Go it alone, or go with a franchise?

Many people dream of starting their own business, often while toiling away in an office or factory on a grey Monday morning. But going it alone is a leap into the dark, particularly for those with mortgages to pay and families to support.

Building a successful and profitable business from scratch can be exciting and rewarding and bring huge rewards. But the failure rate is high. The ‘middle way’ is franchising. Put simply, this is selling the products or services of a major brand under licence. You are working for yourself, but with the technical, marketing and financial know-how of a brand behind you.

Franchising was pioneered in the United States at the turn of the last century, when General Motors granted exclusive territories to its dealers. Here in the UK, the first franchise model was the tied pub network operated by breweries. Statistics show that operating this way carries a greater degree of security and profitability than starting your own business from scratch.

The system clearly works, as latest figures show that:

  • The UK franchise sector contributes £15 billion annually to the economy, up 46 per cent in the ten years to 2015
  • It employs more than 620,000 people, of whom are more than 320,000 are full-time
  • The number of franchisee-owned businesses stands at 14,200, a 14 per cent increase in the two years to 2015

As with any new venture, there are lots of things to consider before taking the plunge into a start-up or franchise. The first is setting up your business and a good place to start is with company formation agents.

Here are some things to be aware of when starting your own business or taking on a franchise:

A head start on branding

A major challenge for any new business is gaining brand recognition. You are an unknown quantity and changing that can take a long time and lots of hard work. It can be a long, hard road with no guarantee that you will be a household name by the end of it. That problem does not exist with the vast majority of franchises. Big franchise brands are a part of British life and we use them to buy our food and fuel, grab a bite to eat, rent a vehicle and for many other daily needs. The customers are already there because they know your brand. Franchises operating successfully today read like a who’s who of the British high street and include:

  • Restaurants (McDonald’s, Subway, Pizza Express)
  • Domestic services (Servicemaster, Dyno-Rod)
  • Home care (Driving Miss Daisy)
  • Health and fitness (Anytime Fitness, Hotpod Yoga)
  • Vehicle rental (Thrifty Car Hire)
  • Estate agency (Winkworth)

Getting advice and support

This is a key advantage of a franchise. You start with a big company behind you and it’s in their interest to ensure that you make a success of it. Marketing and advertising, training, IT systems and equipment will be provided for you, either free or at reduced cost. Practical advice and support will be available from company experts in areas such as sales and human resources, you will receive initial training and, in many cases, they will handle shopfitting at your chosen location. Everything will be covered in the franchise agreement you sign, so study it carefully!

As for business start-ups, they are largely on their own, although many prefer it that way as they are free to make all their own decisions without referring them upwards. There are plenty of sources of useful advice, including a mentoring scheme run by the Government. In many cases, entrepreneurs bring their own expertise to their business and buy in other skills as required.

Marking your territory

Businesses adopt the franchise model in place of a traditional network of outlets and that means every franchisee will get their own territory. Just as there is no sense in having two branches of the same business on a high street, so big franchises need to cover a geographic network without overlapping. Where you set up and the type of premises you acquire will be dictated by the franchise holder to give you the opportunity to reach the maximum number of customers. This often means prime locations in major shopping areas or business districts. Very few start-up entrepreneurs could manage that, often having to opt for cheaper, secondary locations, or even working from a home office and relying on online sales.

Access to finance

Nothing in life is free. You will have to put your own money in at the beginning and there will be ongoing charges to factor in for start-ups and franchises. The amounts required for a franchise vary from business to business and sector to sector. Typically, you will need an initial lump sum and will then have to pay management and royalty fees and purchase goods and equipment on top of heating, lighting and other running costs.

If you do need additional finance, banks tend to favour franchisees with a major brand behind them over entrepreneurs trying to get their own business off the ground. The risks are lower therefore the funding is more likely to be forthcoming. There are also grants available for small business and franchise start-ups in some cases, from central and local government, the EU, regional development bodies and the Prince’s Trust.

For small businesses, funding can be a tough area, as higher failure rates in this sector make lenders more risk averse. If you are one of the 100,000 small businesses whose loan requests are rejected by banks each year there are alternative sources of funding, including:

  • Venture capital investors are a major source of investment in new businesses and will demand high growth and a share of the company in return
  • Crowdfunding is a relatively new investment model made possible by the internet, where businesses sell their idea to the public to attract investment
  • Angel investors put money into a start-up and get a stake in the company in return. If the venture fails, as the majority do, they lose their investment
  • Friends and family are an often willing and flexible source of investment and they are unlikely to charge extortionate rates of interest!

The rate of success

Nothing in life is guaranteed, but franchising is a secure way of going it alone. The figures, from the British Franchise Association (BFA), speak for themselves, with growth trends consistently strong across more than 1000 brands in a wide range of sectors. Fewer than four per cent of franchise businesses fail for purely commercial reasons annually and 90 per cent are profitable. By way of contrast, up to two-thirds of independent start-ups are likely to fail in the first three years. Crucially, amid the uncertainties surrounding Brexit, franchises weather recessions better.

However, those small businesses that do survive make a huge contribution to the UK economy and provide jobs for millions of people. Figures show that:

  • There were 5.7 million private businesses in the UK in 2017, up 197,000 on 2016 and 2.2million more than the year 2000.
  • Small businesses accounted for 99 per cent of all private sector businesses at the start of 2017, most of them small or medium enterprises (SMEs)
  • SMEs employed 16.1 million people, 60 per cent of all UK private sector jobs

Room to manoeuvre

Frank Sinatra chose to do things ‘My Way’ in his timeless hit, but he would never have succeeded as a franchisee. The flip side of all that support from your chosen brand is that they will expect you to operate in line with their policies and procedures. This can include the way offices and stores look, branding and point of sale material, advertising and marketing materials, opening hours and many other aspects of the business. There is a logic behind this: customers using that brand expect the goods they buy and their overall experience to be identical wherever they go. Starting your own business gives you the freedom to create your own rules, although you will also have to bear all the costs of setting up, acquiring premises, buying stock and equipment and paying for the expertise you need in areas with which you are unfamiliar.

You will have to work hard

Any successful franchisee or small business owner will tell you that there can be no success without hard work. You get nothing for nothing, so clock watchers and people hoping to spend more time with their families need not apply. On the contrary, you may need family support to make your venture a success, particularly in the early days. Be prepared for long working weeks, irregular hours and weekend working.

The upside is that there are countless success stories, with many small business people going on to enjoy huge growth and franchisees becoming millionaires. Others have used their franchise experience to set up and run their own hugely profitable businesses, many of which are household names.

Whatever path you prefer, if this has whetted your appetite, some good places to start are the Government’s business advice site, the Federation of Small Businesses or the British Franchise Association.

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