Growing your business through franchising

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1 Coming together is a beginning Keeping together is progress Working together is success... Henry Ford A guide to Growing your business through franchising

2 Index Introduction 1 Current trends in the Irish marketplace 2 What is franchising? 3 Franchising terminology explained 3 Types of Franchise 4 Key advantages 5 Main disadvantages 6 Areas that you and your management need to consider 7 Funding your franchise development 7 What next? 8

3 ...Like Ford our people understand the importance of great partnerships, thinking in answers rather than questions we ensure franchisors and franchisees receive the support they need to achieve success. Ulster Bank Success built through teamwork Latest trends highlight that franchising, as a means in which to grow a business, continues in popularity and success. There are now over 270 franchise brands employing in excess of 25,000 people in Ireland. As a successful owner of a well established brand, now might be the time to look for that next stage of growth - and as you explore which growth strategy to pursue - franchising as a viable business option may just be it. Ulster Bank has more than 25 years experience in supporting franchising customers. Our people are in the business of supporting business ideas every day. They understand and have the benefit of previous experience to help you get the answers you need to make an informed decision. We work with franchisors across a diversity of sectors ranging from casual dining to outsourced business services. We have extensive experience working with both Irish and international Franchises. Our customer commitment is evidenced by our four times winner of KPMG Business Banking Excellence Award, for which we are very proud. Our Team of Enterprise and Franchise Advisors are committed to helping you get your franchise established. This guide aims to introduce you to the world of franchising and the key issues you could consider before becoming a Franchisor. To discuss your plans with an Ulster Bank Enterprise Advisor simply your details to franchising@ulsterbank.com or call

4 Current trends in the Irish marketplace With the fastest level of entrepreneurship in Europe, 1 in 12 people are currently looking to set up a new business. This competitiveness and confidence has bolstered a rapid expansion within the franchising sector. Sales of products and services through franchising outlets have increased by 42% in the past 3 years. The 2006 industry report on Franchisee Satisfaction by Franchise Business Review, report that 72% of current franchisees believe in the growth opportunity for their business is very strong. This confidence and increase in sales has shifted the perception that franchising is only for the fast food sector. Its popularity is now growing to attract diverse business models such as printing and clothing manufacturers.

5 What is franchising? Franchising is, in effect, a system for marketing goods or services. You, the franchisor grant s a licence to franchisees to operate a business under their name and system to market your products and/or services for a specified period. The franchise agreement is usually subject to renewal so long as the terms have not been defaulted by the franchisee. You will receive an initial fee for training the franchisee and assist with the launch of their business. In return you get to share in their success. A return on investment is normally obtained through receiving a management services fee by way of a percentage of the franchisee s turnover, or through a mark-up on the goods they supply. This close inter-dependence is unique to franchising. It s a major factor, in making the system different from other business opportunities, such as agencies and distributorships. That is not to say that there is anything wrong with other systems. In fact, one of the first questions you will need to determine is which type of business arrangement would be the most appropriate for your particular company s expansion. Potential franchisees will be more interested in the more popular franchises that have a visible presence in the marketplace. Franchising terminology explained Franchisor You. The franchisor is the developer (person/company) of a product or services, who offers investors the right to trade under the franchisor s business name. The franchisor also provides support in setting up the franchise and in its ongoing operations. Franchisee A franchise is a business arrangement where the owner of a product, a service or even a recognised trade name agrees, for a fee, to allow a person/company to trade using the same product service or trade name, and passes the benefit of it s know-how to that person/company. Business Concept Your tried and tested method and systems of operating your business. Since, it is this experience that interested the franchisee in the first place and makes your current business a viable franchising model. It sets the standard to which all subsequent outlets should operate. A Franchisee The term given to a business arrangement where you (as owner of a product/service or brand) agree to a third person/company to trade using the same product/service or brand. A usage fee is agreed between you both and in addition you pass on your business acumen to the new start up team. Franchising agreement Typically it will cover: The conditions of franchise The obligations of both parties The duration of the agreement The territory in which the franchisee will operate The payment or fees arrangement Termination conditions Renewal entitlements Disposal provisions 3

6 Types of Franchise Investment Franchise Having invested a substantial amount of capital the franchisee retains overall control, employing a management team and staff to run the business on a day-to-day basis. Executive Franchise This is based on providing the type of services usually described as white collar or professional. Retail Franchise The franchisee will buy the right to run one or more retail outlets, employing their own staff and displaying and selling only those products or services that the franchisor approves. Distribution Franchise The franchisee will be working from a depot owned and run by the franchisor, operating their own rounds and delivering products approved by the franchisor within a defined area. Depot Franchise In this instance, the franchisee runs their own depot, servicing a mixture of trade and retail customers. Job Franchise This is usually a one-person business that the franchisee could run from own home. You will find that a wide range of different types of business use the various franchise methods described above. Examples Building services Catering from fast food restaurants to hotels Cleaning services both commercial and domestic Direct selling and distribution Domestic services such as kitchen and bathroom Employment and training agencies 4

7 Key advantages 1 Reduced Capital Risk Increased potential to expand as your business can use the capital of your franchisee s so your own financial commitment is reduced. 2 Ability to Expand Rapidly Since the franchisee s will deliver and manage their own individual operations. Your franchisee recruitment programme should maintain your growth schedule with less capital outlay from you. 3 Access to local marketing knowledge and contacts Which is part of what your investment franchisees bring. 4 Removes the need for additional staff and property locations You will need fewer staff at head office and in the field than a conventional business because the franchisees are self-motivating. 5 Possibility for international expansion The franchise system lends itself particularly well to international expansion. The benefits of opening in a foreign country through a master franchisee are similar to those of appointing franchisees in your own domestic market but of course, on a much larger scale. Key criteria for success Clear identity Proven track record Established gap in the market for your product and key customer targets Experienced and efficient management support systems Defined operational methods Healthy Profit Margins Strong marketing and branding programmes Established Business System Easily and quickly transferable knowledge

8 Main disadvantages 1 Reduced Profit Margins You don t own the branches so you do not make the same level of profit as a company-owned chain. This is expected, as it is the franchisees that invests the capital to open the branches. 2 Less control You have less direct control over the network than you would have if it were company operated. You will however be able to terminate a contract with a franchisee that doesn t follow your system. 3 Misuse of Business System You pass on the rights to the franchisee to use your trade mark and business system. You need to be sure that you have some recourse if they are misused, particularly if the franchisee decides to leave the network and set up in competition, using the knowledge you have provided. 4 Lack of Motivation You need to select your franchisees with great care to ensure that your network reaches its full potential. It can be difficult to motivate franchisees that have reached their comfort zone. You need also to allocate your territories or locations effectively to maximise the national potential of your business. 5 Franchise Selection Your rate of growth will be determined by your ability to attract franchisees and the availability of candidates who have sufficient capital and are of the right calibre. It is normally a progressive development starting at a cautious pace and gradually gaining momentum. 6

9 Areas that you and your management team need to consider 1 Your current Business Growth strategy Does Franchising support the growth strategy you are looking for? 2 Customer growth potential Are there more customers with an appetite for your product or service? 3 Protection of your USP While easily transferable knowledge is important for success, put in place robust systems that ensure its not so easily copied and therefore devalued. 4 Funding Investment costs typically range from E50,000 to E300,000. Royalty period payments can be lengthy. This can play havoc with cash flow. A detailed financial plan is vital to ensure that you can support your initial development costs and give your franchising business its best possible start. 5 Determining the skills levels of the franchisees with which you partner The gaps they may have in understanding your industry or sector will need to be filled by training and investment on your behalf. 6 Ongoing investment of your time on profit monitoring Your experience will be responsible for carrying out turnover audits for the franchisee. This unique partnerships ensures your experience supports the success of the people who set up a franchise. 7 Would an alternative business model be more suitable? Franchising may not be the solution and at this point its worthwhile exploring as many options as you can. Funding Your Franchise Development As the cost of developing a franchise can range anywhere from 50,000 to 300,000 and the waiting period for income royalties can be lengthy, you will need to develop a detailed financial plan. While awaiting income royalties, the business or some other source must be able to support development costs. The primary source of funding for franchise development is from cash generated from your established profitable business. Franchisable businesses will have proven their success by generating profit and positive cash flow. This cash flow may allow you to raise short and medium term debt to fund the development of your franchise brand. Costs Include Finance of pilot Development of brand Management recruitment Franchisee selection and management process Development and maintenance of operations manual 7

10 What next? Carry out further research as to the viability of your current business model Bring together a strong support team to help. Some of these may already be part of your current business support system e.g. franchising consultant, an accountant, a market research consultant, solicitor, design consultants and legal and tax advice Scope investment outlays such as the financing of initial pilot, development of brand and management recruitment Agree franchisee selection and management process Draft your operation manual and put in place a maintenance procedure Get in touch with your bank and explore funding options And finally, there is currently no Irish Legislation specifically applied to franchising in Ireland. Before developing your franchise brand we strongly recommend that you take specific legal and financial advice regarding your proposed franchise investment Across the page you will find franchising specific sources which will help you gather the information and confidence you need to make a decision. These sources are easily accessed through the internet, our local branches and at yearly Franchising events. The opportunities are endless and we wish you well in your venture. Talk to our Enterprise Advisers at any point and remember we are one of the fastest growing financial companies in Ireland and we d love to do business with you. 8

11 Helpful Sources of Advice Ulster Bank: Irish Franchise Association: British Franchise Association: European Franchise Federation: County Enterprise Boards: ISME: Small Firms Association: Enterprise Ireland: US Commercial Service: Chambers of Commerce: Franchise Information Website: Franchising Events Useful Publications Franchising in Ireland Survey 2006 Irish Franchise magazine Business & Franchise Options magazine Available nationwide. Helpful Advice for your Business Planning your business Available from your local Ulster Bank Branch.

12 For more information or support call into any Ulster Bank Branch and talk to us. Ulster Bank Ireland Limited. Registered in Republic of Ireland. Registration Number VAT number of Ulster Bank Ireland Limited is IE/9/E/61585W. Registered Office: Ulster Bank Group Centre, George s Quay, Dublin 2. Ulster Bank Ireland Limited is regulated by the Financial Regulator. Calls may be recorded. October 2008.