have a brand in a box?
Do you have an established, tried and tested business model which can be rolled out and implemented anywhere at any time? If somebody approached you on the street and said, ‘I would like to run your business for you’, would you have all the tools they needed ready to be handed over? If not, this is your first step.
An essential part of getting your house in order will be to compile a detailed operations manual, setting out how your business runs on a day-to-day basis and how you manage things. This will be your franchisee’s rule book and you need to ensure that any potential franchisees sign a confidentiality agreement before handing over the tools of your trade. There is an additional benefit to this, in that it also gives you the opportunity to define, consolidate and protect what it is that makes you successful – before you share it with others.
How can I ensure that my franchise will make me money?
Practice makes perfect.
As a franchisor you need to give yourself the opportunity to perfect your franchise business using a pilot operation. You can either establish a unit yourself or recruit a pilot franchisee to be your guinea pig for your franchise’s test run. Over a period of ideally a year, you want to establish whether your business is successful, how it can be improved, problems, techniques, territory issues – in essence, what the blockages will be for your franchise.
Use these insights to improve your business model, and feedback what is learned back into your operations manual to improve the formula for future franchisees.
Can I just go straight into my franchising without testing it first?
Yes, but it’s certainly not commercially advisable.
The whole purpose of a franchise is that you are providing a proven successful business to your franchisees. Without a successful pilot operation, you are using franchisees to help develop your business in the short term, rather than providing a tried and tested model which you know can be implemented and operated efficiently across the board. Preparation is key to a successful franchise. Failure to put in the work before taking the plunge will likely result in an expensive and time-consuming unsuccessful attempt to franchise which does more harm to your brand than good.
What about protecting my brand?
If you want a national presence for your business, you will need the correct IP protection in place, both for your business’s name and any logos which you use in your trade. In franchising your business, you are promising your brand to the franchisee, in return for a substantial share of their profits.
Accordingly, you need to ensure that your brand is as strong as it can possibly be to attract the best prospective franchisees. Your franchise agreement will also need to contain the necessary licences allowing the franchisees to use the business’s intellectual property, including all trade marks.
How complicated is the legal side?
Not complicated at all.
There is little to no regulation of franchising in the UK. However, you will need experienced IP solicitors, as well as an accountant in order to ensure that you have the correct documentation in place. Your key document will be a comprehensive franchise agreement. Your franchise agreement should include provisions to ensure that the franchisee pays the appropriate fees on time, complies with the all-important operations manual and licences of your IP rights and, restrictions to stop them using your hard-earned know-how to set up a competing business.