When you’ve worked hard to establish a successful business, you might consider franchising. Starting a franchise can expand your business’ geographical reach, increase revenue, and help you scale more sustainably.
If you’re franchising for the first time, what do you need to know? In this article, we cover the essentials for starting a franchise and offer tips to help you make it a success.
Key takeaways
- As a new franchisor, you’ll need a suite of documentation, including a business plan, a franchise agreement, an operations manual, and onboarding packs.
- Professional advisors, such as a business consultant and a solicitor, will help you avoid costly mistakes.
- Consider testing your model with a short pilot and obtaining accreditation from the British Franchise Association to attract trusted franchisees.
What is a franchise – and how does it work in the UK?
A franchise is a business model for expanding your business. As the franchisor, you own the business brand and the systems. You usually retain control of the intellectual property rights and processes. The franchisee pays an initial fee to join the franchise network, and you provide onboarding and initial support to help them understand the business.
The franchisee runs the business as their own venture and trades under your brand. They pay you ongoing fees in the form of royalties, which are usually calculated as a percentage of their sales.
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This setup works for the franchisee because they can hit the ground running with the reputation and goodwill of an established business behind them. They gain the freedom to be a business owner in their own right.
The relationship between franchisor and franchisee is governed by a franchise agreement. You’ll prepare a precedent for each of your franchisees, but, as with any contract, it can be negotiated for each franchisee.
How much do you need to start a franchise?
There’s no fixed amount, but most businesses need to budget for upfront costs to set up a franchise, including:
- A professionally drafted Franchise Agreement
- Legal advice for intellectual property issues and competition laws
- Consultancy fees to provide expert guidance on the franchise structure
- Marketing to attract franchisees
- Creating operations manuals
- Developing training to onboard new franchisees
As a rough guide, this can cost between £15,000 and £80,000, but costs will vary depending on several factors, including differing fees between professional firms.
How much does it cost to buy a franchise?
Smaller franchises just starting out tend to require an initial investment of around £500. However, larger established franchises may seek an initial fee of more like £100,000 or more. The franchisee will make an initial investment into the business, and the level of the initial fee is decided by the franchisor (you).
Ongoing costs are usually based on franchisee turnover or sales volume, and the terms for royalties in the franchise agreement.
Is a franchise a limited company?
A franchise is a business model, so the franchise itself is not a limited company.
Franchisors and franchisees can technically operate as sole traders or partnerships. However, it’s strongly recommended to run as a limited company to limit personal liability, among other things.
You can even include a requirement in your franchise agreement that each franchisee use an incorporated business.
Are there different franchise models available?
There are a few different ways that you can structure your franchise. When you’re just starting out, you probably want to begin with the unit franchise model. Then, as you grow, you may diversify into the master franchise model.
Unit franchise model
The unit franchise model is also known as a ‘business format franchise’ or a ‘second-generation franchise.’ You grant a franchisee the right to operate in one location or in one branded business. That’s the direct unit model.
A multi-unit franchise is one in which a franchisee runs multiple units within the same franchise in a specific area.
Master franchise model
With a master franchise model, you grant franchisees the right to sub-franchise within an entire region or territory. You provide the training and support to run the business, and the franchisees may open several units to expand your overall footprint.
This model usually works best when you’re working with investors who have enough finances to develop a network of their own franchisees.
Your franchise will grow quickly, but you’re placing a lot of trust in your business partners. You should be confident that they have prior experience in franchising or multi-site business management.
Step-by-step: How to start a franchise business in the UK
Step 1: Achieve financial stability
This may be an obvious point, but it’s a necessary first step. Your business should be profitable and stable before you can scale it by franchising.
Step 2: Prepare a business plan
Plan how you expect to grow. Are you targeting a particular geographical area? How many franchisees do you expect to need in year 1, year 2, year 3, etc.?
Step 3: Talk to a business consultant
A business consultant with franchising experience can guide you through the process and help you avoid costly mistakes.
Step 4: Instruct solicitors
You’ll need corporate commercial solicitors with experience in franchising. Your solicitors will draft key documentation for you, including: the franchise agreement, non-disclosure agreements (NDAs), and exclusivity agreements.
Step 5: Prepare a franchise agreement
It might take longer than you think to get your franchise agreement drafted. You’ll need to make some important decisions on the rights you grant to your franchisees. To get it right, you’ll likely need a few meetings and calls with your business consultants and solicitors.
Step 6: Prepare a franchise manual
This is the document you give your franchisees to explain how the franchise should operate and how you expect them to conduct business.
Step 7: Get accredited by the British Franchise Association
The British Franchise Association (BFA) promotes ethical standards across the sector and offers accreditation to credible UK franchisors. People looking to take on a franchise generally want to work with businesses accredited by the BFA. Getting accredited makes your franchise more attractive to franchisees.
Step 8: Conduct a pilot franchise operation
The pilot is usually a 12-month trial period for the franchise. You might choose one or two franchisees to test your direct unit model. They might find gaps in your operational manuals and training, which you can fix before a full launch.
The pilot gives you an idea of your model’s viability and whether it’s scalable as you envisaged.
Step 9: Get a valuation
A professional valuation will help you determine the initial onboarding fee when you market the franchise for sale.
Step 10: Market your franchise for sale
You can advertise your franchise for sale with Franchise UK, or you could use your social media and franchise exhibitions to market the opportunity.
Step 11: Select suitable franchisees
Get to know your candidates and learn why they want to become a franchisee of your business. Check they understand what’s involved, have some experience in running a business, and are prepared to operate under your brand guidelines and business processes.
Need help setting up your franchise structure?
Before you franchise your business, you need to get your ducks in a row. Do you need to convert from a sole trader to a limited company? Do you need to appoint new directors or ask others to resign? Do you need to register for VAT for the first time?
Quality Company Formations can help you with these services so that your business is ready to begin your franchising journey.
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