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Expansion & Franchising – John Burns

Franchising in 2023: A Better Option for Business Growth?

Big names in retail are allocating greater resource to franchise expansion. A sign of the times, or recognition of franchising as a lower risk alternative for business growth? John Burns, a Partner at Gateley Legal, discusses the franchising model and its benefits.

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Odds are you are probably familiar with Subway, home of ‘Hearty Italian’ bread and meatball marinara. What you may not know, however, is how its founders took their ‘submarine sandwich shop’ from a single store in Bridgeport, Connecticut, to a global business counting more than 44,000 branches around the world.

Capital-light expansion
Franchising as a business model has been popular for some time. Recently, however, more businesses are announcing their intentions to invest in and expand their franchise-based strategies.

Convenience retailer Co-op, for example, plans to triple the number of franchise stores over the next three years as part of a “capital-light expansion programme”, taking its number of franchise stores from 43 to 150.

In the current business climate, franchising’s increasing popularity is understandable. It is more likely to succeed than traditional business models, with only seven per cent of franchises failing within their first three years, according to the British Franchise Association (BFA). That’s compared to the 90 per cent of start-up businesses that fail within the same period.

It also offers high potential to be profitable, with 60 per cent of successful franchises exceeding a turnover of £250,000. Small wonder, then, that the UK franchise industry is now worth around £17.2bn, according to Franchise Direct.

Mutual benefit
The unique functionality and mutual benefit of the franchisor-franchisee relationship plays a big part in the business model’s impressive success rate.

Instead of investing their own capital, time and resources in opening new businesses in different locations, a franchisor develops a franchise agreement that essentially passes the responsibility of launching and running the new business onto the franchisee.

Providing this relationship is built on solid foundations of trust and a watertight franchise agreement, both franchisor and franchisee stand to benefit.

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For the franchisee, investing in a franchise can provide all the benefits of entrepreneurship – independence, flexibility and self-sufficiency, for example – without taking on the risks as well. The franchisee also has access to support, resources, a proven business model and brand awareness, all of which makes it easier for a franchisee to hit the ground running and achieve profitability.

Providing a franchisor is willing to let a third-party ‘hold their baby’, they also stand to circumvent the traditional challenges of expanding a business without additional support.

In the franchise model, for example, the cost and resource required to establish the business in a new location is largely passed on to the franchisee. They provide the fees and royalties stipulated in the agreement to operate a separate legal entity under the umbrella of the original business’s branding, values and services. They can also use their own capital, local insights and connections to drive the business forwards – perhaps even into areas the franchisor alone would find difficult to penetrate.

Furthermore, the more franchises a business can create, the easier it may be for said business to build strong brand recognition among current and potential customers.

In a 2017 article by NBC exploring why chain restaurants were particularly popular among millennials, for example, one franchise owner cited “the consistency factor” as one of the biggest drivers. “You can walk in to any one of our restaurants in any part of the country and expect the same great experience,” he said. “We’ve found all of our customers, especially the millennial segment, are drawn to that reliability.”

Not a sticking plaster
Potential franchisors beware though: franchising is not a suitable option for every business. There are also numerous aspects of the model that need to be carefully managed and backed by strong legal advice if they are to benefit the business in the long term.

Choosing the right franchisee is particularly important. A franchisee will essentially take the reins and be the face of the business in a new location, so a franchisor must be certain that they meet all the requirements in terms of skills, experience, values and integrity. A top-notch CV is often not sufficient to be sure of this, so franchisors will need to be ready to undertake extensive due diligence and background checks on an individual before the agreement is even drawn up.

The perils of not doing so can, in the most serious cases, be detrimental to both the business’s balance books and its brand reputation.

Not all businesses are suited to the franchise model either. The best franchises come from easily replicated businesses with wide-ranging appeal. Where a business model is more niche and complex, it may be harder to reap the full benefits of franchising without significant upfront investment. Businesses in distress may also lack the initial capital and resource required to develop an effective franchising strategy.

The fast-track
Franchising is not the sole domain of the coffee shop or restaurant, however. In fact, the BFA counts such diverse businesses as cleaning services, aqua-natal yoga providers and sign makers among its franchisor membership.

While not a sticking plaster for a failing business, the franchise model does offer a lower-risk alternative, both for the budding entrepreneur and the business owner on the lookout for the next step in the growth of their business. It could even be the catalyst to global expansion, like it was Subway back in 1965.