Pros and cons of going down the franchise route

[mclaren7500]

Hi to everyone on the forum.

I have had some great advice on here in the past and am hoping for the same again.

I run a man with van business in the Bristol area and have built the business up where this year the profit generated would prove very attractive to a franchisee. This is commonly classed as giving the franchisee an income of at least £25K per annum. My expect turnover should hit £250K+ this year and this is the sort or turnover I know I can create for a potential franchisee. My method of getting business is a proven one which mixes old and new marketing strategies. On the one hand I use internet marketing but I found that greater returns could be achieved via the direct marketing approach eg I have secured a contact delivering for a very big retail brand and this contract alone is worth circa £100K per annum.

To that end I have been researching various companies who can set my business up to be "franchise ready" Most Franchise consultants charge circa £6K and then find the franchisee's on a pay on results basis. Commonly this method is in profit after the first franchisee and so is considered a fairly low risk way of building a business and potentially I could have a national brand within 5-10 years.

I am growing the business organically and I will expand into the Thames valley area later in the year so I would add the franchise route on top of my existing expansion plans.

What I would like to know is have any one else been in a similar position with there own business and what conclusions did they reach.

I would also like any views on the pros and cons of franchising as I have had the sales pitch from the franchise consultant and these people for obvious reasons paint a very pretty picture of the potential returns I could make. I on the other hand think I could be opening myself up to an awful lot of work to get my business "franchise ready" plus the ongoing work of making the pilot project work and the franchises as there sold. I envisage this being done in a fairly managed way. Year 1 = 1 pilot project, Year 2 - 2 franchises sold Year 3 - 4 franchises sold but this will still be a heavy workload on top of keeping on top of my existing business.

Again I would be very grateful for any insights anyone may have.

 

[Psl]

First thoughts are;
Do you currently have enough staff to manage your current work load?
The big retail brand contract you have, would work from this be passed to the franchisees and what is the duration of the contract?
What would you offer as the franchise package?

It is all well and good going the franchise route, but if you have franchisees that are bone idle, as a good number are, then you can end up with a lot of problems, and spend your time trying to help franchisees that will not do the work anyway, and they will also have a very negative impact on your business as a whole.

My advice would be to be very meticulous in your franchise selection process.
Just because someone has £20k lets say, to invest in a franchise, it doesn't mean that they will be able to operate the franchise as laid down in the operations manual.A good number of franchisees pay their money, go home and boot up their laptop, log into their online banking and wait for the money to roll in.They do not realise that they have to actually do some work.

On the other hand, if you get a couple of franchisees that really enjoy being in the transport industry, then you could build a very good and reputable brand.

Getting franchisees on board is not hard, the clever part is getting the right franchisees that are willing to follow the ops manual and help build the brand.

There are a few other factors that will determine if the franchise model is right for your business, but until you determine what the franchise package will be I couldn't offer any further advice.

 

[mclaren7500]

First thoughts are;
Do you currently have enough staff to manage your current work load?
The big retail brand contract you have, would work from this be passed to the franchisees and what is the duration of the contract?
What would you offer as the franchise package?

It is all well and good going the franchise route, but if you have franchisees that are bone idle, as a good number are, then you can end up with a lot of problems, and spend your time trying to help franchisees that will not do the work anyway, and they will also have a very negative impact on your business as a whole.

My advice would be to be very meticulous in your franchise selection process.
Just because someone has £20k lets say, to invest in a franchise, it doesn't mean that they will be able to operate the franchise as laid down in the operations manual.A good number of franchisees pay their money, go home and boot up their laptop, log into their online banking and wait for the money to roll in.They do not realise that they have to actually do some work.

On the other hand, if you get a couple of franchisees that really enjoy being in the transport industry, then you could build a very good and reputable brand.

Getting franchisees on board is not hard, the clever part is getting the right franchisees that are willing to follow the ops manual and help build the brand.

There are a few other factors that will determine if the franchise model is right for your business, but until you determine what the franchise package will be I couldn't offer any further advice.

Thanks for your comments. Lots of food for thought

All my drivers / drivers mates are freelancers who carry out the actual work and I work behind the scenes as a sort of back office administrator. In the next few years I am hoping to bring in fulltime sales and internet marketing staff to allow me to concentrate on growing the business. The retail brand contract would not form part of any franchise agreement as it is my own region which I am not planning to franchise, it was just by way of illustration of the sort of work that is out there if you know how to get it.

What I would be franchising would be the brand itself and to set up the marketing to bring in the business to generate the business required to provide the franchisee with a decent living wage in year 1 and then the ability to grow the business if they so desired. The franchisee would carry out the removals, look after the vans and recruit and pay his staff. I would provide a centralised booking service so that they would not have to learn and understand sales as well as the specifics of the job which is likely to be new to them.

I think the skill may well be in finding the right candidate and the franchise would be suitable for someone who enjoys meeting people, offering great service and is not afraid of hard work. The franchise consultants do vet candidates but i'm sure that if someone has sufficient funds they may well be inclined to worry less about other aspects of their suitability for the franchise.
I think one way of finding out if they are genuine would be to make them work a week on the job and then they can see if is the sort of work for them. I am under no illusions about this one as its not for everybody in fact its very hard work. I think the nature of the work would probably put off conservatively 75% of the population and its not a particularly exciting industry to be involved in. My own personal opinion after working within the industry for 12 years is that it is a great business that involves traveling to different places every day meeting different people, helping people at an exciting stage of their lives and has given me great job satisfaction versus my previous career as a computer programmer for 12 years. So in short I think I know who I'm looking for, someone a bit like me.

 

[Psl]

Good thought processes there, and that is not me being patronising
I was going to suggest putting potential franchisees to work prior to signing up but I reckon one in ten would be prepared to do that.

You are right about the franchise consultants being less inclined about the suitability of the franchisees when there is money to be made! And £6k could go some way to recruiting a sales person?

You say you want grow the business organically, so why not just do that and save all the hassle of franchising? As your sales team opens a new area of the UK contract in the required drivers, with their own vehicle which meet your standards, and then have them working under your brand and you still retain a greater control over the business and the brand than you would going the franchise route.

 

[mclaren7500]

Good thought processes there, and that is not me being patronising
I was going to suggest putting potential franchisees to work prior to signing up but I reckon one in ten would be prepared to do that.

You are right about the franchise consultants being less inclined about the suitability of the franchisees when there is money to be made! And £6k could go some way to recruiting a sales person?

You say you want grow the business organically, so why not just do that and save all the hassle of franchising? As your sales team opens a new area of the UK contract in the required drivers, with their own vehicle which meet your standards, and then have them working under your brand and you still retain a greater control over the business and the brand than you would going the franchise route.

Not patronising at all.

I think the organic approach does offer the best approach in terms of maintaining overall control. However I think that franchising if done well offers the opportunity to get a national prescence relatively quickly and it's all paid for by the franchisee's. I have to say part of me has already made up my mind and £6k does'nt sound like to much to find out. The other way to view it is that both the organic approach and the franchise approach can be developed in parallel so I would be expanding the business on two fronts.

Also as an additional thought I have been told by one or more of the franchise consultants I have talked to that the key to franchise success relates very much to the success or otherwise of your pilot project. If you hit the ground runnng on the pilot then you are going to have significant interest when you roll out the other franchises later own. Conversely if the pilot proves a complete dog then little or no interest may ensue moving forward.

 

[Psl]

Not patronising at all.

I think the organic approach does offer the best approach in terms of maintaining overall control. However I think that franchising if done well offers the opportunity to get a national prescence relatively quickly and it's all paid for by the franchisee's. I have to say part of me has already made up my mind and £6k does'nt sound like to much to find out. The other way to view it is that both the organic approach and the franchise approach can be developed in parallel so I would be expanding the business on two fronts.

Also as an additional thought I have been told by one or more of the franchise consultants I have talked to that the key to franchise success relates very much to the success or otherwise of your pilot project. If you hit the ground runnng on the pilot then you are going to have significant interest when you roll out the other franchises later own. Conversely if the pilot proves a complete dog then little or no interest may ensue moving forward.

One of the keys to franchising is the pilot, and the ability to replicate the business under a set format in other geographical areas. One other key to franchising is having a franchise agreement that works for both parties, and having one of these drawn up can be costly, mine cost me £15k, and was still deemed too favourable towards me, the franchisor, by some lawyers!
And you can only draw up the agreement once you have a franchise package in place.

The next big expense, be it in time or money, is your operations manual, and believe me you will have to cover all eventualities in the Ops manual, because if you don't, and something goes wrong, it will be your fault even if the franchisee is at fault!

Then you need to put your marketing pack together, which is relatively simple. What do you get for the £6k by the way?
Advertising for franchisees is a simple enough process and easily controlled.
probably one of your sales staff could sell the franchises as opposed to the consultants?

Just a few more thoughts.
Would you be able to recruit the required key head office staff to accommodate expanding both businesses in parallel?
would you need one set of key staff to run your business and one set to handle the franchisees, or could one set handle both?
Will your sales staff work on the pilot and then be transferred to the areas to be covered by the new franchisees?
Would the franchisees own the vehicle?
what would you charge for the franchise?

 

[mclaren7500]

One of the keys to franchising is the pilot, and the ability to replicate the business under a set format in other geographical areas. One other key to franchising is having a franchise agreement that works for both parties, and having one of these drawn up can be costly, mine cost me £15k, and was still deemed too favourable towards me, the franchisor, by some lawyers!
And you can only draw up the agreement once you have a franchise package in place.

The next big expense, be it in time or money, is your operations manual, and believe me you will have to cover all eventualities in the Ops manual, because if you don't, and something goes wrong, it will be your fault even if the franchisee is at fault!

Then you need to put your marketing pack together, which is relatively simple. What do you get for the £6k by the way?
Advertising for franchisees is a simple enough process and easily controlled.
probably one of your sales staff could sell the franchises as opposed to the consultants?

Just a few more thoughts.
Would you be able to recruit the required key head office staff to accommodate expanding both businesses in parallel?
would you need one set of key staff to run your business and one set to handle the franchisees, or could one set handle both?
Will your sales staff work on the pilot and then be transferred to the areas to be covered by the new franchisees?
Would the franchisees own the vehicle?
what would you charge for the franchise?

For the £6K you get
Franchise Model and Blueprint which determines how the franchise moves forward.
A fully customized Franchise Website which is fully optimised so that it will appear high up in the search engines. Your website will also have autoresponders set up, contact forms and google analytics installed on it.
Franchise Prospectus
Franchise Legal Contract and Side Letter
Franchise Operations Manual
Franchise Business Plan and Financial Forecasts
Franchise Marketing and Recruitment Plan
Franchisee Meeting and Follow Up Process
Franchisee Training Plan
Franchise Visit Agenda and Confidentiality Agreement
Finance Plan which enables franchisees to raise money

It takes about three months to do all this though I am thinking of spending up to a year and I have no idea how they keep the price this low other than its just a case of filling in templates and they just get the info from me and alter the documents where required. I also suspect that the main money is to be made at the back end when they start selling the franchises.

My plan involves bring a full time sales administrator and an internet marketeer into the business in early 2013. They would be tasked with providing work for both the existing business and future franchisee's. Again recruitment is a tricky one but someone with the right background should be able to exceed my current efforts. I think in the early stages this will be more than ample for the pilot project and the first proper franchises.

I would expect the franchisee's to finance the purchase of their own vans and my model requires at least 4 vans to work so I would estimate £40 - £50K in finance would cover this.

I'm not sure exactly what the charge would be per franchise but I think one of the consultants stated that about a third of annual profits is the going rate. So depending on the pilot project I think the price could be between £7,995 and £19,995

 

[Psl]

For the £6K you get
Franchise Model and Blueprint which determines how the franchise moves forward.
A fully customized Franchise Website which is fully optimised so that it will appear high up in the search engines. Your website will also have autoresponders set up, contact forms and google analytics installed on it.
Franchise Prospectus
Franchise Legal Contract and Side Letter
Franchise Operations Manual
Franchise Business Plan and Financial Forecasts
Franchise Marketing and Recruitment Plan
Franchisee Meeting and Follow Up Process
Franchisee Training Plan
Franchise Visit Agenda and Confidentiality Agreement
Finance Plan which enables franchisees to raise money

It takes about three months to do all this though I am thinking of spending up to a year and I have no idea how they keep the price this low other than its just a case of filling in templates and they just get the info from me and alter the documents where required. I also suspect that the main money is to be made at the back end when they start selling the franchises.

My plan involves bring a full time sales administrator and an internet marketeer into the business in early 2013. They would be tasked with providing work for both the existing business and future franchisee's. Again recruitment is a tricky one but someone with the right background should be able to exceed my current efforts. I think in the early stages this will be more than ample for the pilot project and the first proper franchises.

I would expect the franchisee's to finance the purchase of their own vans and my model requires at least 4 vans to work so I would estimate £40 - £50K in finance would cover this.

I'm not sure exactly what the charge would be per franchise but I think one of the consultants stated that about a third of annual profits is the going rate. So depending on the pilot project I think the price could be between £7,995 and £19,995

So you would need four vans and then the franchise fee of say £10k, but then there is the working capital that would be needed?
What are the costs of running 4 vans, fuel, insurance, wages etc per annum?
What would the costs of the marketing team be per franchise per annum?
Would the franchise produce the required turnover to cover costs?

From what you have said your business is doing very well, but will it suffer when you have to deal day to day with the franchisee's? And more importantly how do you ensure that your pilot business doesn't suffer?

 

[mclaren7500]

So you would need four vans and then the franchise fee of say £10k, but then there is the working capital that would be needed?
What are the costs of running 4 vans, fuel, insurance, wages etc per annum?
What would the costs of the marketing team be per franchise per annum?
Would the franchise produce the required turnover to cover costs?

From what you have said your business is doing very well, but will it suffer when you have to deal day to day with the franchisee's? And more importantly how do you ensure that your pilot business doesn't suffer?

I would grow the pilot project to 4 vans in exactly the same way as I have done in my own region. My existing region would not suffer as I am no longer required other than in a purely administrative role which can be done of an evening leaving me with plenty of time to make the pilot project work. Also the strategies I use are not time intensive and tend to work very rapidly. I would envisage spending a bit of time at the outset but the job is incredibly basic and anyone can learn the job in a day. The truth is the first pilot project may not even be sold as a franchise at all, I may just use the Thames valley expansion as the pilot project to prove that I can replicate my model in a brand new territory and then look to get another pilot project up and running in say early 2014.

Again this is going back to a comment made by one of the franchise consultants but he stated that a multiplier of 4 x the franchise fee is normally enough funds for a franchisee to feel that they have enough money to buy the franchise and survive until the franchise takes off so in your example they should have £40K sitting in there bank account or perhaps equity in a house. The good thing with my marketing strategy is that I can bring in work straight away so they should not need the spare cash other than as a comfort blanket.

I would envisage 18 months tops to get a 4 van operation running at full blast. Each van is done on finance so there is no additional money required there. I would expect the operation to advance to 4 vans over the 18 month period. My general rule on this is once I start to turn down work, buy another van as I hate to give work to the competition. A lot of the costs are variable and would only increase as the business increases. Also most of my work is pay on the day via cash or cheque so the franchisee will always have the money in advance of when the bills become due.

In terms of costs I would say the current split is wages 40%, Fuel 20%, VAT 10%, marketing 10% Other motor 5%, general administration 5%

I would propose charging 15% royalty which would cover marketing and general administration leaving the franchisee a very simple way of earning a 10% profit margin plus any wages on top. So if they were to build a £250K franchise they would earn £25K profit plus say £15K - £20K in wages. Alternatively they could just act as an administrator and recruit staff, maintain vans etc and pick up £25K.

The big thing going forward is that I have been able to increase my prices quite substantially and have implemented a 5% price increase in January and have another 5% price increase lined up in July. These increase would add another £25K of profit to the above figure minus any VAT due. These days I tend to be a bit of a cynical optomist so I am confidant that I can deliver what I say but I know that stuff happens along the way that will bite you on the arse and set you back. This is why I would prefer to spend a year getting the pilot project working after spending a year getting the franchise agreements set up so a total of two years even before I would be looking for someone to put there hands in their pockets.

 

[ThePublisher]

. The truth is the first pilot project may not even be sold as a franchise at all, I may just use the Thames valley expansion as the pilot project to prove that I can replicate my model in a brand new territory

Isn't the point of a pilot project that somebody else can follow what you've set up and replicate your success? Surely if all you're doing is opening another branch following your own model, it's not a true pilot?

 

[mclaren7500]

Isn't the point of a pilot project that somebody else can follow what you've set up and replicate your success? Surely if all you're doing is opening another branch following your own model, it's not a true pilot?

Is'nt this a case of semantics or am I missing something. I am happy to call it a pre pilot if this helps. with the 1st franchise sold in 2014 being the pilot. This is all theoretical by the way. Whatever I do the purpose is to iron out the problems before you scale up the franchise sales. It would also demonstrate that the basic principle of building a £250K business from scratch can be achieved in an 18 month timescale with the added benefit that I would reap all the profits.

 

[alanjgibson]

Hi Mclaren 7500

You ask a very interesting question about a business model that can reap great rewards if planned and developed correctly.

Franchising is not a get rich quick format for business expansion nor is it a route to grow a business out of a fundamental problem in terms of product, service or financial/operational performance. Not every business, or indeed business owner is suited to Franchising, but as can be seen by the c1300 franchise systems in the UK it is very effective when planned, developed and implemented professionally.

There are five essentials for effective Franchising:

1. A proven business format, model and brand
2. Demonstrable financial benefits for both the Franchisor and Franchisee
3. Protected IP (intellectual property)
4. A business format that is easily replicated and can be learnt in a reasonable period of time
5. A culture of mutual support and development exists with the prospective Franchisor

There is an often discussed 6th element which is “A reason to belong”. What is the compelling reason for a Franchisee to buy your Franchise rather than any other or indeed start a business themselves.

The foundation of any good Franchise system is a comprehensive Audit and Development Plan. This should be the first stage in the development of the Franchise and amongst other areas is used to determine the outline structure, processes and procedures of the Franchisable system, the Franchisee profile, Training and Development programmes and full five year P&L, Cash Flow and Balance Sheet financials for both Franchisee and Franchisor. Throughout this process the optimum level of fees including License Fee, Management Services Fee, Marketing Levy and Product fee will be calculated to suit the business and ensure both parties can make sufficient profits from the arrangement.

The Audit and Development Plan will also highlight how all of the key documents required of an ethical Franchise, the Prospectus Pack, Disclosure Document, Operations Manual and Franchise Agreement all tie up with each other.

My suggestion is that engage a Consultancy Firm that is affiliated to the British Franchise Association and has extensive experience of setting up and running successful Franchise systems to guide you through this process. It can be very difficult indeed to juggle the day to day requirements of the primary business as well as the development of a new business model. This can be a costly exercise but Franchising is a medium to long term project and the rewards, which should be clearly outlined in the Development Plan, should more than cover the intial investment with a satisfactory timescale for positive ROI.

Packaged, templated Franchise solutions need to be reviewed with extreme caution, filling in gaps in template documents can make it very difficult to develop an effective Franchise system. If you are considering such a system make sure you speak to previous customers of the Consultant and ask them their experiences of the systems and processes employed, don’t just rely on printed quotes.

You may also want to contact the leading High Street Franchise lenders HSBC, Lloyds and Nat West to ensure that they will lend against models developed on templated systems as they often do not provide sufficient protection for Franchisee and Franchisor.

Hope the above helps and if you would like to discuss this further on a one to one basis please feel free to message me privately.