Starting your franchise by selling part of an existing established area

Posted on 01/11/2011 by dugan

If you are wanting to sell part of your established area, then the best thing would be to put together a really great package and use this to get your first franchisee on board. It would not be called a resale, but rather a franchise area available with an existing customer base.

  1. Define the area and ensure it matches the overall potential of any new franchise area.
  2. Price of area would be usual franchise fee + the cost of goodwill (i.e. existing customer base). A usual and fair valuation would be based on 1 x annual net profit being generated by the turnover being sold with the area, although there are many variables that affect this.
  3. Produce a prospectus which is a mix of general prospectus and specific details about the ‘resale’.
  4. Allocate a budget in order to generate some interest in this area through direct advertising (Online advertising is best and there are a number of options to look at once you have a budget).
  5. Launch a mini advertising/marketing campaign to generate some leads from your area.

Sometimes this is a logical way of doing things, because if you end up having problems ‘selling’ this area with an existing customer base, then you will probably identify problems with the overall franchise package, which will allow you to sort them out.

My advice is to make the area very attractive to a potential buyer (if people can see they can make their money back in 6-12 months simply by maintaining or slightly increasing the customer base, this will be attractive) and you can do this by discounting the overall franchise fee as well as discounting the goodwill value of the customer base. On top of this, the person that buys will get unparalleled support from you as they will operate alongside you.

You will make sure they succeed, and in doing so, you will have a real ambassador of the business and the franchise and effectively you’ve created a pilot franchise who potential franchisees will be able to speak to and get good feedback to help them make their decision.

Contact me on my contact page if you need any advice or help in any or all of the areas above.

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What percentage of the franchise fee do recruitment agents usually take?

Posted on 12/10/2011 by dugan

This is a question I get asked a lot, so here is a straight and realistic answer to this
question:

In terms of percentage of franchise fee that franchise recruitment
consultants will look to take, it varies vastly according to their
expertise, experience, what they’re used to, and, at the moment,
unemployment can lead to consultants working on lower commissions.

Good franchise recruitment consultants will usually work on a mix of monthly
retainer and commission with the monthly retainer varying from £250 – £1,000
per month and commission varying from £1,500 to £4,000 (or between 10 and
25% of the franchise fee) depending on if you’re paying them a retainer or
not.

My advice to you would be to ensure that the costs of recruitment are
included in your franchise fee and these include:

1. Advertising/Marketing costs to generate franchise leads (whether online,
shows, print media, etc) – You should allocate a cost of at least £2,500 per
franchisee recruited. After 12 months you will know the exact figure by
being able to divide direct advertising costs by franchisees recruited, but
for now £2,500 is a realistic and achievable figure (depending on what your
franchise fee is)

2. Commission costs – it is best to work on allocating 20% of your final
franchise fee figure to a paid commission, although this 20% may end up
being a mix of retainers and commission

The summary is that franchise recruitment is not easy, nor is it cheap and
too many brands are advised badly by franchise development consultants, who
get paid to get you to the point of being able to recruitment franchisees
but have no expertise in that field, and in order to win the work, will not
go out of their way to tell franchisors about the pitfalls and costs of
recruitment.

If your franchise fee was going to be set at, say, £20,000, then you should
expect the recruitment costs to account for at least 25-30% of this fee.
What is left should cover all other direct costs involved including
materials as well as training, support, etc. After this most franchisors
will usually take a certain amount as profit, but effectively this will
cover the costs of development initially, and then become part of an ongoing
recruitment fund, which should be run almost as a separate business.

I see far too many franchisors getting bad advice and going down the wrong route, and I don’t charge for this advice in the hope that at some point you may see value in
some of the areas we may be able to help you when the time is right.

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How to avoid investing in a bad franchise!

Posted on 14/02/2011 by dugan

The best way to avoid joining a scamchise (!) is to speak to existing franchisees in the network, and not only the ones that should be provided to you by the franchisor, but by finding people through yellow pages, etc.  Bear in mind that these people are running a business so you must be respectful if just cold calling them, because if done in the wrong way, you will be met with a cold response…

Franchises are currently unregulated in the UK which is why there is a great potential for misleading info going out and leading to people making bad decisions.  If you would like to speak to an independent financial advisor who is well versed in franchising, and who, for a fee, would fully  and unbiasedly evaluate businesses on your behalf just let me know as I can set up a 10 minute initial chat, and if you were happy to go ahead, he would carry out a full evaluation.

This can go hand in hand with paying an experienced franchise solicitor to go over the franchise agreement (which is recommended and costs a similar price) and I’d be happy to recommend the ones I rate highly and are also not so expensive.

I’ve seen far too many people make the wrong decision simply because they didn’t do their due diligence in the right way, so spending a bit of money to get to a right decision can be more than appropriate.

The analogy I like to use is one where one should never buy a house without spending money first to have a complete structural survey done, because although it adds to the upfront costs, it could identify a problem which would either allow you to negotiate on the asking price, back out entirely, or it could simply put your mind at rest somewhat and allow you to make an informed decision and commit with a positive feeling.

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Why do 10% of franchise brands recruit 75% of available potential franchisees every year?

Posted on 14/10/2010 by dugan
In the UK it seems that the standard procedure for a newly set-up franchise brand is to book a stand at a franchise exhibition even though the majority of new brands will find it difficult to recruit their first franchisees through a show.
Shows can end up costing up to £10,000 for decent stand space, stand ‘dressing’, printed promotional materials and time so to not achieve a result should be unthinkable.
Much as I support some of the shows, I would like to understand why franchise development consultants continue to recommend that new franchisors (who have usually just spent tens of thousands on consultancy fees just to get to the recruitment stage) invest so much money launching at a show when they don’t appear to have a large recruitment budget!
Surely the more sensible approach and advice to them would be to set a realistic 1st year target, agree sensible overall recruitment budgets (to included advertising, marketing, PR, systems and personnel) based on those objectives and then decide where it would be best to apportion that budget to keep thing affordable and still achievable.
I would always suggest new brands with low budgets seek the low cost, easily measurable and easily amendable form of lead generation through established online franchise advertising portals.
The money saved by taking this approach should be invested in either working with an experienced franchise recruitment consultant, or in setting up good in-house systems and processes to receive and handle leads as they are generated.
If this whole process is managed well, then you will be able to generate a flow of leads to match your budget and fit your objectives.
If anyone has a good argument or disagrees with this view (apart from the show organisers themselves!), I would love to hear from you…
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‘Franchisee’ or ‘Franchise Owner’ – is there a difference?

Posted on 19/06/2009 by dugan

I was at the BFA Franchisor of Year Awards on Thursday night to see TaxAssist just pipped to the post by Countrywide Grounds Maintenance amidst the usual pumping dance music accompanying those honoured to the stage!

Andrew Quail, the head of business services at the BFA, had spoken during the annual conference about the issue of whether or not a franchisee could also be called a franchise owner, as there was a suggestion ‘franchise owner’ could be the franchisor…

As an independent franchise consultant specialising in franchisee recruitment, and ensuring that the process and decisions are fully informed from both sides, I take a somewhat liberal approach to this subject dependent on the brand I am working with, the profile of the person they are trying to attract and my own judgement based on the people I am talking to.

The word, ‘franchisee’ can invoke emotions of subjugation for those individuals who view franchising more as a partnership than a hierarchy. Business coaching and consultancy franchises are a perfect example of a sector where I would use the term ‘franchise owner’ to describe a franchisee, and where the franchisor in many cases would rather refer to their franchisees as consultants or coaches rather than franchisees.

For people simply looking for a job type franchise with no real potential to employ staff and grow beyond that, the term ‘franchisee’ fits much more closely, because that individual is effectively just an employee within his own franchise business.

My thoughts are that, until franchising becomes a fully regulated and more closely controlled industry in the UK, like it is the USA and Australia, these kind of debates will be largely irrelevant.

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The Franchise Failures Formula

Posted on 22/05/2009 by dugan

If you are looking to invest in a franchise and you have narrowed the field down to a few, and you have started to schedule visits to those brands, there is one important question you should ask, which, if asked in the right way, will tell a few truths.

It is very important to ask the following questions in the order given below…

  1. How many franchisees have you got currently? (make sure you write this down)
  2. How many resales have you had in the network? (make sure you write this down)
  3. How many franchise agreements have been signed since you started? (make sure you write this down)

If this information cannot be given to you there and then, make sure you get answers to these questions as all franchisors should be able to provide this detail if they want to.

The reason for those questions is to find out how many franchisees have failed since the start without actually asking the question, and the the formula for that is:

Franchise Failures (FF) = Total number of Franchise Agreements ever signed (TFA) minus [the number of Franchisees Trading (FT) plus the number of Franchise Resales (FR) in the network]

FF = TFA – (FT + FR)

The answers you get will sometimes really tell a story and you make your own judgements based on that.

You could of course just ask the franchisor: “How many franchisee have you had leave the network without selling their business (i.e. fail)”, but by doing it in the way I have described above will really tell you if they know, or care, or are willing to get you the information…

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The London Olympia Franchise Exhibition

Posted on 09/04/2008 by dugan

I spent Friday last week at the franchise expo in London. I have been to this show for the last 5 years or so and my first impressions this time was that there was much more space than in previous years. The explanation, it seems, is that there were less exhibitors than usual, which could reflect the current economic climate.

Managing to avoid accepting all the pieces of marketing literature offered to me by slick salesmen types and scantily clad ladies, I had a good walk around meeting with a number of companies we have a business relationship with – things don’t change much with these shows..you see the same faces and it is all very ‘same, same but different’ – a common phrase heard in Thailand when you ask the market vendors why you should buy off them rather than someone else with exactly the same wares.

I spoke to one of the show’s marketing guys when the doors had closed that evening, and he seemed very optimistic on the numbers of people who had come through the door – it had seemed rather quiet to me and I challenged him on this but he was adamant that they had hit their target numbers, but would not commit to what they were… Quite a number of franchisors I talked to said that their stands had been pretty quiet throughout the day but they thought it would be busier on the Saturday. A couple of others said that although numbers were down, quality was up, so a bit of a mixed bag.

The stands which had been most busy were the franchise solicitors as they had dealt with a good number of potential franchisors seeking to sort out their franchise agreements and so on.

Saturdays are usually reserved for the family day out and becomes a bit of a free for all, so suited business types and serious contenders ensure they are available to go on the Friday, which is exactly what I did.

As I stood on the packed/delayed 9pm train back to Norwich from London Liverpool Street, I had a look around and had the thought that not even 1% of the 100 or so people packed into my carriage were involved in franchising in any way, even as employees..and this is biggest problem franchisors in the UK face – there is a such a limited pool of people that understand and are looking for franchise opportunities, compared to the 1,000+ franchise brands seeking franchisees, that those brands that achieve their recruitment objectives often have very big budgets, or extremely successful recruitment strategies…

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