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Publications // 24/12/2015

How Franchising Can Benefit SMEs

Faced with a difficult economic outlook and likely rising unemployment, how do SME’s move forward? Adrian Price looks at the franchising sector and briefly explores the starting process of setting up a franchise.

According to the 2012 NatWest/BFA franchise survey, franchising continues to outperform the economic downturn with turnover up by 8% to £13.4bn and nine out of ten franchise units are trading profitably1. Clearly, the franchising sector is going pretty well and the BFA’s campaign is delivering results. However, prospective franchisees still need to do a lot of the hard legwork to determine when and where to invest their hard earned cash.

Setting up a franchise

Before setting up a franchise, gain an understanding of where the market is going and the amount and strength of competition at both a local and national level.

Ideally, you should be looking for a low initial investment with proven recurring revenue lines from multiple sources at good margins and, continuing customer relationships. Also consider a number of key areas such as the proposition, routes to market, ideal customers, sector analysis and working capital.

The levels of initial and on-going costs and the conditions are also important factors to think about along with, restrictions in the franchise agreement, including how long it will run and whether you will have the option to renew. Do not be afraid of asking about exit strategies and resale history from the outset, as ultimately you should be looking to make income returns annually and no doubt capital returns over a period of time.

The old favourite business plan heading of SWOT analysis (strengths, weaknesses, opportunities and threats) is more important than ever before. Firstly, it will help to articulate these areas to a bank manager to obtain funding but more importantly, they can gauge the likelihood and impact of risks and how they affect decisions about the business in the future. Always try to expect the unexpected and have a contingency plan to deal with any events that may arise.

“…nine out of ten franchise units are trading profitably”

Social, technological and economic changes are fast moving so consider what your business will look like in six months and three years – you may be surprised what could happen!

Finally, speak to current franchisees about the level of support, training and business development assistance provided. Information on the quality of the goods or services will also provide a wealth of information not available on the internet. Look for franchisees with a similar background or who are at differing stages of development in different areas and ask what successes and failures they have faced. Also research the franchisor. What is their background? How has the business grown? Have they lost any franchisees? Can they financially support the network? A franchisor who does not share this information should be avoided!

For further information or to discuss any issues raised in this article, please contact Adrian Price on 01489 566708 or aprice@menzies.co.uk.

Download the Menzies report.

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