13 February 2015

Franchising, UK Franchise Business Sector

Franchising, UK Franchise Business Sector

The UK franchise sector now sees around 1,000 different franchise businesses in operation. The sector is expanding and franchising is becoming an ever more popular route for people looking to start their own business.

Franchising offers many benefits to someone looking to start up or enter a new market, it comes at a cost but on balance that cost can often be worth paying.

What we want to do is give some information about the UK franchise sector and some tips on how best to structure and apply for borrowing when starting, expanding or growing a franchise.

Lenders View Of Franchises

Typically a lender will prefer a franchise operation over the same business operated by the same person that is not franchised. The rationale being that there is;

  • Back up and support
  • Someone else (the franchisor) has an inherent interest in you succeeding
  • There are set metrics to compare you against

These are the obvious benefits. The lesser known benefit is that the franchisor will often agree to work with the lender if default occurs or will provide a covenant to the lender as a quasi guarantee. The strength of this covenant varies massively but is a key criteria for many lenders and one that franchisees are often oblivious to.

What this means is that a very good franchisee could be held back by prior bad performance or bad form from the franchisor. Track record and experience are vital to a lender. If a number of franchisees have failed from one particular business then lenders will naturally be more cautious. If the franchisor has prioritised themselves over the lender when default occurs then again, the lenders will be more cautious.

Our very first tip to any prospective franchisee is to speak to other franchisees. That doesn’t mean names given to you by the franchisor, but use Google, do some leg-work and go see other franchisees. Ask them critical questions. You will find that franchisees will talk to you and be honest, they do this as it is in everyone’s interest that each other is successful.

Different lenders have different attitudes to franchising. If you want to know who is keen at any given time then get in touch and we can let you know.

Business Plans For Borrowing

Most lenders, especially the banks, will want a full business plan from you. Franchisors will provide a lot of the information for this but please be aware;

  • The lender will know what ‘stock’ information looks like so don’t copy stuff verbatim
  • Will have ‘actual’ information and financials to compare what you are saying, so be realistic and support all your assumptions

Also, be aware that you shouldn’t need to explain the franchise in detail. What we mean is that you don’t need to explain the range of pizzas Domino’s offer, or that you will deliver, offer collection and that you will be selling pizza. The lender knows this. It is what we refer to as stressing the variables.

OK, what is stressing the variables?

Every franchisee is operating the same business as every other franchisee in their business. However, every franchisee is different and 100% unique.

You need to stress the variables, these are the things that make you unique. Typically these form;

  • Your experience, wherever that may be from
  • Your personality, we are all individuals, let that show in your business plan
  • Location, local target market, local demographics and local issues all need to be talked about
  • Bespoke support, who else is working with you to add skills to your business
  • Local franchisees, don’t talk about what a franchisee in Cardiff has done if you are based in Tunbridge Wells, talk about the franchisees in Tonbridge, Sevenoaks, Ashford, Bromley etc. Refer to local and more regional operators

If you are going to spend time on a business plan then do stress the variables, comment on the standard information but don’t flog it to death. If your lender does not know McDonalds sell burgers or Costa sells coffee then you are in the wrong place, go somewhere else to borrow for your business!

The final point on business plans is to remember that they don’t have to be boring, be inventive about how you present a business plan, lenders like that, we are all human after all.

UK Franchise Sector Size

It is easy to quote the growth of the UK franchise sector as a strength in your lending application. It is, but temper it a little as much of it is erroneous or not relevant to you. Make sure you quote the relevant stuff. If you are operating in the care sector then quote care statistics, if fast food then quote food sector details.

The UK franchise sector highlights in 2013;

  • Industry annual turnover: £13.7 billion
  • Revenues have grown 20% since 2008 (overall UK economy has contracted 2.5% in the same timeframe)
  • Number of franchisors: 930
  • Number of franchisee outlets: 39,000
  • Number of people employed in franchising: 561,000
  • Full-time employment tops 250,000 for the first time ever
  • Franchisees reporting profitability (including new businesses): 92%

This came from The Natwest franchise survey 2013, the 2014 report is not yet published.

For more localised information then the following are good resources to refer to;

  • The BFA
  • Demographics & Population resources from ONS. The ONS is a great resource of information and well worth searching around for research to support your business proposal
  • Mintel consumer trends report. Mintel produce some great research articles, most of these are sold and some costs are prohibitive to smaller new start businesses, however their Consumer Trends Report is well worth perusing and can be downloaded for free (at time of writing)

You can also use this report published by BIS. It is good to use when seeking commercial lending as it is a government source, completely independent and trusted by lenders. Have a look and extract the bits that benefit your lending application;

bpe_2014_statistical_release.compressed

Lending Ratios

This is one of the big things that crops up when we talk to clients about franchise funding. The question is ‘How Much Can I Borrow?’

The answer to that is it depends. For a high street bank they will normally ask for a 50/50 split between what you are putting in and what they are lending you. The best advice here is to contact us before doing anything as there are things you can do to improve your position.

For many franchises you will find that banks are more receptive and more willing to advance. It is not uncommon to get a 30/70 split with the bank lending 70%. Typically this is for franchises with good track records. Banks tend to have a ‘top 20’ list of preferred franchises, again if you are looking to approach a bank then speak with us first as different banks have different appetites to different franchises.

The Business Lending Misconception

Some of this goes back to ‘stressing the variables’ but it is worth looking at.

Banks like experience. They like someone who can demonstrate a capability to do something. All pretty reasonable.

The issue comes apart when lending to franchises. Typically a new franchisee will have little or no direct experience of the industry they are entering. The reason why is that franchisors like fresh meat, people who enter a franchise without preconceptions of how things should be done.

This acts against what banks like to see. The stock client answer is ‘Why would I buy a franchise if I already knew everything I needed to know?’. You can then go one of two ways, either fight the bank and probably lose (after all you still need their cash at this stage) or roll with it (quote Oasis).

When showing experience then look into your work history and life experience, also look into why the franchisor wants ‘you’ on board (good franchisors will be picky about who they want), think;

  • What past job roles have given me that I will apply here
  • What training the franchise provides to meet the things I am less good at
  • What experiences I have had that I will apply here
  • How my previous roles and experiences apply to the new franchise (analogies work well here)

Always think about the skills you have that compliment your new franchise.

Other Resources

There are loads of franchise specific resources out there. The links above to ONS etc are really helpful. Please also use our resources around business plans and finance options, it is good to know what is available;

  • Cobweb provide business information split via different sectors
  • Parliament.uk provide a UK business report to download – sn06152 (1)

If you want to ask any questions then always call us on 01293 541333.

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