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With the economy looking bleaker by the day, embarking on a new business venture might not seem the most sensible thing to do, but interest in one type of business model - franchising - continues to be high. Are franchises worth a closer look?

Resilient model

Even in the middle of the downturn the performance of franchise businesses in the UK is impressive. A survey carried out this year by The British Franchise Association in conjunction with NatWest showed that franchises generated turnover of £12.4 bn in 2010 – an increase of 5% on the previous year.

The same survey revealed that there are over half a million people employed by franchises in the UK. So what makes franchises so popular? And what are the things to think about if you are considering buying one?

650 varieties

You might think of franchising as being limited to big name operators like McDonalds and other high street names but there are over 650 different franchises now trading in the UK.  The choice of business is enormous.

The principle of franchising is pretty simple: the business owner (the franchisor) grants a licence for a specific period of time to a franchisee. Of course there’s a fee to pay, but the theory goes that in return you get a proven business concept together with inside knowledge of the business and ongoing support. This removal of many of the normal uncertainties associated with starting a new business is probably what makes the franchise model so popular.

Available franchises

Franchises are available in every conceivable business sector – from hotels and travel to publishing and recruitment. There are comprehensive online directories of franchise businesses like this one at franchiseinfo.co.uk.  

Questions to ask a franchisor 

If you’re thinking of investing in a franchise you need to go in with your eyes open and do extensive research. It’s crucial to remember that you’ll be entering a contract with the franchisor for a set time period – and once you’ve signed up, it will be difficult to get out of the franchise agreement.

Ask how long the business has been operating and how many other franchisees there are. Make sure there isn’t another operator on your doorstep and try and speak to some other franchisees to see how successful (or unsuccessful) they are.

If all of this information isn’t forthcoming, you need to ask yourself whether you really want to get involved.

The cost

There will be a one-off fee to purchase the franchise and you should be clear about what this fee buys you. Start up costs will also include the purchase or lease of premises, recruitment costs and the purchase of equipment.

Most franchisors will provide marketing expertise and run promotional activities relating to the business. Try to get as much information about these activities as possible to ensure that they are properly formulated and specific.

Most importantly, ask yourself if the support and training being offered is enough to justify the fee. Is there a similar business you could actually start up yourself without getting involved in the financial commitments of a franchise?

Ongoing costs

One of the least attractive aspects of a franchise deal is the obligation to pay ongoing fees during the life of the franchise. While you might feel comfortable paying the franchisor for his expertise at the beginning of your relationship, as you begin to become more familiar with the business you’ll feel less in need of support from the franchisor, and less inclined to hand over annual management fees – normally a percentage of annual turnover.

Make sure you know what these fees are at the start and ask yourself if you’re happy with the level of payments that will be due.

Finance 

You might be investing a redundancy payment or other lump sum in the franchise but chances are you’ll have to seek some sort of financial support as well. Often the franchisor will offer to provide finance and the main banks including NatWest, HSBC and Lloyds have dedicated franchise teams affiliated with The British Franchise Association.

Banks tend to look favourably on franchise start ups and can lend up to 70% of the initial cost. Lending by banks is also facilitated by the government sponsored Enterprise Finance Guarantee.

More information

There is a wealth of information out there about franchising. If you are seriously interested in the possibilities offered you could do worse than visit a franchise exhibition. Only a few of these shows are supported by the The British Franchise Association and those that are will only have accredited exhibitors and will offer free educational seminars.

The prospects

Franchising does not of itself offer a surefire route to business success and there are plenty of pitfalls to avoid before settling on a franchise that’s appropriate for you.

If you have the right mindset and go into the venture prepared to work at it, there’s plenty of evidence that a franchise can provide a stable and reliable income. 

Tell us about your experiences with franchises using the comments box below!

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