Looking to enlarge

If you have decided you want to expand your business, franchising can sound the perfect opportunity: you increase your presence in the market, and somebody else puts in the finance and the labour. Like most things, however, the reality is not that simple.

Just because an existing business runs well, it does not automatically follow that it will franchise easily. "Potential franchisors must realise that not all businesses are franchisable," says fast food and franchising consultant Stuart Price. "It is essential to do a feasibility study first."

A franchisable operation is one that is easy to replicate, easy for the franchisee to learn, and should have a market demand beyond the geographic area of your own business. To prove the business can be replicated and its systems standardised, you should ideally have more than one company-owned outlet before moving into franchising.

It is also vital to have a good record of trading to ensure the product is viable - ideally, this should be for at least three years, the period during which most new businesses fail, and it certainly should not be for less than one. The franchisor failure rate is highest among young businesses with relatively few franchisees.

As well as assessing your operation, you will need to assess the market-place in which you intend to franchise. Your product works in its current area, but does it have universal appeal? Is it a unique product, or is it a "me too", following other operators who already have a firm grip on the market-place?

Before you can take on franchisees it is important to take a close look at the management of your company to assess whether you are capable of providing the support network and the culture needed to run a group of franchisees. "Managing franchisees is very different from managing employees," says Price.

Setting up the systems to support franchisees is an expensive operation, involving a lot of man hours, legal fees and other costs. You will need a franchise agreement, drawn up by a good franchise solicitor, to ensure your own business is protected; you will need an operating manual which details how a franchisee is to run the business; and you might want to set up a pilot operation to test the feasibility of franchising your business.

It is vital, therefore, that your business is well-capitalised and that you are not viewing franchising as a way to grow via somebody else's money. Done properly, franchising is expensive; done badly, it can only damage your business in the long run.

Successful franchising depends on a fairly rapid rate of growth - but not so fast that management and finances cannot keep pace. Without a good spread of existing franchisees it is difficult to persuade other people to invest in the concept - which means you will be restricted to taking on people who may be less than ideal. Economies of scale is also an important element - the greater the number of franchisees, the more you can spread your costs and the greater the income you receive.

Case study: Pierre Levicky

Pierre Levicky made the classic mistake when he decided to franchise his small group of Pierre Victoire restaurants. He didn't have enough capital to expand through company-owned outlets, so he took the view that franchising would be a way to grow while letting other people put up the money.

"But franchising is very expensive - it's involved an investment of £1m so far to put together the whole package," he says. "If you are really going to be ethical and provide the necessary support to make sure the franchisees survive the early days, it costs a lot of money."

Levicky points to poor economies of scale at first. "It's important to realise that the income you receive from franchisees doesn't match the resources you have to invest in the early days - in our case we didn't break even until we reached about 25 franchised units," he recalls.

"For example, even if you only have a few franchisees you still have to employ a training person and an operations person, at £20,000-£25,000 a year each, plus their expenses for travelling around the country - yet all you receive is 5% of the turnover of a handful of new businesses.

"Legal fees are another enormous cost - our first franchise agreement cost £9,000 to draw up - and we have changed it six times in the past four years as we have refined it. Likewise, the operating manual probably cost another £15,000."

In many ways Levicky had his work cut out for him more than somebody setting up a fast food operation. A traditional restaurant is not standardised in the same way that a McDonald's is, so the back-up needed to transform a franchisee who might previously have been a computer programmer into a successful restaurateur is enormous.

Now the company has reached a sufficient size it is able to be selective about the franchisees it takes on. However, in the early days, without a track record, it had to sell itself hard to get people to invest.

"Until you reach about 25 outlets you don't have much choice about who you take on; it's more a case of winning over people with capital who are committed. It took 11 months of negotiation to get the first couple of franchisees," says Levicky.

"Some people aren't capable of becoming restaurateurs - they think the concept sounds glamorous but they can't handle washing the floor or, if they are used to an office environment, perhaps cannot relate to the ways of a chef.

"We always paint the blackest picture before they start, but sometimes things don't work out - we've changed three franchisees by mutual agreement since we started."

According to Levicky, the first three years are tough and require everything to be ploughed back into the business to consolidate and improve it. "But you mustn't lose faith, because when you've cracked franchising it is very profitable."

And how profitable is it for the franchisees? "In the first year most make £25,000-£30,000, but we've had cases where people have worked very hard and made £120,000 in the first year."

So would he choose the franchise route again? "In the early days I wondered why I was franchising and didn't just stick to what I did well, which was running restaurants. We were lucky in that we had an income from the company-owned restaurants to finance the franchising.

"But now we've turned the corner and it's working well. In fact, it has become very exciting because we have people from all walks of life becoming franchisees. They can bring new things to the business, for example, in terms of computing and marketing."