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Franchising is a safer option in the credit crunch

Steve ThompsonWho would want to start up a business in the current economic climate?

It’s a question that must have been asked thousands of times up and down the country in the last year, usually rhetorically as most people assume the answer should be “nobody,” or words to that effect.

However, there is a good alternative answer – “a franchisee.”

The repercussions of the credit crunch are being felt in many aspects of business, from raising funds to finding new customers and nobody can claim to be totally immune from them. But starting up a franchised business can minimise some of these challenging circumstances.

The very point of a franchise is that it is a tried and tested business model. This can help increase confidence – not only among would-be entrepreneurs who are looking to set up their own business but also among some of the potential stakeholders with whom business owners will deal with further down the line, such as financiers.

Statistically, franchisees have a considerably higher chance of succeeding in the long term than people starting a business from scratch. According to the NatWest/BFA Franchise 2008 Survey, 91% of franchisees reported profitability. This kind of statistic gives franchisees a foot up the ladder towards winning the confidence of businesses they need help and support from, such as customers and suppliers.

Confidence is vital in any business but having a franchise based on a tried and tested business model won’t automatically win everyone’s approval. There is still an element of risk and the ground work must be done to make sure the proven business model you’ve bought into succeeds at the end of the day. A meticulous and individually-tailored business plan will make all the difference.

Franchises have other advantages over businesses that start from scratch too, especially in the level and breadth of support that they should receive from the franchisor.

Many franchises come with marketing strategies which have been developed by the franchisor. However, franchisees will need to be able to tailor this to the needs of their individual business. The franchisor’s business plan, often no more than a template, should be a useful starting point from which an individually tailored and finely focused strategy can evolve.

Perhaps one of the key advantages in terms of support that franchises should have is the opportunity to discuss issues, problems and opportunities with owners of similar franchises and also the franchisor. Most franchisees would expect this kind of support to be provided by the franchisor. However, in practice it is not always the case. Before agreeing to become a franchisee, prospective franchisees therefore need to talk to as many existing franchisees as possible about this issue and also the franchise generally.

Most franchise models enable individual franchisees to work happily alongside each other without any real element of competition between them. But this is not always the case and conflicts of interest do sometimes arise. For instance, two franchisees may find themselves chasing identical customers. Generally speaking franchisees will not be permitted to market actively outside of their territories, however, difficulties commonly arise in relation to neighbouring territories. It is important to discuss this issue with the franchisor and find out what their policies are.

However attractive a franchise may seem, good legal advice is essential before any contracts are signed. Such advice should highlight potential pitfalls and help ensure potential franchisees know what they can expect further down the road.

Once a suitable franchise has been identified and contracts are signed, the benefits of a tried and tested business should become apparent. Any “wrinkles in the system” should have been ironed out and this should leave the business owners able to spend more time selling their products or services. 

Given the brand strength normally associated with franchises, it should be easier to build the business at a time when consumers and businesses are tightening their belts.

There are other key elements of the franchise model which need to be carefully considered before embarking on any venture. First, franchisees generally continue to pay royalty payments to the franchisor long after they have established a thriving business. Some franchisees come to resent this, so it’s an important issue to consider at the outset.

Another way that a franchise differs from a non-franchised business is in the selling of the business further down the line. Entrepreneurs may wish to take the less risky road of franchising to run their own business while the economic climate remains tough, then sell it on and start their own business from scratch when things have improved.

However, franchised businesses can be more difficult to sell and the returns may consequently be lower than if the business was not a franchise. Also, franchise agreements will generally prevent the franchisee from competing with the franchise for a period after the agreement comes to and end, typically for 12 to 18 months. Again, potential franchisees should weigh up these pros and cons before making their decision. Once more, sound advice from professionals in the field is a relatively small but invaluable investment.

For further advice on the pros and cons of a franchise, contact Steve Thompson, of Darwin Gray Solicitors on (029) 2082 9136 or view their website at

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