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How To Finance Your Franchise Business

Posted on: Wednesday, 20 May 2020 4:35 pm

Part 1: Turning Your Business Into a Franchise

Franchising is sometimes overlooked in an expansion plan within a company, but it is a tried and tested growth strategy in business which has been the cause of wide-scale business networks for many entrepreneurs. The Franchise Company are experts in franchising and we can help your business expand in the UK and internationally. In this post,  we’re going to take you through why and how to turn your business into a franchise and then discuss how you would go about securing finance for your franchise business. You can find out more about us and what we do right here.

Let’s start with why you may want to turn your business into a franchise. In a franchised business, the owner of the business (the franchisor) grants others (franchisees) the right to buy into and use their already established brand, running their own branch of the business. Franchisors will offer support to franchisees, along with marketing, operations guidance and branding, but what’s in it for them? In short, expanding your business through franchising reduces the risk of business failure as less than 3% of franchisees fail and 90% are profitable, which is far less risky than traditional company-owned expansion. 

Going down the route of expansion by franchising allows your business to grow more quickly than opting for traditional, company-owned expansion. When franchising your business you have more independence away from the day to day running of your business and don’t have to oversee different site expansions. You get to focus on the bigger picture, and by collaborating with and supporting your network of franchisees, you can work on growing your business and making it successful. Franchisees help to grow a business in a new territory and generate returns, without the business owner having to actually invest heavily in a new branch of their own.

An appeal that speaks to every business owner is that franchising your company is a cheaper alternative route to growth as opposed to doing it the company-owned expansion path. The franchisee will pay for the licence to sell your products on service and then a charge in the form of a fee and/or royalties for ongoing support, training and marketing. 

There are many benefits to business franchising, however, for some business owners it’s not the first obvious next step in their growth strategy, but it can certainly be the route to building large-scale business networks. One benefit of franchising is that the business can expand with less capital when compared to the traditional route of company-owned expansion, and therefore can expand more quickly. This is primarily because the start-up costs of opening in new territories falls to the hands of the franchisees, through initial start-up fees. The resources needed to build and support a franchise operation are often less than those of a company-managed network, and you may find that when buying stock on behalf of your franchisees, you are able to negotiate large discounts or other benefits from suppliers due to economies of scale. Due to a franchisee having invested a large amount of their own, franchised units are often found to perform better in relation to company-owned units, as there are committed franchisees with more at stake. Franchise units are also found to be less troublesome to manage for this reason. Franchisors can reduce stress and time spent  on day to day running and management of the business and focus on bigger operations, allowing franchisees more independence over their units in the process.

Franchising is by no means a rash decision that can be made, or something that happens overnight. It takes a lot of careful planning and preparation to successfully and effectively franchise your business. At The Franchise Company, we’ve supported over 200 businesses on the road to becoming successful franchises. Our approach is designed around our experience and knowledge in franchising, combined with your experience and knowledge of your own business, how it is run and how it fits into the market, in order to develop the franchise model that’s going to work the best for you and give your company the best chance of success. 

The key to a successful franchise is consistency. You should be very clear about how your business works and therefore be able to replicate it. All of your franchisees need to be able to run their businesses using the same systems in order to see the same results. 

It’s really important that when you are documenting the procedures and operations of the business that you start protecting your brand and making it valuable. Your business should be distinctive, so that you are instantly recognisable (maybe some rebranding is in order), so you can register them as trademarks. You need to be able to block any copycat businesses setting up direct competition, otherwise franchisees will be less inclined to buy in and pay a franchise fee, which will inevitably diminish the value of your franchise. 

Our project approach is flexible and we carry out all of our strategies in line with our client’s needs. We create bespoke plans and documents which are based on an in-depth understanding of the workings of the business and your corporate values. We can carry out the majority of development work for the franchise, or we can work with you as project managers to add value within the development work throughout the franchising process. The range of services we offer for new franchisors includes:

  • Franchise feasibility studies Franchise package development
  • Developing business plans Franchise fee structures and financial models
  • Franchisee profiling Franchise territory analysis
  • Producing franchise agreements Producing franchise operating manuals
  • Developing franchisee training and support programmes
  • Trademark registration Franchisee recruitment
  • Setting up and running pilot operations Franchise network management
  • International franchising Franchise seminars and training for the team

If you’re thinking about franchising your business then get in touch with us today and let’s have that initial discussion. We’ll get to know a bit more about you and your business and give some initial advice about the procedure of becoming a franchisor! 

 

Part 2: How To Secure Financing For Your Franchise

Now that you’ve decided whether a franchise system is right for you, it’s important to start thinking about the finances involved in completely changing your business model at all levels of the organisation. While franchising is generally far more affordable than company-owned expansion, allowing for faster and more efficient growth overall, that doesn’t mean it is cheap to franchise a business! The startup costs of new franchises are often offset to an extent by the fee payments from franchisors, however, there is still an awful lot of work that needs to be done before you can start that process.

Once the franchise has been set up, piloted and is in its growth stage, most franchises finance themselves on an ongoing basis using profits from the business in the form of fees from franchisees based on revenue from the individual units of the franchisee network. However, to reach that point, or even to fund new growth during this part of the business cycle, there are several options available to franchisors.

Loans

Especially during the startup process of becoming a franchised business, there are a wide variety of different costs to be taken into account, such as the creation of high-quality franchise documentation, the legal processes of moving into another business model, extensive restructuring of the business, creation of branding and marketing materials for franchisees, supporting franchisees with training and development and more. This can require significant capital, and if you don’t have the level of capital available, franchising might not be suitable for your business at this point in time. However, most major banks have specific units dedicated to franchise finance, which can be an option for some businesses.

Franchise Units of Banks

Franchise units exist within a variety of major banks, including Natwest, Lloyds, RBS, HSBC and Citibank among others, and are set up to exclusively cater to the financial needs of franchisors and franchisees. Franchisors and franchisees alike are often reluctant to change their banking provider when moving into a franchise model, however there are many benefits to working with a bank that has units geared specifically towards the franchise sector. As they have a strong understanding of how franchises function financially, these banks are more likely to grant funding to franchise owners as they are aware of the higher security and success rates of franchised businesses, compared to those growing via company-owned expansion.

Having a good working relationship with your local franchise finance unit can be useful when it comes to helping your franchisees with their finances in the future. As well as being able to lend capital, franchise banking units are able to give sound financial advice to both franchisors and franchisees to improve their chances of success. Many franchise units of the banks also have dedicated franchise relationship managers who deeply understand your business and can give you high-quality advice regarding your organisation specifically. Having a strong relationship - whether this is strictly professional or has a financial component - with your local franchise banking unit, can have a wide variety of benefits for both you as a franchisor, and your franchisees in the future. This kind of relationship can also show potential franchisees that your company and network are reliable financially, and committed to supporting the franchisees in your network.

At The Franchise Company, we have strong working relationships with many of the UK’s most popular franchise banking units to help our clients and their franchisees get sound financial help and advice when they need it.

Capital Injection or Personal Loan

Franchisors can also use their own personal capital to help support the franchise network if it needs an injection of capital. This can be a good way to give the business the support it needs to get off the ground or work through difficult periods without having to go through lengthy application processes or rounds of funding to gain external investment for the company. However, having enough personal capital to invest in the business, or to get a personal loan which you can invest in the business isn’t always easy, and there are many business owners who are not able to pursue this financing method. However, for individuals or organisations where this is an option, it can be an effective way to finance the franchise business with minimal interference from external stakeholders.

Investment For Shares

Like many other startups, franchised businesses or businesses looking into funding their growth, development and expansion can look to external rounds of investment to finance their initial move into a franchise model or their expansion during the growth stage. Investment from external stakeholders in situations like this can be a good boost to the company, network and franchisor, in exchange for shares in the company.   

Business Growth Funding Schemes

Business Growth Funding Schemes are designed with businesses and their growth in mind. There are a huge number of business growth funding schemes available, and are often available locally or regionally. At The Franchise Company, our team of expert franchise consultants are able to help identify opportunities for our customers to grow with the help of business growth funding schemes in their area or sector, to improve the growth of the business and franchise network as a whole. Business growth funding schemes can be brilliant for franchisors looking to build or grow their business without going down traditional routes with banks or investments for increased funding.

There are a wide variety of options available for business owners looking into moving their business into a franchise model, as well as for franchisors looking to further expand their business and the reach of their franchise network. To find out more about the process of moving into a franchise network, as well as how The Franchise Company can help you and your business grow and expand as part of a franchise network, get in touch with our team of experienced franchise consultants today.

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