Assessing a risky business

Franchising has traditionally had a bit of an image problem in the UK. But the right formats offer those wishing to start their own businesses the opportunity to do so within an already tried and tested system.

However, there are still risks involved and those thinking of taking this approach should first spend time studying the market, competition and growth prospects. And if they have their eye on particular product or service franchises, they should check how some of the franchise holders are performing.

Last year was a record-breaking year for franchising, according to the latest NatWest/British Franchise Association survey. Turnover rose l3 per cent to £10.3bn and the number of franchise systems grew at the fastest rate since l999. There are many variations, but six categories predominate - catering and retailing, personal, property, automotive and business services.

Are they all making money? Nine out of 10 franchisees say they are trading profitably - a small increase since 2004. Most franchisors and six out of 10 franchisees expected their business to improve. Average turnover for franchised businesses broke through the £300,000 barrier last year, but 27 per cent reported annual turnover of only £50,000 or less. A similar percentage claimed annual turnover in excess of £500,000 and 4 per cent more than £2m.

The attraction of franchising is that it offers a degree of independence and scope for enterprise, but it is not the most flexible trading system. Iain Murray, the author of The Franchising Handbook, points out that such restrictions are "a source of cohesion and strength and present few problems provided the market is stable". However, he adds that it can become frustrating when individual franchisees spot changes in trading conditions, but under the terms of their trading agreement can do nothing on their own to adjust.

It is important to remember that the biggest single reason for the owner of an operation to franchise a business idea is that it enables him or her to get hold of other people's money. The franchisee pays for a business; the franchisor taps into the aggregate resources of a number of franchisees, who provide the capital to enable him to open more outlets. The franchisor has the benefit of commitment from franchisees with a significant stake in the business, rather than less committed manager and staff.

The franchising relationship, as Murray describes it, is a kind of commercial marriage. The franchisor and franchisee court and formalise the relationship which has its ups and downs but, all being well, settles into harmonious understanding. It is not a marriage of equals.

But great gains can be made. One example quoted by Murray is pub operator Mitchell & Butler's decision to launch a franchise, which fitted well with the aims of one of its managers who wanted to work for himself. The new franchisee put together a competitive food and drink offer, which gave the pub a distinctive identity. In his first year the return on investment was 500 per cent.

Such examples suggest it is unnecessary to follow the route of well-known franchise operations, such as the printing and business services group Kall Kwik or the fast-food group McDonald's. If you already operate a successful business, your route to expansion could be based on franchising.

Opening a shop? Then offer something special

Not so long ago, in my local high street there were four or five grocers, along with butchers, newsagents, tobacconists and confectionery shops too, but they've gone, blaming the onward thrust of supermarkets and multiples.

The same is true throughout most of Britain. Yet despite the closures, in many towns and villages independent convenience and specialist shops still flourish, even where there are supermarkets a few miles away. Our local chemists seem to flourish, although supermarkets sell wide ranges of healthcare and toiletries lines, often at low prices. Two of our high street butchers survive, with one of them winning national awards and at Christmas attracting queues of customers for their turkeys.

Our DIY shop has built a reputation for stocking almost everything you could possibly need and always providing cheerful, friendly and efficient service. The business is being expanded sideways and at the rear.

The lesson is clear: If you still want to be an independent retailer today you've got to offer something special. Sadly, too many would-be retailers start with a passionate belief that they can create a business offering finer delicatessen wares, wines, gift lines or super kitchenware without worrying too much about location or competition. It's no good dreaming of opening a high-class greengrocers unless you can match or improve on the quality and presentation, if not the prices, of supermarkets.

The other key commitment has to be to personal service. Even if you employ part-time staff on Saturdays, as owner manager you've got to be centre stage, keeping an eye on every detail.

Retailing can be tough. There will be more failures. But it is not always the fault of the "big boys". Most shoppers like the convenience of one-stop shopping at the local supermarket, but there are many things they prefer about the specialist shop as long as the products and the service, range and presentation are outstanding. WA