Published on 23 May 2011 by Tony Groom
Many people dream of owning their own business and in the current economic climate are finding themselves pitched into starting up thanks to redundancy perhaps before they are quite ready.
A franchise often comes with an established brand, support in the way of training, promotional materials and advice so it is tempting to see buying into a franchise as a safer option than going into business completely independently.
But anyone considering sinking their savings or their redundancy payment into any kind of business is taking a risk and a franchise is no different. There are several key things to remember.
Most important is that while the franchise provides support, it may also impose limits on independent action in order to protect its brand and reputation. Its primary purpose is to make money for the owner of the franchise operation. The most successful franchises will have tested their business model and methods and incorporated these into the package offered to franchisees.
It can happen that a franchise has failed because the franchisee has failed to follow the advice and gone off in their own direction. Any individual franchisee is still effectively an independent business owner and has a responsibility to make sure they understand the fundamentals of the business and are confident that those can be met and maintained.
The big danger in taking on a franchise is getting a false sense of security that someone else is responsible for your business. This means that a business plan is as important for a franchisee as for an independent trader.
In a recent case of a franchise business in difficulty, a business rescue company was called in to help a parcels delivery company. One of the biggest issues was that the franchisor declined to take any legal steps to protect its intellectual property or the rights of its franchisees. A consequence was that people then believed it was fair game to ride roughshod over the franchise terms.
The franchise model offered complete geographical coverage and each local franchise unit’s success was therefore dependent on the efficiency of the whole network. As individual units began to fail that offer could not be guaranteed, thereby damaging the reputation of the others and the brand as a whole, but also people who had gained privileged knowledge within the franchise could then go and set themselves up in competition.
Equally essential when setting up a business, therefore, is scrutinising any legalities required of the franchisee.
There is nothing in UK legislation that requires any franchisor to operate to a particular standard in offering franchises for sale. The British Franchising Association is a voluntary self-regulating body for the industry and can offer a great deal of useful advice and guidance, but essentially the only way for a franchisee to protect themselves is to carry out due diligence. It is very difficult for a franchisee to take a franchisor to court for being misleading or negligent.
Any franchisor will present a potential franchise buyer with an agreement or contract and it is easy to assume that this is a legal document whose written terms are absolute and cannot be changed. However, before signing up to anything it is better to assume the terms can be changed and take legal advice, then challenge anything that the buyer is unsure about. If they are still uncomfortable then they should not buy into the franchise.
So the essential message to anyone considering buying into a franchise set-up is that yes, it can be a very good business opportunity but it does not eliminate much of the risk inherent in setting up a business and the same preparation work must be done as for any business start-up.