Take a trip down any British High Street, and the chances are you’ll end up spending money in a franchised business.
In fact, many of the world’s most familiar brands – including Domino’s, Starbucks and Subway – have grown quickly and spectacularly through this model.
It’s not just food and retail that are adopting the franchise model. We are increasingly seeing international franchise deals in the recruitment, legal and educational sectors. In education, there’s been a number of British private schools growing along these lines.
The UK – and Europe in general – has traditionally lagged behind the US and Australia, but in the coming years I expect we’ll see an increasing number of industries turn to the franchising model. If managed properly, entrepreneurs can scale their businesses remarkably quickly.
Perhaps the most obvious benefit of franchising is that it allows entrepreneurs to use franchisees’ capital to grow, instead of taking on significant debt. Entrepreneurs aren’t limited by their own balance sheet and aren’t taking on the risk of leases, equipment and employees.
As was seen with the global takeover of McDonalds, the speed and penetration of roll-out can be stunning. Businesses funding themselves tend to be slower and more methodical, but a franchise business model can have multiple franchisees opening new places around the world at the same time.
The franchise model also taps into franchisees’ local knowledge – in terms of location, economy, culture, law and experience. If you’re simply expanding, you’re less likely to get managers whose interests are as aligned. After you’ve invested resources in them they might up and leave. In contrast, a franchisee will have signed up to an agreement for years and made a substantial financial commitment.
Franchising doesn’t come without risks. Failure often comes down to a lack of due diligence – such as the franchisee not having the right skills, experience, location or working capital. Entrepreneurs need to commit resources to training and ensuring the franchisee is running the business correctly. In addition, it’s not uncommon for entrepreneurs to make the mistake of cutting the margins too fine for the franchisee: it needs to be win-win for both parties.
When operating on an international basis, there are challenges stemming from different legal systems to contend with. In the UK, there’s no specific franchise law, but the moment you cross borders it can be a different story. There are other legal risks that many don’t appreciate, so you need to ensure that your agreements are enforceable in that country.
Successful franchising requires a different set of skills to growing your business alone. And franchisees shouldn’t take an entirely entrepreneurial approach – innovation can be useful, but it’s more important that they’re a good follower and manager. But as well as considering the success of the franchisees, entrepreneurs will also need to make sure that the core business functions properly. Just consider C&A – a former stalwart of our high streets. While the core business collapsed, a visit to the continent shows that the franchisees are thriving.
Franchising isn’t a model for every business and doesn’t come without challenges. However, when the franchise model works well, it’s been proven time and time again to offer the prospect of rapid, global expansion.