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Advice Zone: Franchising

28 January 2005 by

Franchising is an option worth considering when setting up a hospitality business, and there's a wealth of opportunities available, from hotel brands like Holiday Inn to burger operators like McDonald's.

The model offers franchisees the chance to leverage an existing brand and can help to attract customers in those difficult first months. While the model places some constraints on the operator, it also takes out some of the guesswork when opening the business as, hopefully, the idea will have been proven to work elsewhere.

Aligning with an established brand may also help to attract financing. And where the brand is new to the market and is desperate to get established, it may be possible to negotiate some better deals.

As the franchisee you will still put in your own money and generally have to take out a lease, although the franchisor will sometimes take on the head lease and then sublet the premises to you.

For the franchisor the model represents a potentially lucrative new revenue stream by allowing other operators to run outlets under their name and taking a percentage of the franchisee's profit. The model also offers the franchisor a way to expand and enter new markets without stumping up the necessary upfront investment capital.

Check list

  • Look at as many comparable properties as you can.
  • If the franchisor is the landlord, establish whether they are charging more rent to you than they are paying to the freeholder. While 5-10% more isn't too bad, 30-40% should be questioned.
  • Have a full structural survey undertaken before signing.
  • Try to negotiate rate clauses in the lease that coincide with the terms of the franchise agreement.
  • Find out who's responsible for carrying out refurbishments.

Produced in association with the British Franchise Association and Paisner & Co.

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