INTRODUCTION
Selling a franchise in an established brand is a growing method of business expansion. It is not only used by large international brands but by small businesses which want to expand whilst limiting their exposure to capital investment and the everyday costs of running a business.WHAT IS FRANCHISING?
For the owner of a brand it is a method of expansion, which relies on other people making a capital investment. Although it is normally associated with well-known names it is just as often used by small businesses, which have developed a successful brand, based on an established identity and a proven business system.For the purchaser it is a means of starting a business, which already has an established identity and system of work.
As with any other new venture, there are advantages and disadvantages for both the brand owner (the franchisor) and the investor (the franchisee).
ADVANTAGES
FranchisorThe franchisor will have developed a tried and tested business system, which has been established into a well-known brand, whether it is international or just local. By selling a franchise the franchisor can expand whilst reducing his exposure to large capital expenditure and without employing additional staff.
Franchisee
Because the franchisee is buying a proven formula some of the risks associated with other business start-ups are reduced. Also, because the franchisee is buying the right to use a proven system he can save time and money by not having to develop his own.
DISADVANTAGES
FranchisorThe franchisor must select his partners with care otherwise the brand's name may be damaged. However, the franchisor can often reduce the risk by providing thorough training and by carefully selecting only suitable partners. His risks can also be reduced by insisting on a contract which carefully controls how the franchisee operates his business. It might provide for investment in marketing, an advertising budget or the use of specified products (these may even be supplied by the franchisor).
Franchisee
For the franchisee the risks may be many and various. Whereas the franchised brand and system may be tried and tested success is not assured and, like any other business, the franchisee will need to make a large capital investment, probably finances by borrowing, as the use of an established brand comes at a price. The cost of the product may also limit the possibilities for success.
Before buying a franchise the purchaser will need to be sure that he is not paying too much for the business with the consequence that the business is doomed to failure. In this regard the purchaser must make sure that any forecasts used by the franchisee are not over optimistic. He must also ensure that, if the agreement has to be terminated, that the consequential terms are not too onerous.
PURCHASING A FRANCHISE
There are many types of business, which are franchised, and many different types of agreement but at the heart of any franchise is a contract. There is normally a principal contract whereby the franchisor licences the franchisee to use his brand name and business system; there may also be a variety of secondary contracts; these might cover such things as staff training, equipment, leases of property and even financing. The contract may also contain terms relating to such things as trademarks and trade secrets, software licences, targets and profitability, marketing budgets and termination.FINANCING
Is the business viable - in particular an assessment must be made as to the cost of the product being purchased. Whereas the franchisor has an interest in the success of the franchisee, ultimately, the franchisor is selling a product to make a profit. The franchisee should consider not only the total cost (i.e. the amount payable on the contract together with any other costs, such as the cost of borrowing) but also the value of what is being sold: is the brand sufficiently strong to be a success. He should also consider the permitted geographical area of operation or the number of other outlets that the contract allows the franchisor to licence in the vicinity.The franchisor may also be selling a total package, which includes finance. It so, is it being sold at a fair market rate?
Ultimately, a thorough analysis of the franchisor's contract of sale must be carried out before any decision to purchase is made.
