Irish Franchise Blog

When money is scarce and banks aren’t lending, should a Franchisor help a prospect to sign up by financing part of their initial franchise fee? The question was put to me by a client who has dozens of prospects interested in his franchise but they find it difficult to come up with the €50,000 fee.

Up to now, I have always advised franchisors to say NO to such a request. I believe that if the prospect isn’t able to pay the initial fee at the time he signs the franchise agreement you’re talking to the wrong person. If he can’t come up with the initial fee how on earth is he going to meet his ongoing working capital requirement?

Some franchisors do offer terms, however. At a franchise marketing seminar in Birmingham a couple of years ago I was staggered to hear one franchisor say that he allowed his franchises to pay off the initial fee—it was £27,000—at the rate of £2,000 a month. I wondered how many franchisees he was turning over every year. A lot, I’ll bet.

What every franchisor looks for is commitment, and I don’t see any commitment from someone who is allowed to pay off the fee in monthly instalments and then, if he changes his mind after one or two months, reckons he can just walk away from the business. For him, it’s a cheap gamble: he can quit when he likes without losing much money. But for the franchisor it’s a different story: he has to spend more money attracting other prospects and it is not always easy to sell a territory after someone has operated there for only a short time.

But the world has changed. In these straightened times, even sincere, committed people, with a good track record in business are finding it hard to raise capital. Why lose a good candidate if it’s within your power to assist him financially? I emphasize the good candidate. You wouldn’t want to do it for everybody, but rather than risk losing a prospect who ticks all the other boxes you might want to offer a deal.

In the case of the client who asked me the question, I suggested he seek a down payment of €20,000— a big commitment in itself these days—and agree manageable monthly instalments for the £30,000 balance. Obviously, the franchisor will not want to be out of pocket—he has set up costs to cover, including training, marketing materials, and perhaps products that are part of the package.

However, I would only recommend doing this if the initial fee is substantial. If the franchise fee is less than €15,000 and you’re being asked for terms, you are definitely talking to the wrong person!

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Home based franchises are very popular these days and it’s easy to see why. When money is scare and banks are not lending any, franchises in the lower price category–€10,000 to €15,000—can be particularly attractive.

In this price range you’ll find most of the businesses that can be operated from home. There’s a broad range of opportunities available, in almost every industry, from cleaning franchises to home delivery operations, pet franchises, computer services, fitness and health franchises, home improvements, and children’s entertainment. Finding a franchise that suits you should be easy.

Apart from the initial fee coming within your budget (the price of other franchises might be €25,000 to €50,000) there are other benefits, too. Working out of your home means you avoid the costs of renting an office or shop  Normally with this type of franchise you don’t need to hire staff, either, which adds up to low overheads and maximum profits.

You can choose what hours you want to work and enjoy a healthier work/life balance. There’s no daily commute, which reduces your fuel bills and wasted time. There’s no boss breathing down your neck, no pointless meetings or office politics to contend with, and no line management headaches. It means you can spend more time with your family.

Sounds idyllic?  A low investment opportunity could be appealing in the current economic climate but, remember, the initial fee only gives you the right to operate the Franchisor’s brand in a protected territory. You’ll need additional funds – bankers call it working capital –to get your business off the ground.  Even working from home you still need to put in the hours and a firm “hands on” commitment to owning, operating, and developing your own business.

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Setting initial fees and royalties is a very important aspect of franchising your business. Set them too high and you’ll frighten prospects away. Too low and you won’t make any money.

Fees and royalties should not only reflect the market value of your brand but also adequately support the cost of training, financing and ongoing marketing you will need to provide.

The initial fee should reflect the earnings potential of the business and be proportionate to the total amount of money the franchisee will need to run it. It should not be a major consideration. No point in asking €75,000 if that’s more than the franchisee will gross in his first year, or if he needs to find an additional €250,000 to lease a premises and pay for fit out and stock.

The fee should basically cover the cost of enfranchising someone: i.e, what you will spend on marketing in order to source the prospect and sign him up, and other expenses such as training, technology, and the value of goods you include in the start up package. You can’t be scientific about this, but you should be able to come up with a ballpark figure. Yes, you will make a small profit on each sale–but don’t depend on it. And, for sure, don’t rely on franchise fees for working capital. Wonderful if you are selling a franchise every week, or even one a month. But franchising is a numbers game and there are no guarantees. 

You are not in the franchising business to make a quick kill: you’re in it for the long term benefits. Remember, when you award a franchise you are creating an income stream—from monthly royalties or management fees—for years to come.

While all your franchisees should sign the same contract, there is no reason why they should pay the same initial fee. In the early days, when the franchise is new, I recommend setting a low fee to attract the first batch of prospects. After the first, say, three franchises have been awarded, you can step up the fee to new entrants in stages, and as the brand develops, until you reach the level that is justified and the market will bear.

There are three ways to make money from a franchisee. You can put a mark up on the products you sell to him, charge him a percentage of his gross earnings (usually 6 to 9 per cent) or charge him a flat monthly fee, irrespective of what he earns. Most franchisors charge a percentage, but the flat fee comes in handy if you are in a cash business and you have no control over what the franchisee will earn. You don’t have to worry about bookkeeping and accounting and whether or not your franchisee is giving you the right information or the wrong information. There’s no cheating.

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Delighted with the success of my new client, Tone At Home. After only three months in the franchise market we’ve sold five franchises and the company has been shortlisted for the Best Emerging Franchise 2010 award. The competition is run by the Irish Franchise Association.

Apart from being one of the fastest-growing franchises in Ireland, Tone At Home has also become the largest weight loss and fitness equipment hire company in the country, with more than 500 fitness machines on hire in the Dublin area alone.

Their success is quite remarkable in the current economic environment, and a tribute to the energy and commitment of founders Suzanne Carroll and Stuart Holmes. Getting recognition from the IFA is really the icing on the cake. There’s stiff competition for the Best Emerging Franchise and Tone At Home are up against O2, Caremark, Kids Party Club, and Motivation Weight Management Clinics. The winner will be announced on February 19.

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A mention in the Sunday Times on November 15 led to the first four franchise sales for my newly-launched client, Tone At Home. Four sales in three weeks is about as good as it gets in franchising and signs are that Tone At Home could be one of the success stories of 2010. The leads came directly from the article–the company has yet to start advertising the franchise. 

Tone At Home fills a niche in the multi-million euro health and fitness market in Ireland, offering the latest fitness and weight loss equipment for hire and for sale. They provide a next-day delivery service to homes and workplaces, making exercise easier for people who don’t want to join a gym. Tone At Home is a home-based franchise, and founders Suzanne Carroll and Stuart Holmes plan a move into the UK market next year.

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What’s the difference between a franchise and a licence? A franchise exists between the owner of an identifying trademark and the operator of a business using the trademark when:

• The Franchisee engages in offering, selling or distributing goods or services under a marketing plan or system, prescribed in substantial part by the Franchisor
• The Franchisee’s business is substantially associated with the Franchisor and the Franchisee pays a fee to the Franchisor or an affiliated party, directly or indirectly, in order to engage in the business

The first of these conditions exist when the Franchisor

• Provides the Franchisee with advice and training
• Retains significant control over the conduct of the Franchisee’s business, grants the Franchisee an exclusive territory, or requires the Franchisee to purchase or sell a specific quantity of the Franchisor’s goods or services.

A simple test determines whether the Franchisee’s business is substantially associated with the Franchisor: if the former uses the latter’s trademark to identify its business, it is substantially associated with it.

As for fees, they include payments made by a Franchisee to a Franchisor when signing a franchise agreement and payments made for training and assistance, royalties or inventory. Business relationships that do not satisfy these conditions may be licensing arrangements, distributorships, dealerships, or any one of a variety of other business relationships.

The key question is not whether the business entities entering into the arrangement intend to establish a specific relationship (e.g, a licence rather than a franchise); the key is whether they operate independently, even though one buys and sells goods produced by the other under a trademark.

The relationship between Franchisor and Franchisee, by way of contrast, is a dependent one, as evidenced by the arrangements regarding marketing, training, and the like.

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John and Mel Fisher, the husband and wife team behind Business for Breakfast, the fast-growing networking franchise, have asked me to source a Master Franchisee for Ireland. The Manchester-based company began its international expansion in August with a successful launch in the Czech Republic.  They see enormous potential for BforB in Ireland and have a list of potential franchisees waiting for the Master Franchisee to be appointed.

The search is on! Before advertising the opportunity I am calling people who have previously expressed interest in taking a Master Franchise. People in this bracket are real entrepreneurs who have not only the money but also the management expertise to market such a business. Some have operated a Master Franchise in the past–a big advantage since they’re well aware of what’s involved.

John and Mel’s own business has been hugely successful. They have 35 franchisees and several hundred members who meet in small groups (over breakfast, of course!) and offer each other those all-important referrals. Networking systems like BforB are very popular, the leader in this field being BNI, another franchised operation which is truly international. BNI is well established in Ireland and I hear that most of their territories–especially in the Greater Dublin area–are already sold. Another challenger in this market is Shay Cahill’s Venture Network Business Network which is gaining ground in the Dublin area. Whoever said competition is good for business was absolutely right, and I see a really professional organisation such as BforB making a big impression in Ireland. 

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I spent most of June on the road, or should I say in the air. I was in Geneva, Paris, and Vienna to discuss franchising with two new clients–Ski Republic and Novum Publishing. Both companies are turning to franchising to expand their well-established businesses internationally.

Ski Republic is a new kind of ski equipment hire company which has done to skiiing what Ryanair did to air travel. It has revolutionised the business by offering personal service for much less than the traditional operators charge. Ski Republic has 27 shops in some of the most popular resorts across the Alps and their move into franchising comes as a result of more than 100 inquiries from potential franchisees. Already master licences are being optioned for Austria and Switzerland and the scope is enormous.

What makes this an exceptional franchise opportunity is the money people can earn for just six months work in the winter season. Profits can exceed €100,000. Earnings apart, franchisees get the bonus of working in some of the most beautiful places on earth!

Novum Publishing is also a very attractive franchise. It’s the No.1 co-publishing house in Austria, Switzerland, Hungary and Germany. Since 1997 they have helped hundreds of authors to get their books published. The company provides a complete editing, design and quality print service and promote their works at publishing events and international book fairs.

Recognising an increased demand in the co-publishing market Novum intends to grant franchises throughout Europe in the 12 months.

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I’m delighted to say that I’ve just been elected to the Executive Board of the Irish Franchise Association. It’s a privilege, and may I say a big “thank you” to members who supported my nomination. I’ve long been a enthusiastic supporter of the IFA’s aims and ideals, and have served on the IFA’s Membership Committee for the last two years.  Joining the Board will hopefully enable me to make a more significiant contribution to the affairs of the Association. Apart from endeavouring to boost membership by 30%, we’ve a lot to do this year to promote IFA activities.

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When I talk to would-be Franchisees about a franchise agreement I take them through the main points and always advise them to discuss the agreement with their solicitor. In fact, they’re obliged to that under the terms of the agreement, so that they fully understand what they’re getting into. I never gave much thought to the fee a solicitor might charge for this service– until recently, when a prospect called me to say that her solicitor wanted to charge €2,000 to read over the agreement, warning her that “if I have to do any additional work on it the fee might rise to €5,000.”

What! The quote was outrageously high. Naturally, I told her to find another solicitor. Since then I have been taking great care to advise prospects to shop around. My own research has shown a wide variation in what solicitors will charge to read an agreement–from €300 from a one man practitioner to €900 for a multi-partner Dublin firm. All cautioned that their fee might be higher if they needed to take advice from other sources, or communicate with the Franchisor. Fair enough, but I would seriously question whether this would ever be necessary.

A franchise agreement from a reputable, established, company will be based on a particular format and any solicitor who is familiar with franchising should take no more than 45 to 60 minutes to read it, especially if the agreement comes from a member of the Irish Franchise Association, which will have approved the agreement before admitting the franchise to its membership. In my experience of having sold more than 50 franchises for various clients (and shown the agreement to dozens of other prospects who didn’t proceed for whatever reason) I only ever had one letter from a solicitor. He listed 10 points, but he was simply looking for clarification; he was not challenging the legality of the agreement. But no matter who has issued the agreement, for his own comfort the prospect should have it checked before he signs it.

High prices charged by solicitors to read these agreements might persuade some prospects not to spend the money and this would be a worry.

What’s your experience? Comments please!

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