Many of us dream of giving up the 9 to 5, becoming self-employed and running our own businesses, but are overwhelmed by the uncertainties and risks of doing so. In such cases, a franchise represents a compelling opportunity.
Franchising is a system where the franchisor grants a franchisee the right to use their brand, systems and support, to set up and operate a business unit, in a specific geographic location. In exchange for this, the franchisee pays the franchisor an initial investment fee and then ongoing charges thereafter.
Operating a franchise is often described as working for yourself but not by yourself. As well as being able to use what are in some cases, very powerful brands, with proven products or services, a franchisee also benefits from having access to back office support, covering: marketing, web design, social media management, business planning, software systems, accounting systems, CRM systems, training and more. The franchisee is usually granted permission to operate in a specific geographical territory, free from competition from another franchisee.
Becoming a franchisee is one of the safest ways of setting up a new business. A franchise is usually based upon a proven business model, which has been tried, tested and enhanced over the years. Whilst around 25% of all new businesses fail after 2 years, over 90% of franchises are profitable in the same time frame. Of franchisees that have held their franchise for more than 5 years, only 2% are loss making.
Successful franchisees deal with customers and manage teams effectively. They are also good at following procedures very closely and operating within set parameters. As well as being prepared to work hard, franchisees should be driven, motivated and resilient. Because of these specific requirements, the recruitment process is often long. Franchisors need to make sure that they work with suitable franchisees, who are going to be successful and improve the brand. Likewise, franchisees need to make sure that they select the right franchise, since they are investing in some cases, huge amounts of money. Such large investments are one of the main reasons that franchised business units often perform better than company owned units. The initial investment ensures that the franchisee is motivated and committed, leading to better customer service.
Franchise businesses often take a year or longer to payback the initial investment, so it’s important that the franchisee enters an industry that they genuinely like. Franchisees come from a wide variety of different backgrounds, from all walks of life, and don’t need industry specific or business management experience. 30% of all UK franchisees are now women and 18% are under 30. Comprehensive initial training is usually provided by the franchisor. In fact, the franchisor often prefers that franchisees don’t have any experience, so they can teach them best practice from scratch. Franchising may be particularly attractive to those who: may be looking for a career change, may have reached a glass ceiling in their career, may have been made redundant, or looking to change their work-life balance. Whatever the reason, there a multitude of different franchise opportunities available.
In the UK, there are over 900 different franchisors, with more than 48,000 franchise units. Franchised units employ over 600,000 workers and together turnover around £17 billion a year. Throughout the industry, multi ownership is common, with 30% of franchisees operating more than one franchise unit. By operating more than one unit, it’s possible for franchisees to achieve economies of scale and increase their profit margins. One third of UK franchisors also have international operations.
The USA is by far the largest franchise market in the world. There are more than 2,000 franchise brands, with over 700,000 franchise establishments. Together they turnover nearly $700 billion a year, directly support over 7 million jobs, and contribute almost 3% to US GDP.
Certain global brands are synonymous with franchising. McDonald’s franchises more than 90% of its establishments and has a goal of reaching 95%. This asset light model results in higher profit margins and lower capital requirements. McDonald’s believe it’s important to retain some company owned establishments to maintain franchise credibility, improve processes, and develop new products and initiatives. McDonald’s 34,000 franchise establishments - in more than 100 countries - achieved combined gross revenues of $78 billion in 2017. 80% of McDonald’s profits came from franchised establishments, despite franchises contributing only 44% to total group revenue of $22 billion.
Subway is the world leader in franchising, in terms of number of franchise outlets. Subway has 44,000 restaurants owned by 21,000 franchisees, in over 100 countries. It has around 24,000 restaurants in the US and over 2,000 in the UK, but unlike McDonald’s, Subway does not operate any outlets itself, which is a rarity in the franchising industry. Despite having more restaurants, revenue of around $1 billion is a fraction of McDonald’s, with the average Subway restaurant selling only one fifth as much as its competitors. The franchise model has allowed Subway to expand at breakneck speed. Subway and McDonald’s combined franchise operations make up almost 10% of total US franchise establishments.
Whilst Quick Service Restaurants account for an unusually large number of the globally recognised franchise brands, accounting for over 40% of US franchise employment, there are other industries that have successfully managed to operate a franchise model at such scale.
Intercontinental Hotels Group is one of the leading hotel groups in the world, owning well known brands such as Crowne Plaza and Holiday Inn. Over 80% of its 5,348 hotels across the world are operated by franchisees, rising to 90% in the Americas and Europe. Operating profits margins for the franchised hotels are 50%, compared to just 18% for the company owned hotels. IHG branded hotels together achieved sales of $25 billion in 2017, with nearly $2 billion of that finding its way to the group via franchise fees.
Franchising is naturally associated with these huge multinational companies and with the food industry in particular, but in reality there are franchise opportunities in a vast array of different industries, such as: fitness, coffee, after-school tuition, cleaning, property investment, beauty salons, business coaching, laundry, retail, vehicle repair and many more. Opportunities range from one-man band and van-based franchises to investment, managed and area franchises. In some cases, the franchisor may request the divesture of all other business interests, whilst in others it is possible to own the franchise as an investment, whilst working and having interests elsewhere.
Initial investment fees range from a few thousand pounds up to several hundred thousand pounds for the biggest brands. There are also working capital requirements to consider. Ongoing royalty charges are generally between 5 and 15 percent of total sales, depending on the franchise. Franchise agreements typically last for 5 years, with an option to renew for another 5 years. In addition to new franchises, there are also resale opportunities, which may require lower start up costs.
To finance franchise investment, bank finance is usually an option. Franchisors may sometimes stipulate that the franchisee must invest a minimum amount of their own money, but the banks will often lend the majority of the total initial investment on a secured basis. Banks may even lend on an unsecured basis, when they have complete confidence in the model, or where the franchisee has insufficient assets. To access the finance that is readily available, it’s important to have a solid business plan and to have researched the market comprehensively.
With so many franchise opportunities, all offering a differing proposition, and with such inconsistent and limited information available, finding and then understanding the best franchises can be daunting. At GCIS, we can help to navigate through the swamp of information, and help you to understand what opportunities are available. Our market intelligence and business planning can also help to access finance and to assess commercial viability.
GCIS - Commercial Intelligence - Market Intelligence/ Research into Business & Investment Projects
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