Financial considerations when franchising your business

So,you’ve decided to take the leap into growing by franchising… or, perhaps, you already have started franchising and are wondering if you’re doing things in the best way?

Author: Carl Reader, Chairman at d&t, a leading franchise financial specialists

I’ve personally worked with hundreds of brands, both in the UK and internationally, and a common theme that I have found is that often people don’t know the benefit that they can have by addressing the financial systems and support in their operation from day one.

Yes, you might have your own accountant and your own funding broker, but it’s unlikely that they are as integrated in the industry as specialists such as d&t.

In fact, the thought going through your mind right now is “this can be tomorrows problem” Hopefully I can help you think otherwise – and it doesn’t cost anywhere near what you’d expect.

What should you be thinking about when designing your franchise system?

First and foremost, the most important thing that you should be thinking about is unit level economics. The great franchisors, both domestically and internationally, know that profitable franchisees build a long term sustainable franchise network that has true value to everyone involved.

Whilst that might sound like a catchphrase that ignores the commercial reality, those who’ve trodden the path before know that relying on the management service fee (MSF), or even worse the initial fees alone, creates a split between franchisor and franchisee.

The unit level economics dictate whether your potential franchisees can get funding for their franchise from the banks on preferential terms, whether the model is attractive once they get independent advice, the morale of the network during their term and of course, the likelihood of both referrals and renewals

Once we have that mindset in place, we can then turn to the practical steps that you can take to support your network:

Assisting new franchisees with funding

Whilst you might hope that you will stumble across several billionaires who will happily pay you in cash, the reality is that most new franchisees tend to need some level of funding.

By having a process in place to help them through this, you can ensure that they

About the author

avoid the trap of speaking to their local bank manager, who will likely be unaware of the preferential lending terms available to prospective franchisees of proven brands

You can do this yourself; however there are quite a few risks in this. For a franchisee to successfully raise funding, they need a strong business plan which has truly considered the realistic chances of success, and the various matters that might impact the business on both a local and national level.

As a franchisor, you ’ ve naturally got a vested interest in them achieving funding as it will secure you a new franchisee. And as an accountant by training, I’m fully aware that you can easily become a spreadsheet millionaire by hitting the zero key on your keyboard a few times!

What’s more, as a franchisor, you could potentially open yourself up to liability risks

Carl Reader is Chairman at multi-award winning franchise accounting firm d&t and author of The Franchising Handbook. He has previously served as Affiliate Chair and Board Member at the British Franchise Association.

Reader has spoken to global franchising audiences about best practice in franchising, and has worked with countless household name brands.

He has been recognised as one of the '20 faces of franchising' by What Franchise magazine, is a judge of many industry awards, and regularly contributes to the trade press hello@team-dt should the franchisee not perform as planned. Many franchisors are aware of the misrepresentation risks that come with initial material provided to prospects, but these risks also apply to information you provide to them directly in detailed projections or templated business plans.

So, the best route is to find an independent funding broker, but not just any funding broker I’d recommend that you ask them three questions to check that they are the right fit for you:

● Ask them if they are truly independent

A ‘broker’ who is tied to one or two finance companies isn’t a truly independent broker and you can’t be assured that they are getting the best deals for your franchisees.

● Ask them if they truly get franchising

And ask again! So many new finance companies pop up and put the word ‘franchise’ into their branding. Ask how long they’ve been working actively in franchising with more than just 10 or so brands, how many brands they work with, etc Really dig deeper to understand whether they are just putting a marketing strapline onto their website, or if they are truly integrated into the industry.

● Don’t fall for the ‘spreadsheet millionaire’ trap!

Yes, we talked about it as a risk for you as franchisor – but there is also a risk your broker has the sole focus of getting the deal done too. If the only service they provide is funding; with no follow up accountability on those plans, then it is likely that their main source of income is based on success fees Again, this might help you today but decimate your unit level economics tomorrow.

Creating a system to manage your networks finances

Being in franchising since 2006, this is probably the area where I’m most amazed at the differences between networks. We all know that finance is the language of business, but it’s very rare that franchisee and franchisor speak the same language!

The very best in class franchisees have a system that consolidates and provides analytics of their networks performance –not just their sales (which is where the MSF comes from) but also their profitability. There are two ways in which you can do this:

● You can build it yourself If you have experience of Application Programming Interface (API) connections between various packages, the risks of different charts of accounts, and coding experience you’d be able to create a consolidation tool that works.

● You can use an existing system, for example d&t’s free of charge Franchise Dashboard, which helps you hit the ground running with the insights you need to manage your network

Once you ’ ve got a system, this is where the magic kicks in!

If you use a holistic provider that manages both the planning (through funding applications) and the results (through filing of accounts and tax returns), you can not only monitor what happened 18 months ago, but also compare against what was planned to happen. This can help you drive performance, and in turn happiness, through your network – whilst also being able to spot when things aren’t quite what they seem.

Appoint a mandatory accounting partner in your franchise agreement

Under the EU Block Exemption for Vertical Agreements, you are permitted to enforce certain suppliers that are integral to your network, and we all know that financial management is vital to both the health and the performance of each and every franchisee.

It is much tougher to justify enforcing a generic accountant who uses off the shelf systems, but when you have one that also provides the network infrastructure to manage the finances of the entire network it becomes a no-brainer

When choosing your partner, again you should follow similar questions to those mentioned above about their longevity and experience in franchising, and working with concepts that are similar to yours

The kind of things that a reputable accounting partner would suggest, without you prompting them, would be:

● A mandatory chart of accounts to ensure that you are comparing apples with apples and that the information is similar across the network.

● Structuring of your initial franchise fees and an explanation of the tax differences between training and secondary training, for example.

● Practical KPIs to monitor within your network.

● Joining up budgets vs activity vs results.

● A reporting structure to head office.

Ultimately, whilst franchising itself isn’t a complicated method of growth, it needs the right foundations to ensure success

The usual objections to a mandatory accounting partner is the perceived fear of a franchisor that ‘it would be offputting’. Thankfully, those fears can be allayed by our experience

Firstly the stats show that over 70% of new franchisees are starting their first or only business, and that the remaining who already have a business are likely to be more established multi-unit franchisees.

Secondly, they need to pay for an accountant anyway Surely it’s best for them to get one who knows how every other franchisee in the network is doing, so that the advice is specific and based on much more knowledge and experience than a generalist.

Look at the data more than once per year

Yes this sounds obvious, but you’ll be amazed how many franchisors rely on paper accounts being emailed/posted 18 months after the start of the financial year. That simply isn’t good enough

Check in regularly, monitor their bank balances, costs and income, and be there for them to support them.

The best in class have systems which allow them to do this daily if they wish, but if you have a disjointed system with different accountants and potentially differently structured bookkeeping packages (or perhaps even worse, using more than one bookkeeping package), I’d suggest employing someone to monitor these things weekly or fortnightly Of course, it might be far easier to appoint a network accountant with these tools already in place.

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Instead, why not use the data to help you identify who you can serve and how you can serve them?

By tying up budgets vs activities vs results, you can support your bottom 20% with whatever assistance they need, and work with your high flyers to identify the key traits and activities that make them stand out amongst their peers (ps hint – it is likely to be their focus on the stats, and taking action!)

Finally, sleep at night

Once you ’ ve got your financial processes in hand, it’s a job well done And if you ’ ve appointed the experts, it takes little intervention afterwards.

Whilst I appreciate these things can be tough to get your head around, our team at d&t are more than willing to help you and hold your hand through this process

From setting up your systems from day one, through to converting franchise networks with 500 locations on to a better way of doing things, we ’ ve been there and we ’ ve got your back profitable franchisees build a long term sustainable franchise network that has true value to everyone involved.

How do I recruit franchisees?

Let’sstart with a solid piece of advice ... finding and recruiting the best franchisees is more than just a numbers game.

Author: Suzie McCafferty, Founder of consultancy firm, Platinum Wave Franchising

Many franchisors are reporting that whilst franchise recruitment enquiry numbers are down, the actual number of quality enquiries has remained the same, so they continue to grow at the same rate as before, only with fewer applications to wade through.

A dream scenario you might say?

Yet the mantra “it’s a number game ” has been so deeply ingrained into all recruitment activity for decades now, that the quantity of enquiries is often prized in equal measure to the quality

There’s no denying that the more people you can tell about your franchise, the more people you are likely to get an enquiry from, but what you really need, if you ’ re going to keep your conversion ratio (and your cost per lead) low, is an honest and compelling story shared with the right people, in the right place.

The commitment required to buy a franchise is enormous. Leaving aside the obvious financial commitment, you are essentially asking people to take a massive leap of faith with their future, so your marketing and recruitment processes need to be pretty persuasive to attract and convince the right/best people.

If you get 10 enquiries and they’re all perfect, you ’ re a marketing genius. If you get 100 enquiries and none of them are worth looking at, then you ’ re doing something wrong

From looking at a lot of portal listings and company websites, you could be forgiven for assuming that most franchisors are trying to attract the exact same person. Every click takes you to the same, safe, generic sales messages - in fact, if you took away the company logos, it would be hard sometimes to tell which company you ’ re reading about.

Have you ever followed up an enquiry and had to spend the first couple of minutes reminding the person which franchise you ’ re calling about? Lacklustre marketing content and the ease with which people can apply for multiple opportunities on franchise portals, are certainly contributing factors. Fill your details out once and within a couple of clicks you can request info from every brand in the sector.

To be fair to the portals, we demand they send us high volumes of enquiries every month so why wouldn’t they want to make life as easy as possible for the readers to

About the author

Suzie McCafferty, with nearly 25 years of first-hand international franchising experience, is a well-respected personality in the franchising world.

Having franchised her own printer cartridge business from a single store in Edinburgh to a network of 70 locations across six countries, McCafferty’s consultancy comes with an authenticity that few can match.

Prior to founding the now multi-award-winning Platinum Wave Franchising in 2010, she was Managing Director and Board Member of the £30m turnover franchise network at Select Appointments suzie@platinumwave co uk www platinumwave co uk get in touch? It's up to those of us doing the recruiting to make sure our content is more attractive, and memorable, than our competitors

McCafferty is a Non-Executive Director with one of the UK’s leading franchise brands, Right at Home. She is also the Onboarding Director at HERO Brands, owners of multiple international franchises including German Doner Kebab and Island Poké. She is also Chair of the BFA’s Regional Forum and Encouraging Women Into Franchising, Scotland.

Right, enough of the challenges – what are the solutions?

When researching opportunities most of today’s content hungry franchisee prospects are just as interested in understanding the culture and personality of your brand as they are in prospective returns on investment. You need joined up marketing that shows in addition to your franchise being a sound financial investment, you, the franchisor, are an expert in your field, an innovator in your sector and an inspiring leader to work with!

You’re asking people to make a long-term commitment to you, so who you are and how you do what you do, is incredibly important.

The public has long moved on from being hooked in with headline promises of overnight riches and early retirement Today your prospects are very wellinformed individuals who will put in an incredible amount of research before engaging with your emails, let alone picking up the phone to you.

This means if you want to have any influence in their decision-making process, you need to be providing the right information, in the right format, exactly where and when they want it. You won’t get a chance to shout “ no wait, come back, there’s loads I haven’t told you ” – so create a coherent information journey that delivers the goods

Yes, figures are important, but you need to tell them your story and be honest about what they can expect as a franchisee in your network At a very basic level that’s how you stand out – your story is your story, and your company culture is unique.

Sound like a lot of work? It is. But it’s crucial if you want to recruit the best franchisees. And we ’ ve not even discussed who’s going to do it, or what ‘it’ even means for your brand

So, who’s going to take on this incredibly important role for your brand? Adding to your headcount and payroll, particularly in the early stages of growth is not something most businesses can afford But you still need the skills and man hours to effectively launch your brand to the thousands of people out there looking for the perfect franchise opportunity.

Inevitably you’ll find yourself facing a chicken and egg conundrum you can’t afford to invest in a marketing team until you sell some franchises; you can’t sell franchises without good marketing.

Here’s a basic list of the things you’ll need:

● A franchise page on your website with content that accurately reflects your brand and your opportunity

● Listings on the most suitable franchise portals (once you determine which those are).

● E-Shots to the portal databases that promote your opportunity in a clear, engaging voice

● Google Ads to draw in those people not looking for opportunities on the portals

● Well placed expert opinion pieces that identify you as a leader in your sector or industry

● Print Ads in franchise media, trade magazines and marketing collateral for events.

● Quality copywriting and branded imagery.

● Someone to build a database of enquiries and manage a flow of content to each prospect that relates to their level of engagement fraction of the cost of bringing it in-house. You don’t need an enormous budget to get started, but you can’t do it for free and it’s not advisable to do it on the cheap

● Someone to manage that database using the latest technology to establish levels of engagement so that the best people are followed up quickly and personally.

● Someone to be ready to pick up the phone and talk expertly and professionally about your brand, answer tough questions, maintain dialogue and then identify the right people to invite to a discovery day, webinar, or one-to-one meeting.

● Discovery Day or webinar presentation.

● An engaging franchise prospectus.

Daunting, isn’t it? And that is by no means an exhaustive list, it’s just the things that have to be done. It can, however, be broken down into three essential parts: lead generation, lead management and lead conversion.

You might find one person you can employ full-time who has all the skill sets required, but to be honest, we haven’t yet It takes a team – and everyone on our team has at least 15 years ’ experience in their chosen field.

So, who is going to do it? You’ve built a great business that’s ready to franchise, so there’s a good chance you could take on most of it yourself – but do you have the time, which after all is your most valuable resource?

There are some quite specific skills required here and anyone who has them all to a high standard will be able to command a very good salary. But is it really a full-time role at this early stage?

An agency will work for a retainer and doesn’t need an employment, holidays or sick pay They will also have all the skills you need because the tasks are spread amongst a team of specialists. They should also be able to offer you plenty more besides the basic list of requirements above, such as social media management, pay per click, photography, video shoots, branding & design, copywriting, media engagement and campaign strategies

Outsourcing can bring you a team at a

That would be your lead generation taken care of, but what about lead management and selection & recruitment? If you can find a company offering all three services, you can expect to pay a monthly retainer with a commission on each franchise sold An experienced team will be able to hit the ground running - there’s no single approach to recruitment that works for every franchise (and it involves a combination of many different things) but a good agency will have solid and proven building blocks upon which to create the right strategy for your brand.

However, outsourcing isn’t always the right answer There are many franchisors who have done it all themselves, only adding a team member when they had simply too many franchisees to manage alone. Only you know your budgets, your existing inhouse skill sets and the speed you want to recruit at, but it’s good to know you have options

Effective recruitment activities that you should consider as a starting point

Your own website

Some brands have an entirely separate franchise recruitment website from their primary b2b or b2c site, and that’s certainly something to inspire to, but probably not necessary from day one You don’t need to write War and Peace (you won’t sell a franchise on the strength of one web page) but enough to articulate that franchise opportunities are available, where and what the person should do to get in touch.

A simple contact form works well here

Enough so that you get a name and contact number and/or email address. If the person can’t be bothered to spend 30 seconds filling in these basics then they aren’t particularly interested, but you don’t want to put up something resembling a mortgage application at this stage either They’re on your page, you have their interest, don’t make taking the next step too labourious.

and many brands would pay to advertise on all of the major ones. The truth is, some are better than others – but more importantly, some will perform better for your brand or market sector than others Put yourself in the shoes of a potential franchisee looking for an opportunity in your sector and use Google – see what sites comes up first and offer the most relevant content – that’s probably where you should be

LinkedIn

If you know precisely who you ’ re looking for, then LinkedIn is phenomenal for recruitment. They even have a tool called LinkedIn Recruiter.

● I want a graphic designer – 2 million people

● I want a graphic designer in Glasgow –1,000 people

● I want a graphic designer in Glasgow with more than 16 years ’ experience –250 people

● I want a graphic designer in Glasgow with more than 16 years ’ experience who has worked in the education sector - 12 people

That’s a nice concise list to approach, isn’t it? But it requires you to really know the attributes of the franchisees you ’ re looking for. Also, if you ’ re going to try LinkedIn, please make sure your own profile is up to date and professional looking – first impressions matter

Social Media

Franchise Portal

Once upon a time this was all you needed to guarantee a decent stream of enquiries

Channels like Facebook, Twitter, Instagram and Tik Tok can be great tools for recruitment, but it entirely depends on who you ’ re trying to attract. Never make the mistake of thinking “well, I don’t use Facebook so I’m not going to advertise there” – you ’ re not trying to recruit yourself, you ’ re trying to recruit franchisees – the big question is, ‘ are they on there?’.

Again, what works for one franchise won’t necessarily work for another – Tik Tok might struggle to deliver you candidates for an accountancy franchise, but you can be sure that some children’s activity brands are using it to great effect

Trade Media

Prospective franchisees are going to want to see that you ’ re a player in your own sector – otherwise what value are they getting from your brand Print advertising can be expensive depending on the sector, but most will offer digital options too Could you submit an opinion piece or perhaps secure an interview or podcast appearance?

A PR firm can advise you on the best way to go about this – but please note that the days of getting free advertising disguised as a press release are long gone Nowhere worth appearing is interested in content that isn’t of value or interest to its readers.

British Franchise Association (BFA)

Perhaps the biggest strength of the BFA is that fact that it’s not an organisation you just decide to join – you have to pass accreditation no matter how big or wellknown you are. This accreditation (and there are plenty of other good reasons to join) gives your prospective franchisees a serious helping of comfort when deciding if they can trust you or not

Franchise Awards & Business Awards Awards work ... they really do. These days we’ll barely part with money for a new toaster unless a reasonable number of complete strangers have given it a 5-star rating on Amazon (other retailers are available). Third party endorsements are always more powerful than your own claims to greatness.

You might not be ready to enter 'franchisor of the year ' just yet, but have a look at what’s out there – in particular, do your competitors have any awards or accreditations that make them look more attractive than you?

Go for it – you’ll either win or you won’tbut remember to answer the questions and keep your entry relevant It’s not about telling them what you want to shout about, it’s about demonstrating that you ’ ve excelled at the very thing they are giving the award for. Also, you can still get a lot of PR and marketing mileage out of a finalists place even if you don’t come first.

Dealing with enquiries

At Platinum Wave Franchising our recruitment team never refer to an enquiry as a lead. An enquiry only becomes a lead once it’s qualified. A name on a spreadsheet who’s never answered their phone or replied to any emails shouldn’t be taking up space on your hot list For an enquiry to become a lead, you need to have communicated with them and confirmed that they understand what you ’ re offering and declared that it is of interest (and ideally, affordable) to them.

When a good candidate gets to the point of contacting you, it’s usually because they have given it some thought and are ready to take a step closer to properly engaging with you Not to be rude, but it’s unlikely you are the only brand they’ve reached out to. Therefore, time and first impressions are of the essence.

Have a proper plan in place so that there is a process to follow. This gives everyone a consistent experience and means you don’t need to think on your feet and forget anything important No-one’s going to buy your franchise on the first call, so don’t terrify them by going for the close.

Whether you decide to respond by phone, text, email or smoke signal – do it promptly, confidently, and establish their level of interest, suitability and where they are in their own research You should have a prospectus to share and a timeline of next steps so that expectations are managed and no-one gets disappointed.

If the end goal is for them to sign a franchise agreement and join your network, what do you need fro to that stage – and w need from you?

● Do you have all the they’ll need?

● Do you have addit beyond what’s sha

● Do you have an ap asks for the right in

● W ill you be requiring an Non-Disclosure Agreement before meeting them?

● Where are you meeting them and is it for a casual ‘get to know you ’ or a proper Discovery Day?

If you ’ re going to let them speak to existing franchisees – how and when, and are your franchisees prepared for that?

Basically, whatever your process, you don’t want to be making it up on the hoof infront of a good prospect – make a plan and give them confidence.

Good luck

Once you ’ ve decided on a process, put yourself through it, and then ask a friend or colleague to do the same Why not go through a competitor’s process so you can compare and contrast – you can be sure your candidates will be familiar with several application approaches.

In summary, you have options If you only have budget for one piece of activity, make sure it’s the most effective one and nail it If you can afford a 10-channel strategy, then make sure you ’ re not ignoring quality in favour of quantity – it really is much more than a numbers game. n phone to you.

Asa relatively new franchisor, I have noticed that some of my more experienced colleagues are cuddling up to potential franchisees by calling them 'franchise owners'.

I’m tempted to follow this new fashion, but I have a nagging feeling that the term might come to infer to my so-called franchise owner that they have some proprietary rights to my franchise system.

Author: Mark Abell, International Franchise Consultant

Could I find myself having created a rod for my own back? Should problems arise down the line could I find myself in court trying to convince a franchisee-sympathetic judge that I hadn’t misled my 'franchise owners ' into believing that their territories included some equity in my franchise system? I am justified in being a little nervous?

You are right in that there is a discernable trend for franchisors, including some who are among the longest established, to describe their franchisees as franchise owners

Presumably the logic of this term is that a franchisee owns a franchise - ergo he is a franchise owner.

Presumably the phrase has been created, as you have suspected, by an over-creative franchisor who felt it would be warm and cuddly to give its franchisees a feeling that they owned a business, rather than just a franchised outlet. The franchisor would have seen it as a marketing ploy that would

That seems reasonable and harmless enough. Or does it?

The short answer is a resounding, no. It is a dangerous perversion of established legal terminology that could seriously back fire on a franchisor if he ever has to litigate on an agreement in which the franchisee is referred to as a franchise owner.

That may sound a slight over reaction, even verging upon hysteria, but it isn’t. It’s a reality. Let's go back to basics to understand why

System leasing

Some 40 years ago, the founder of the then very successful print and design franchise, Kall Kwik, proffered an incisive view of franchising which is still very relevant in the 2020’s.

tablished legal ck fire on a franchisor ement in which the se owner.

suggested it was “ a system leasing angement under which the franchisee quires from the franchisor a licence to duplicate the franchisor’s existing and successful system of providing a product/service to the end user ” .

It is not a perfect definition, but it does touch on the underlying commercial arrangement between the franchisor and its franchisees – the permissory and temporary nature of the franchisee’s rights to use the business format and other intellectual property of the franchisor.

This view is reflected in the more than 50 countries that so far have introduced franchise-specific legislation All of them, ranging from France, B the Netherlands and Sw China, U.S., Brazil, Viet Arabia take this view. In manifests itself in one o approaches to defining

About the author

Dr Mark Abell LLB has been acknowledged as a world leading expert in franchising for over 40 years.

Abell now works with a select portfolio of world leading franchise brands on the development and implementation of their international and domestic strategies

DrMarkAbell2022@gmail.com

The so-called marketing plan definition, and so-called common interest definition. The former originates from the Californian franchise law - the first in the world

It describes franchising as existing when " a franchisee is granted a right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor in connection with a trade mark in return for a fee"

The community of interest definition, first found in the laws of U.S. states such W isconsin and New Jersey, provides that there must be a common financial interest between the franchisor and the franchisee, and the franchisee is granted the right to use the relevant marks and carry on the business in return for a fee.

Both these long-standing approaches

Association's own definition is based on that of the European Franchise Federation. This defines franchising as being a relationship whereby "the franchisor grants to its individual franchisee the right to conduct business in accordance with the franchisor's concept."

All these definitions are based on the fact that the franchisee does not own a franchise, but is granted the right to operate one and that it is temporary right To use a conveyancing analogy, a leasehold is not a freehold. It follows, therefore, the franchisee is not a franchise owner.

But so what, you may ask? What difference does it make? Well, quite a lot

Entrenched pro-franchisee view

If a court was to hear a case based on an agreement that called the franchisee a franchise owner it would most likely courage the judge, who generally starts om a pro-franchisee position (protecting e little man from the bullying approach of e large corporate), to take a still more trenched pro-franchisee view at is not to say that the terms of a operly written franchise agreement ould be set aside wholesale merely ecause of the use of the term franchise wner It is far more subtle than that leasehold is not a freehold. It follows, therefore, the franchisee is not a franchise owner. onsider, for example, the Natural Life se. Despite good evidence to the contrary, the court of first instance held in favour of the franchisee and that the managing director of the franchising company was personally liable It was left to the Court of Appeal to sort things out and reverse the decision.

There are many othe For example, the Ch held for the franchise it was emphatically o with a strong sugges judgment was totally When a franchisor ha franchisees it needs which to avail itself I to alienate the court through the use of soft and inaccurate terminology.

So, using the term franchise owner is both incorrect and dangerous. The questioner is right to have been concerned about its increased use It is something that I would warn franchisors and their advisers to avoid at all costs. n