These are regularly paid to the franchisor on either weekly or monthly basis. The fees are in return for the continued management services provided by the franchisor such as advice, training and support. The method of calculating the fees vary between the franchised businesses. The following methods are commonly used or a combination of both:
- a percentage of your gross turnover.
- a mark-up on stock supplied by the franchisor.
These fees are commonly calculating using similar methods as the management fees but are for separate purposes. The royalty fees are in respect of the legal right to use the franchisor’s brand name.
The longer the franchise contract or the greater the reputation of the franchise will make the initial fee larger. The greater the reliance on the franchisors efforts and support the higher the management fee. Renewal fee is charged when the franchisee is granted an extended contract term. Transfer fee can be charged when the franchisee sells the outlet to another person. When on going management fees are absent, mark-ups or rebates on products supplied to the franchisees normally substitute them. Advertising or marketing fees are sometimes collected for promotional activities on behalf of the whole network.
The Advantages Of A Franchise Business To A Franchisee
Receiving Specialist Training- Franchisees receive initial and continued specialised training programmes which enables new and inexperienced franchisees to become competent operators within their chosen business. This benefits both the franchisee and franchisor.
Raising Capital (Receiving A Loan)- A franchisee has improved prospects to finance part of the capital costs as financial services (Banks and Building Societies) are more willing to give loans to a franchise business as it is a proven business rather than a sole proprietor (still to be proven).
The franchisee also requires the minimum level of capital the franchisor sets. This avoids having to little capital which is one of the main causes of business failure.
Using An Established Brand Name- Many franchisors have established themselves as A brand name, such as McDonald’s and Prontaprint. A franchise with such a company immediately provides you with a nationally held reputation on which to build your business.Ex Negotiating for good sites with letting agents or building owners with the backing of a known trade name.
Reducing Business Risk- The reduction of business risk is quite outstanding compared to a sole proprietor as the success rate is currently eight out of ten compared to a eight out of ten failure rate for independent businesses. A franchise business is one of the safest way to run your business but it is not completely risk-free.
Benefiting From Research And Support- Franchisors are large enough to have their own specialist departments, for example marketing, accounting and research. Franchisees will have access to all of these resources.
Franchisees will also receive help, advice and support on how to run and develop their business.
Introducing New Products Or services- The costs associated with research and development leading to the introduction of new products or services are carried out by the franchisor. This allows franchisees the use of trademarks, copyrights, patents and trade secrets. These factors all increase the credibility and reputation of the franchisee in developing their own business.
Geographical Area- Franchisees are given a geographical area knowing there won’t be another franchise by the same firm within the area.
Advertising And promotional Support- The franchisees will benefit from this especially as advertising will take place both locally and nationally by the franchisor. The franchisee may have to pay a small percentage to the franchisor for these services.
Proven business format- The franchise business is proven to be successful as it is presumably well established and well known. There is also tried and tested product or services and a set of established operational guidelines which avoid major problems in the start-up period.
Bulk Purchasing- Better terms will be agreed through the franchisor as mainly all the businesses of the same franchise are purchasing from a central point which leads to significant discounts being negotiated by the franchisor and franchisee.
Instant Recognition- The design of the premises look the same throughout the world so it will be recognised by tourists etc. Ex McDonald’s
The Advantages Of A Franchise Business To A Franchisor
The business can be expanded in the least cost effective way. The costs of new premises, more staff and buying extra stock are met by the franchisee. The business is probably more successful than if it opened more branches and took on more staff. Some of the best franchisors recognise this i.e. McDonald’s “Fundamental to our long term success story has been the innovative ideas and contribution of our franchisees. Without them, McDonald’s would not be what it is today.” I obtained this quote from a McDonald’s franchise pack which was said by the chief executive officer Andrew Taylor. The franchisees have a financial stake in the business and are working for themselves. They will therefore work harder to make it a success as the business creates their income. The franchisee also pays towards the general costs of the business, such as advertising. The franchisor gains the economies of scale that come from buying in bulk from the suppliers. Franchisees usually have to buy their supplies from the franchisor. This benefits the franchisor as it can buy goods in bulk, and therefor more cheaply and it also makes profit on the goods it sells to the franchisees.
The Disadvantages Of A Franchise Business To A Franchisee
Continuing Costs- The initial fee enables the franchisee to make use of the franchisor’s services and to operate the business system. However A continuing fee will also be given which is usually a percentage of the turnover. This is were the problems occurs. A franchisor may increase selling prices as means of increasing turnover, thereby generating larger fees from the franchisee. In contrast, this may not be beneficial for the franchisee, who may feel that the customer base cannot withstand price increase and who would prefer to achieve increased profitability by improved efficiency and decreased overheads. A franchisor may decide to update and modernise equipment used in the overall running of the network, thereby forcing franchisees to do the same to remain compatible. This may result in major expenditure.
Hidden Costs- Many franchisors will not provide accurate costs for the whole operation so you will always have to calculate the costs to make sure so you get the right loan from a financial institution.
Qualities of the franchisor- Not all franchised businesses are well-established and therefore it may be difficult for the franchisee as it won’t benefit from advertisement, resources etc. and the cost of a failed product or service could affect the reputation of the business.
Restrictions Of Selling Your Franchise Business- To sell or transfer your business, the franchisor will have to be ensured the new franchisee is suitable to operate the business. So the replacement franchisor will undertake an assessment to ensure it meets the criteria. The sale of the franchisee will incur fees payable to the franchisor, to cover the cost of dealing with applicants and training new franchisees.
Restriction On Business Activity- Franchisor’s will not normally allow franchisee’s to become involved in activities outside the agreement. So basically you are unable to exploit profitable business opportunities within your franchise operation.
Lack Of Independence- The franchisor will control many aspects of the business and receive a proportion of your sales income. So you never are your own master.
Devaluation Of trade Name- McDonald’s is a well known franchise but for instance if their is a widespread out break of food poisoning and it is traced back to one of it’s outlets and given national media coverage, most of the franchises will suffer.
Purchasing Goods- The franchisor may restrict franchisees to only buying goods and services from him and possibly at expensive rates.
The Disadvantages Of A Franchise Business To A Franchisor
A franchisee may not provide a good service, which might damage the name and reputation of the franchisor.
Features Of A Franchise Business
- The franchisee buys the right to use a known and success name, logo and brand within a certain geographical area.
- Staff uniforms are also standard. So too is the training that the franchise unit receive.
- All products sold and used by the franchisee must be bought from the franchisor.
- The way premises are designed and how the name and logo are used are strictly laid down. Fixtures and fittings are standard so that the premises are easily recognised by the consumers all over the world. Favourite Chicken And Ribs, Burger King and Clarks look the same all over the world.
Qualities A Franchisee Requires
- Willingness to work hard and full time commitment
- Desire To Succeed
- Ability to plan, Implement and control the business in terms of your resources of time and money
- Attention to administration, the recording of financial information and managing finance
- Temperament
- Capacity to learn and adapt
- Ability to capitalise on your strengths and to minimise the effects of your weakness
- Good communication and ‘people’ skills
Personal Franchise Characteristics required for success
Franchisee % Franchisor %
Very Important Not Very Important Not
important important important important
experience the same industry 0 20 80 2 14 84
experience 12 46 42 16 47 37
- Management ability 84 15 1 66 31 3
- Desire to succeed 90 10 0 93 7 0
- Willingness to 92 8 0 93 6 1
work hard
- Creativity 26 56 18 12 44 44
- Strong people skills 63 32 5 64 34 2
- Financial backing 71 27 2 67 27 6
- Support from family 52 28 20 46 32 22
Study Size: 148 franchisors and 105 franchisees say how important each quality is
I obtained this survey from the thirteenth edition of “Taking up a Franchise”
Ten Common Mistakes Made By Franchisee
A Large Industry Guarantees Your Success- Many franchisors will point out how large an industry they are but this won’t make you succeed alone.
The other issues the franchisor provides which are the training, site selection, market plan and many other factors will be more important in providing you success than only the size and growth trend of the industry.
I Can Open The Franchise For Less Capital Than The Franchisor Predicts- Don’t mislead your franchisor. If you are over optimistic and undercapitalized you will pay the penalty of failure which the franchisor is not to blame for.
The More Franchises Exist In A Chain, The More Successful They All Must Be- Sometimes in the eagerness of the franchisor to expand the system will “overpopulate” a city with many units causing each to steal business from others.
To Become The First Franchise In A System- You could receive more care and attention as your the first franchisee to join ONLY IF the franchisor has good experience in its industry.
There Is No Need To Hire An Accountant Or An Attorney Until I Received My Initial Training- An early mistake can be costly so you should have a professional involved before signing a check or any other legal document.
I’ll Use About 80% Of The Franchisors Business Plan and The Remaining I’ll Modify It Enough To Fit My Style Of Management- If you buy a franchise use their business plan as it is proven. Your Contract can be terminated if you insist doing it your way and violate the agreement. If you really feel strong in making the business plan suit your style just save your money and open your own business.
All Franchise Systems Are Similar- Therefore, the biggest franchise with the lowest cost will be my choice. NO! Each system has a culture of its own. Meet the franchisor and several of other existing franchisees in the same network to see how you’ll fit in.
A Franchise Is Guaranteed Success- Any new business venture involves risk. You must be willing to work long hours to implement the franchisors business plan in order to succeed. The advantage is you have a successful plan but the unknown is how well would you implement it.
I’m Positive The Financial Services Groups Will Finance Part Of My Costs If I Choose The Right Franchise- It is true that Financial services groups are more willing to finance franchise than independents. However, they may not believe in you or your chosen franchisor like you do.
I Know How To Work With And Manage People- If you have a poor experience in managing and working with a group of employees, make sure you discuss this with the franchisor. As in most franchise systems you will be hiring , motivating and training several of employees.
The Legal Agreement Between The Franchisee And Franchisor
The contract in which the franchisor and franchisee agree and will be legally binding once it is signed, it is a vital aspect of franchise which should cover issues such as:
- obligation of the franchisor
- obligation of the franchisee
- right to renew
- training
- fees and payment
- insurance
- trademarks
- sale of the business
- death or incapacity of the franchisee
- termination
Ethical franchising requires all franchisees are treated with the same respect and not more favourably than the others in the same network. This basically means all franchise contracts in the same network should consist of the same issues. It is therefore unlikely that a franchisor will amends the term of a contract. However you should always understand the terms of a contract and its limitation and to have your contract vetted (A specialist franchise solicitor who will vet your contract) will be very valuable.
The British Franchise Association (BFA)
The British Franchise Association (BFA) has been established as a self-regulating body for business format franchises throughout the United Kingdom in 1977 by leading franchisors. It isn’t compulsory for franchises to become members of the BFA and there in fact many reputable franchisors who are not. Being a BFA member is A benefit to the franchisor as franchisees will prefer to form a partnership with a BFA member as members have to conform to difficult policies and procedures devised by the BFA to form universal standards throughout the franchise industry in Britain. They will achieve the membership if they are able to meet the BFA’s criteria. The BFA also provide official information packs for all prospective franchisees for a fee.
The benefits of having a membership with the BFA are substantial as companies are clearly identified as offering ethical business format franchisees and undertake A ongoing commitment to uphold the association’s high standard of conduct. Belonging to BFA-endorsed franchise network is an excellent selling point for a franchisee when the time comes to resell the business.
In association with HSBC and the Daily Express , the BFA organises the franchisee of the year awarding which a franchisor nominates a
franchisee who must then submit a 1000-word essay indicating why they deserve to win.
The Importance Of The Brand Name
Feeling hungry? You want a burger? What’s your preference-“Burger King” and “McDonald’s”, or “ Burger Junction” and “ Burger Planet”? Or A pizza? Where would you go “Domino Pizza” and “PAPA JOHN’S” or “Pizza Man” Or you want to go on holiday? “Global Travel” or “Robert’s Travel”
Unless money is an issue, the chances is that you will probably opt the name you recognise and trust, the name you know and expect from your past experience will provide you the high standards you come to know over the years.
This is called ‘consumer instinct’. A consumer will be walking to an established name rather than an unknown quality even though it might provide you better value for money and satisfaction. In franchising, the brand name and track record factor’s is more significant because it’s a franchisor’s main asset to be licensed out to franchisees. A name that customer’s recognise is a very powerful asset in licensing and some would even point out that it is evolved around it.
Companies such as McDonald’s, Subway, Holiday Inn and Prontaprint have earned their reputation through years of successful franchising and consist of a well established and desirable name to offer franchisees with people not only queuing to buy their goods but also take on the name and reputation of the business.
“The right choice of franchise will mean that the franchisee will begin with a well known name and reputation and a product or service which has already succeeded in the market place” suggests the Royal Bank of Scotland handbook on franchising and “A recognised name of which the public is already aware and which has the credibility with suppliers.” states similarly the book Taking up a Franchise but in reality not many franchisor’s can offer this starting point. This is the period of growth for franchise and many business are offering their business to be franchised which however they provide a short track record and are not well known or even totally unknown beyond their region of the country.
At least quite a few franchise businesses can provide a well known name but all new businesses will have to start from nothing.
The Importance Of Advertising
Purpose Of Advertising
Advertising is a way used by companies to promote their products to the public and to encourage them to buy it. Informative and persuasive are the two main type of advertising.
How Advertising Affects Individuals
- It increases the costs of marketing products. This money could have been spent on improving the product or price reductions. It is likely that the consumers will pay more of any advertising costs than firms.
- Advertising can encourage people to buy products which they might not have otherwise have purchased.
- Advertisements give valuable information to consumers which might otherwise be difficult to come by.
Methods of advertising used by small businesses:
- Word of mouth
- local newspapers
- leaflets
- Yellow Pages
- Public transport
- Catalogues
Methods of advertising used by larger companies:
- Radio
- Television
- National press
- Specialist Trade Magazines
- Trade fairs
- Billboards
Persuasive Advertisement
The purpose of persuasive advertisement is not just giving out information but to persuade the public to buy the product or service. Here are some methods used with designing advertisements:
- Television, film and sport personalities are used such as Gary Lineker in the Walkers crisps advertisements.
- Sex appeal is used in the levi jeans and Peugeot car advertisements.
The Importance Of Marketing
Marketing is about creating customers by looking at all your activities through their eyes and giving the customers what they want and at a profit so basically it is identifying the customers needs in order to require profits.
Marketing is just not about selling, it is about what a company believes about its product, objectives and the driving force of all the people who work there.
When marketing a new product its important that the company produce the right PRODUCT to fulfil the customers needs or wants. The PRICE will have to be value from money but not necessarily cheap. The product must be PROMOTED so that potential customers are aware it exists. Also product must be available for sale in the right PLACE which is convenient for customers. These are the 4Ps and are referred as the marketing mix.
Marketing is used to get current information about customers, predict future trends, produce the right products and to increase sales.
Without marketing, businesses could find them in a position in trying to sell a new product that few people want. This mistake can lead in huge financial losses as the business will have spent a large amount of money developing and setting up the new product and promoting its launch. This shows that marketing is a key factor of success in any business.
This puts franchise businesses at a huge advantage as marketing is done for them (at a low fee) and they will also benefit from the product being tested first to know if it is a success and it will also be advertised or promoted in some way to make people realise the existence of the product which will increase the sales. These advantages is not benefited by a sole proprietor as little or no marketing is carried out so the business never moves ahead which is probably why many of the businesses exist for a short period of time.
A Business Plan And It’s Significance?
Statistics show that one third of all new businesses will fail within their first year of trading and those remaining A staggering 95% will not survive beyond five years. Poor planning has been listed as A major contributory factor to why so many business fail. This is the reason why A business plan is the most important document you will ever have to produce when starting A business. A well thought out and carefully planned structured business plan is the key to success. It will provide you clear indication of exactly where your business is heading to and will enable you to foresee any problems long before they arise.
This detailed documant states various stages the business must go through and the various targets the business needs to achieve if it is to become successful also to state its market and financial objectives, details of its operation, its customer base and its financial statues.
Other reasons for A business plan is to persuade financial providers that the business will succeed in order to receive A seed capital (start up costs) and A development capital (costs as the business develops). If you are buying a franchise business you will need to identify the strengths and weaknesses of the business to decide if you can make it a success.
A typical business plan will contain the following:
- Details of the business- name, location, physical size of business, statue etc.
- Goals and objectives-An aim you will want to achieve i.e. break even within the first 18 months of trading.
- Present state of the market - State of the market in terms of sales volume or revenue, location of the market and prospect for further growth.
- Customer profile- Intended customer targeted and defined perhaps according to their income, sex, location etc.
- Competition analysis- A detailed analysis of competitors products and strengths and focus on being better. Pricing Policy and promotion and advertising should also be included.
- Projection of sales volume and revenue in the short and long term- Objectives and including statements concerning the projection of sales.
- Present orders- Banks will take new businesses more seriously if there is evidence of present orders.
- Assets and required financing- Any proposed expansions which will include assets (new machinery and storage space) requiring financing.
- Staff- Amount of staff intended to be employed in the future and the skills, ambition and background of the staff.
- External factors- Ex. Are interest rates rising.
- Ownership- All the owners and the amount of percentage they put in the business and what will be the expected return amount to the owners.
- Financial forecast- Projection of profit and cash flow so A bank can focus on it when extra finance may be required.
Frequently Asked Questions
What is business Format Franchising?
Business format franchising is when the franchisor allows for the franchisee to make use of the current plan or format and a complete system of doing the business. It also gives permission for the franchisee to use the trademark and logo. The franchisee also receives assistance with site selection, product supply and advertising for the business. For these services the franchisee will have to pay an initial fee, ongoing management service fee and a royalty fee.
How much capital can the franchisee finance for the franchise business?
For an established franchise with a good track record you may be able to borrow up to 70% of the costs including working capital. For a new franchise which is less established you will have to put at least 40/50% from your own capital. You should always try to receive the right amount of loan.
Does it matter if the franchisor is not a member of the BFA?
Membership of the BFA does not guarantee the success of the franchisor but does indicate that the franchisor has achieved the associations ethical guidelines and high standard of conduct but their are many well established and reputable franchisees who are not members.
How Does A Franchise Chain Start?
If A store owned by an individual in a particular trade becomes successful the owner will want to expand so he/she will open a second or third store and hire employees on day to day basis and if this business plan is still successful the entrepreneur will want to expand the business but not to operate additional stores himself or herself, he/she may decide to “franchise” the store and the business system to a independent business person . The franchisee (independent business person) will in return the franchisor may ask for an initial fee and/or a continuing fee based on the percentage of the franchisee’s sales. The business is now franchised and more franchisee’s will join in the future if the business continues it success. This is the beginning of A franchise chain.
Articles On Franchise
These articles are about franchisees who talk about their franchise business and they also point out any advantages and disadvantages.
The franchisee of a Kall Kwik outlet points out that advanced and upgraded technology equipment and consistent new development is a huge benefit and they can also offer customers a huge selection of services including design and production of a range of business literature, corporate reports, presentation etc. which are all generated from the franchisor’s initial ideas. Also they are provided with detailed training, intensive new franchisee support services, centralised marketing and ongoing guidance and now if you think you opened your own photocopy business you will probably have none of these services and that basically explains why there is such a high failure rate for small businesses.
Then there is an ambitious entrepreneur who identified a growing market for frozen food and home delivery after Asda (the company who he worked for) decided to stop this project of home shopping he decided to become a Wiltshire Farm Foods franchisee and the only reason he didn’t open his own business was that he was provided with back up.
Many of these franchisee’s have no previous experience of the trade and have been made redundant from their previous jobs. Also a few noticed a gap in the market in which there was no or very little trade carried out of that activity. Advantages pointed out by some of the franchisee’s are network’s buying power, benefit from research and development of product, planning and paperwork done, shopfitting, secure contracts with larger companies and the primary reason for this is because of the business name (ex. cleaning companies), effective marketing etc. One disadvantage said by the Benetton’s franchisee is that all the orders have to be made a year in advance of the delivery which give the company time to make the clothes.
This also includes two newspaper articles from The Daily Telegraph and The Observer. The remaining articles are from The Franchise Magazine and the Business Franchise (Magazine).
Survey
This survey is to investigate if people know what A franchise business is and which type of business (Franchise or Sole Proprietor) they prefer and why.
- Do you know what a franchise business is?
(If yes could you please continue the survey)
Would you open a franchise business or a sole proprietor business (tick one box only)?
- Franchise Business
- Sole Proprietor Business
(Answer appropriate section for you)
What is your primary reason for choosing to run A franchise business?
- It is A well established business
- The risks are minimised
- The access to resources and help, advice and support are provided
- Benefits from advertising and promotion
Other.............................................................................................................................................................................................................................
What is your primary reason for choosing to run a sole Proprietor business?
- No restrictions are placed on you and no one to answer to for your business decisions.
- Keep all profits
- Developing your own ideas and putting them into action
Other.............................................................................................................................................................................................................................
Survey Response
This survey took place in Wexham school and Slough library. I asked 50 people during this survey and the results are as follow for each question:
- Do you know what a franchise business is?
94% of people knew what a franchise business is. That is 47 people.
6% of people didn’t know what a franchise business is. That is 3 people.
Survey Response
47 people knew what a franchise business is and they continued the survey. The other three people who didn’t know what A franchise business is took no further part as their answers will be insignificant.
The result to this question was:
-
Would you open a franchise business or a sole proprietor business (tick one box only)?
- Franchise Business
- Sole Proprietor Business
70.2% (to 1 d.p) of people where in favour of running a franchise business. (That is 33 people).
29.8% (to 1 d.p) of people where in favour of running their own business. (That is 14 people).
The Graph And Pie Chart Show How Many People Preferred Running A Franchise Business Or And A Sole Proprietor Business
Survey Response
The 33 people who preferred to run a franchise business answered this section of the survey.
- What is you primary reason for preferring to run A franchise business?
- It is A well established business
- The risks are minimised
- The access to resources and help, advice and support are provided
- Benefits from advertising and promotion
Other.............................................................................................................................................................................................................................
The result for this question was:
63.6% (to 1 d.p) of people preferred a franchise business as it is A well established business. (That is 21 People).
24.2% (to 1 d.p) of people preferred a franchise business as the risks are minimised. (That is 8 people).
9.1% (to 1 d.p) of people preferred a franchise business as there was access to resources and help, support and advice is provided. (That is 3 people).
3.1% (to 1 d.p) of people preferred a franchise business as they would benefit from advertising and promotion. (That is 1 person).
0% stated any other reasons.
The Graph And Pie Chart Show Why People Preferred To Run A Franchise Business
Survey Response
The 14 people who preferred to run their own business answered this section
of the survey.
- What is your primary reason for choosing to run a sole Proprietor business?
- No restrictions are placed on you and no one to answer to for your business decisions
- Keep all profits
- Developing your own ideas and putting them into action
Other.............................................................................................................................................................................................................................
The result for this question was:
21.4% (to 1 d.p) of people preferred a sole proprietor business as there are no restrictions and there is no one to answer for your business decisions. (That is 3 people).
14.3% (to 1 d.p) of people preferred a sole proprietor business as they keep all the profits. (That is 2 people).
64.3% (to 1 d.p) of people preferred a sole proprietor business as they can develop their own ideas and put them in to action. (That is 9 people)
0% stated any other reasons.
The Graph And Pie Chart Show Why People Preferred To Run A Sole Proprietor Business
Brief History And Development Of Favorite Chicken & Ribs
Prior to 1986 only multinational companies based in the USA were offering franchise opportunities in the fried chicken sector of the British food industry.
This was when Favorite’s founder saw there was a huge gap in the market for high quality fried chicken stores in secondary locations.
The aim was to open a chain of fried chicken restaurants offering at least equal quality of food and service as the brand leader, but at a fraction of the set up costs.
This was the upcoming and birth of Favorite.
In early August 1986 seven stores were opened in which 4 were owned by the founder directors and three franchised units all under the “Favorite Fried Chicken” banner. Six of these original Favourite stores are still trading as part of the current system.
In the mid 1990’s a three year rapid expansion of the brand was implemented. This included an increase of staff numbers enabling greater franchisee support, training and control. Also a major re-branding and updating of the corporate image took place with all stores undergoing refurbishment under the new name of “Favorite Chicken & Ribs”. Customer
service levels were improved by means of new staff training scheme and tighter monitoring of performances.
Today, with the largest UK owned chicken franchise chain, Favorite are still determined to continue with those good old fashioned principals of service value for money, serving all there customers “Britain’s Tastiest Chicken!”.
Favorite Chicken & Ribs provide all their franchisee’s :
- Proven product concept
- Express units & restaurants
- Site selection, design & planning services
- Marketing and promoting
- Total shopfitting & staff training programme
- Ongoing operational support
- Regular “Mystery Shopper” Audits
- Central purchasing & Distribution
- Continual product development
They are also successfully franchised since 1986.
Interview Questions With Favorite Chicken & Ribs
Q1) Why did you decide to run a franchise business? I ran this type of business because it was an easy option to start up a business as support was provided.
Q2) How long have you been running this franchise business for? 13 years.
Q3) How long is your contract for? Forever.
Q4) Why did you choose this type of product and service to run? Because this area was in need of a fast-food restaurant.
Q5) How much capital was required (Initial fee) to start this business? £100,000.
Q6) Was it possible to finance part of the costs (franchise fee) and did you receive A loan? Yes it is possible to finance the costs and I did receive A loan.
Q7) How helpful (or difficult) has the franchisor been to work with? Very helpful, reliable and there if any problems arise.
Q8) What restrictions are placed on you by the franchisor? We have to buy all their products.
Q9) What benefits do you receive while being a franchisee? The Favourite franchisor’s deliver all the products to us.
Q10) Did you receive useful training by the franchisor? Yes, we were sent to another Favorite outlet to see how things are run and done.
Q11) What profits do you make? All profits are ours after the fees.
Q12)What is the royalty fee and when is it paid? The royalty fee is4 % of my total nett sales and is paid monthly.
Q13) Would you want to run your own business in the future? Why? No, Because this is hard work and it would be much harder to start your own business without any help.
Below are a few photos I took of the franchisee and his Favorite outlet.
Interview Date: Tuesday 11th December 2001
What Is A Sole Proprietors?
The largest and most common kind of business in the United Kingdom is a sole trader or a sole proprietor. The sole proprietor is the original form of entrepreneur. The sole proprietor puts in their own investment as the risk capital as funders aren’t to enthusiastic about lending to a one person operation which isn’t a proven business.
The sole proprietor make’s all the business decisions and risks and takes all the profits. The business income is taxed as personal income, and you also have to pay your own national insurance contribution’s.
The sole proprietor has very few legal formalities and apart from regulation’s particular to the business (e.g. fire and health safety for fast food restaurants) it will only encounter problems in keeping the records required for customs and excise and for your accountant to negotiate your liability to tax with the Inland Revenue.
The drawbacks of this business is you will have to suffer any losses on your own. So the sole proprietor is responsible for all debts in the business. The business is one of the sole trader’s asset as is the house and the car. So if the worst happens and the business fails and subject only to the provision of the bankruptcy acts everything you own (except absolutely basic essentials) the house, car, jewellery, furniture, savings can be seized and sold to pay off the creditors.
The sole proprietor will receive no income when they are ill or away on holiday and the business can shut down if the owner dies.
Problems A New Businesses Faces
Failure of business occurring during the first one or two years is much more likelier than occurring later on in life. Failure of business in the first two years tend to result from:
Lack Of Market Research
What can seem an obvious idea to one individual may not simply appeal to the mass market. An engineer may invent unbelievable new gadgets which may contain complicated circuitry, but there is very little demand for it which shows not much research was put in.
Cash Flow Problems
Suppliers may be unwilling to allow long periods of credit or discounts because the business is simply not ordering enough volume from them.
Lack Of Skill
Putting ideas into practise need certain characteristics ranging from technical skill to personal drive and ambition. If A entrepreneur does not consist of these skills, the business will not survive.
Lack Of Finance
This is one of the common mistakes why business fail. Whether the business requires capital to pay suppliers, wages or even the taxman , it will still need access to finance. Although the owner will invest as much as he/she can afford, the business will rely primarily on the bank and other financial suppliers. If the financiers do not consider that the business is going to succeed, perhaps in two years of making losses, then the flow of funds will cease the business into liquidation.
Over-Expansion (Overtrading)
Sometimes a business can expand rapidly, requiring more machines, more material, more labour, without actually receiving the money from previous orders. Whilst larger companies have financial resources they can fall back on, the smaller business does not have such a luxury.
The Advantages Of Being Sole Traders
The main advantage is that a sole trader are their own boss meaning they are in complete control and take decisions without anyone’s permission or agreement and without interference. Legal restrictions are minimum and there are no lengthy starting up periods as there are no complicated forms or procedures to act on and no expensive administration costs. Sole traders need less capital to start up and all profits are kept by the owners after tax. They are also taxed differently from any other type of businesses. In particular the National Insurance contributions are paid at a lower rate but this is because they receive fewer benefits. As all profits are kept by the sole trader which will motivate the sole trader to work harder so if the business is more successful the more of the opportunity for profit to be made. The owners has flexibility to choose the hours in which he/she work and when he/she go on holiday. Sole trader can offer personal attention to customers special needs in to account like stocking a particular brand of a good or making changes to a standard designs (and sometimes credit can be paid afterwards) etc. which larger companies are unable to provide. Sole traders businesses may be entitled to government support and does not have to make public any information about the state of the business.
The Disadvantages Of Being A Sole Trader
Sole traders have unlimited liability. So if the businesses run in any debts the owner is personally liable. This may lead to the sole trader being forced to sell personal possessions (house, jewellery, car, etc.) or use of it’s personal savings to pay off the debts. The money used to set up the business is often the owners savings or from relatives. It may possibly come from financial institution however it is often difficult to raise the money as the financial institutions are unlikely to lend the capital required to start the business or to expand the business later on as the business has a high failure rate. Sole traders do not have the advantages of economies of scale that a large business has so they cannot easily compete on prices. In situations where the owner is the only person working in the business, illness or if the sole trader goes on holiday the business activity can stop. A prime example is if the sole trader is a mobile hairdresser the illness or going on holiday can lead to loss of income in the short term and even the loss of customers in the long term. They will also have to work long hours and have to do everything themselves from choosing the business name to hiring staff and advertising (if any). All sole trader businesses are unincorporated businesses, the owners can be sued by customers in the even of a dispute. The sole traders are highly dependent upon the skills and their own ability. Also the owner’s skills may only relate to his/her specialist area and be poor relation to running the business and undertaking accounting, marketing and administration activities. Finally this type of business lacks continuity so if the owner dies the business will probably be sold, but begin trading again under another name.
Important Issues For A Sole Trader
(some of the advantages and disadvantages are included)
In law, the sole trader and the business are one and the same. If your hair was ruined by a local hair dresser you would sue the owner, which may be the hairdresser him/herself. When the owner dies the business ceases to exist.
A sole trader will often find out that banks are reluctant to lend money to them. Usually the business is started with the owner’s savings and borrowing from family and friends. Young people may be able to obtain finance through special schemes, such as the prince’s trust.
A sole trader can keep all the profits, after paying expense and income tax. The accounts of the business are private. A sole trader is always personally liable for any unpaid debts. If he/she fails to pay then possessions may be taken and the owner declared bankrupt.
Opportunities for development are likely to be limited because it is difficult to raise additional capital. The most usual way to expands to plough the profits back into the business to extend the premises or open more outlets. However, this will depend on the ambition of the owner but many sole traders prefer to operate on a small scale.
Typical examples include newsagents, plumbers, hairdressers. beauticians, market traders, small retail shops, small catering outlets (e.g. fish and chips shop and Indian food shops). These businesses do not need huge amounts of money to set up. Most transaction for the business costs are made in cash so there is little danger of large unpaid debts.
The business name should not be same from any other. You require licenses to sell a type of good for example alcohol or tobacco or to run a activity like a disco. Planning permission will be required if there is a change in the use of the premises. You will have to register with Customs and Excise for VAT.
Essential Qualities To Become A Successful Sole Proprietor
In entrepreneurship conflicting mixture of qualities are all essential in their own ways. The primary reason to develop these qualities in some stages of your business career is so you will be able to control ever changing circumstances.
- Ambition- You should always be full of ambition and establish that early on so you can devote all your energies to achieving that or you will pay a heavy penalty.
- Persistence- Always persist until you achieve all the goals you set out for or their was no point of putting so much work and effort into a plan if you fail to carry it out.
- Endurance- Power of enduring; bearing (hardship) patiently. Always endure the obstacles you will encounter along the way until you find a way to turn them around into victories.
- Obduracy- Only be obdurate when you know for sure that what you believe is indeed the right thing. You must also expect to be seen as hardhearted at times, as when you have to fire someone.
- Understanding-You should always be expected to have a great deal of understanding from your goods not arriving on schedule to why three members of your staff are going on holiday at the same time. Listen carefully to what everyone says and resolve the situation yourself with a victory result.
- Empathy- This is more complicated than understanding as it means developing the power to enter into and understand another persons feeling without intrusion.
- Articulation- Express thoughts very clearly in your own words and accent but in such a way everyone can understand you.
- Confidence- Confidence is a quality all entrepreneurs have or acquire.
- decisiveness- The entrepreneur never has a problem making decision in any situation where a clear decision is called for and then the entrepreneur will stick by that decision when others around are expressing doubts
- humour- A well developed sense of humour will lift you well clear of so many emotional traps.
- Persuasion- This is a very useful quality when knowing you will never make someone do anything they really don’t want to without employing pressure but with gentle persuasion you can often get people to see things your way if they are not 100% sure of what to do.
- Intuition- It’s a magnificent skill to develop. Creative, thinking and inspiration are other words related to intuition.
- Temperance- Being temperate means keeping moderation in all things.
- Patience- You need a great deal of patience if you are to become a successful entrepreneur. Patience with staff, customers, suppliers and patience in everything you undertake.
- Style- Style to promote your image as an entrepreneur. You need style in how you dress, talk, walk and in handling sticky situations.
- Service - A business person who makes services to others a top priority will progress to the limit.
Latest Information On Businesses
2001 Business Failures Down
The number of business failed during 2001 fell by nearly 1%. In England, Scotland and Wales 40,532 firms went into liquidation or were declared bankrupt last year. This was down from 40,847 in 2000, said business information company D&B. And during the last three months of the year the number of businesses going under fell by 6% compared with the previous quarter with 9,864 firms failing. D&B spokesman Philip Mellor said the main reason behind the fall was that it had been easy for businesses to predict what was going to happen “The combination of a stable economy and low interest rates has made it easier for businesses to plan ahead,” he said. It was likely that the number of businesses failure would increase during 2002, he added.
(This source of information was obtained from Sky News Active)
Small Businesses Often Avoid Help
Most of UK’s small business owners do not ask for business advice because they don’t think they need any. According to leading psychologist Dr. Peter Collett, entrepreneurs are less likely to ask for advice due to there psychological make up. A business link survey found that 82 per cent of owner operators said they could manage their businesses perfectly well without any help, thank you. Dr. Collett, a psychologist specialising in culture and management style, says: “ People who run their own business are usually extremely confident and self assured. That sometimes feel hesitant about asking for help, particularly if they feel they ought to know the answer. What makes them so effective up to now often prevents them from being even more successful in the future.”
David Irwin, Chief Executive of the small business service, the agency within Government tasked with managing Business Link, says: “There is a common misconception that you only need to ask for advice when your business is in trouble. It is our job to challenge this view and ensure that UK businesses benefit from the wealth of experience that Business Link has to offer.”
(This article is from the Business Franchise Magazine)
Key Words
Business Plan- This is used both to present your proposal to prospective lenders and by those who will be responsible for managing the business and planning on a day-to-day basis.
Cash Flow- Controlling the flow of cash you collect from the customers and other sources before you pay your suppliers and any other creditors.
Creditors- The suppliers to the business to whom money is owed by and the amount owned by the business to them.
Entrepreneur- A business person who seeks to make profit by risk and initiative.
External Capital- The amount of money (loans, grants, overdraft) you need to raise from outside sources.
Franchise Agreement- This document acts as a safeguard to protect the rights of each party, franchisor and franchisee, by setting out their legal obligations towards one another.
Full BFA Franchisors These companies have financed and managed a successful pilot scheme for at least 12 months. In addition they must provide evidence of successful franchising over a two year period with a minimum of four franchisees.
Gross Profit- The profit derived from buying and selling goods and services, before the deduction of overheads such as rent, wages and transport costs.
Initial Fees- These fees are one-off fees payable to the franchisor to cover the cost of setting up a new franchise.
Liabilities- The money which the business owes in the forms of loans, hire purchase agreements, trade suppliers, tax etc.
Management service fees- Theses are regularly paid to franchisor in return for the management services provided by the franchisor such as advice, training and support.
Net Profits- The profit of a business after taking account of all expenses.
Overheads- Costs incurred by a business regardless of its sales.
Renewal Charges- This is made by the franchisor to cover the legal costs of renewing the franchise agreement.
Royalty Fees- Fees payable by the franchisee for the legal right to use the franchisor’s brand name.
Seed Capital- The initial cash invested in a business to get it up and running.
Sole Trader- A self employed individual.
Turnover- The total amount of money which comes into a business from all sources.
Working Capital- This term describes the money required to finance the day-to-day running of the business.
Comparison Of A Franchise And Sole Proprietor Business
Most franchisees should begin his/her business with numerous of advantages and it would seem to them they have been running the business for years with the training provided to them before they start the business showing them how they should handle all the business issues which come with the trade. Then there is a sole proprietor who will be thinking there is a mountain to climb when he/she start their business and knowing they could lose everything when they begin the business it should make them more worried of this dangerous type of business.
The franchisee start with special training received for them and their employees when they begin the business and throughout their time as a franchisee, improved prospects of receiving a loan, established brand name, reduced business risk, benefit from research and support, geographical area,
advertising and promotion, proven business format, networks buying power and instant recognition but how does a sole proprietor compete with this and more like it they receive the opposite of most of the franchisees advantages. They don’t have good chances of receiving a loan as there is a high failure rate for sole proprietor businesses and even if they do advertise and promote there business, it won’t be the same quality or way as franchisees do it. They will have to build the reputation of the businesses name on their own and the business risk is very high. If they open their business their is no guarantee a same type of business would not open in the same area or even next to it and sole traders don’t have the advantage of economies of scale.
Also think about the product or service a franchsor can provide. If you wanted a meal you would rather eat a fillet meal in McDonald’s than go to a sole trade business and try one of their meals. You could also compare a newly started Kall Kwik franchise business which can provide corporate reports, presentation, brochures, manuals, advertisements, newsletters and design and production of a range of business literature services for a business customer or anyone else. Would a sole owner photocopy business be able to compete with the Kall Kwik’s services unless the owner has put in a huge investment I can positively answer no and even for all the other types of businesses a franchise business can offer more, there are circumstances when they can’t but that is only if the franchisor is new to franchising or the franchisor just wants to take your money and that is for the franchisee be smart enough to recognise that.
Conclusion
After carrying out my survey, interview and research, I have reached a point where I’m totally satisfied that a franchise system provides an ideal opportunity for a small business to operate. I don’t think a franchise business is a guarantee to success but it would make it closer to that if you opened the right franchise business for you with the help of the BFA and you have the essential qualities required to become a successful franchisee. I am also not saying that a sole proprietor or any other business is not the right choice of business and isn’t profitable but I think and could prove it by statistics and facts that there is an improved type of business you could run and there is more profit to be received in a franchise business in the long term future if it is an established business. A sole proprietor business is very hard work and there is very little support provided and is well known for it’s high failure rate but if you choose the right type of trade, location and have the entrepreneur skills required you could have a good chance of succeeding.
This is proven by the sole proprietor I interviewed who was very successful as he has run his business for 25 years and presently earns a profit of £30,000 a year but if he went in to franchise and had been running a franchise business for 25 years, he would probably be earning much more than £30,000 and this is shown from a few of the articles I studied however franchise businesses where not very well established 25 years ago and there was not many opportunities too.
The franchisee who I interviewed was also very successful and had been running his the business for 13 years and was impressed with the support which was provided to him by the franchisor
My survey was also in favour of franchise businesses as 33 out of 47 people would open a franchise business if they had the opportunity to open a franchise business or a sole proprietor business.
The articles I studied also gave me a good understanding that franchise is a successful business formula if you have the qualities to capitalise on the products and/or services and advantages already provided to you by the franchisor when you start the business.
My research shows me that the advantages overshadow the disadvantages and some of the disadvantages don’t even appear with some of the franchise trades nevertheless there are many fees you will have to pay initially and continuously and you won’t be in total charge of the business as most of the issues will have to be discussed with the franchisor before proceeding and you could describe these two disadvantages as the biggest downfalls however if you are strongly against the fees, there are some franchise businesses who don’t charge royalties like ChipsAway and there are other franchisors who give their franchisees 100% freedom and mainly back their decisions. I am trying to point out that some of the downfalls which are associated with franchise is not included with all franchise businesses.
Also look at the advantages a franchisee receives in advertising, marketing and brand name alone, which are very useful and particularly in the early stages of a franchisees career. The advertising and brand name will help in many issues like increasing the sales so will the marketing but this will also help to develop new products.
Finally, I do think a franchise system provides an ideal opportunity for a small business to operate as it is the closest to any business which can guarantee success and this is proven by the statistics and facts for the present time. There are downfalls in the franchise business as is there in any other businesses but many can be avoided if you make the correct decisions in choosing your franchise business.
Bibliography
Books I took out are:
Author: Matthew Record
- Guide to Taking up a franchise (The Daily Telegraph’s thirteenth edition)
Author: Colin Barrow, Godfrey Golzen & Helen Kogan
- How To Start Your Own Business
Author: Jim Green
Author: Pat Bond & Jill Martin
Author: Ian Chambers
- Careers Advisors (Use of Internet and information supplied)
- Business Franchise (Magazine)
- GCSE Business Studies (The Revision Guide)
- Interview (Favorite Chicken & Ribs and MARS a day...) and photographs