Brands of gold?
New franchise operations appear on the scene with a predictable regularity, but sorting the good opportunities from those which are simply going to eat up your savings is not always easy.
Franchise consultant Stuart Price splits the catering franchises on the market into core brands and periphery brands. In the core brands he includes the likes of McDonald's, Burger King, KFC, Wimpy and Pizza Express. The periphery brands he describes as those with fewer franchisees and a less-proven franchise operation.
The core brands tend to offer a more assured route to success. This is down to a number of reasons: the power of a leading brand; the fact that the companies operating them have substantial experience of franchising; and, because they can afford to be highly selective about which franchisees they take on, their franchisees tend to be people who will stand the greatest chance of success.
Although a McDonald's franchise does not come cheap, some of the company's franchisees report margins of 10%, which compares with an average of 5-6% in the fast food industry. Indeed, the company claims to have made more millionaires than any other company.
By contrast, the pizza home delivery market has seen a lot of franchisees selling up because they cannot make adequate returns. Margins have been severely squeezed because of high levels of competition, leaving little spare to cover often unforeseen costs associated with keeping a fleet of mopeds on the road.
The riskiest franchises tend to be those where the company has a limited track record in its own company store and very few franchisees. Any company with less than a year's trading record should be treated with extreme caution - ideally it should have had at least three years' experience in which to prove the success of its product before franchising it.
Recent research by fast food consultant Stuart Price and the University of Westminster revealed a disproportionately high level of catering franchisor failures between 1984 and 1994 (if the franchisor's business collapses there is a domino effect around the franchisees).
Small companies tend to look at franchising as a way to grow quickly, but they often lack the necessary criteria to franchise successfully. These include: a system which enables them to manage and service franchisees' needs; a brand name which is generally recognised, so giving value to the franchise; a product which can easily be copied by others; and a thorough understanding of the market in which they wish to franchise.
Even if a company has franchised successfully abroad, there is no guarantee its product will take off in the UK. US fast food chains, such as Wendy's, Arby's and Popeye's, have successful franchise operations in the USA, but are yet to prove themselves in the UK market.
Before taking on a franchise, it is always advisable to check whether the organisation is a member of the British Franchise Association. The organisation vets members before accepting them, which, although no guarantee, means at least some of the more unscrupulous operators are weeded out.
Taking on a franchise isn't simply a case of picking the one you like the look of - the bigger the brand name and the higher the likely returns, the more you are going to have to sell yourself to be accepted as a franchisee.
Franchisors expect you to have a business plan, or at the very least to illustrate business acumen, if you are to stand a chance of being accepted.
The big name brands only take on a tiny fraction of the people who apply to them to be franchisees - they receive several thousand inquiries a year, but only a handful even make it on to a shortlist.
Next week: how to be a franchisor
