The investment requirement for setting up a franchise ranges from six figure sums down to a few hundred pounds. But do the opportunities at the lower end of the market give value for money? Jess Sturman reports.
The so-called credit crunch has led Britain to become a nation of bargain hunters with purse strings tightening by the second. Primark,
The Independent has reported, “has become the UK’s biggest value fashion chain with a 25% increase in its half-year takings.”
Buying a top from Primark can be done on a whim, but the decision to invest in a franchise should not be taken as lightly. Although cost is not always indicative of quality, if you are thinking of buying a franchise, don’t be tempted to invest in one just because it is at a bargain price, especially if it promises large profits for next to no work.
Franchise development services managing director Roy Seaman of CFE explains: “It takes substantial capital and time to establish a profitable business. Prospective franchisees should not be misled into believing every promise made by a franchisor unless substantiated with proof. There is no shortcut or free lunch in franchising so prospective franchisees should follow their instincts, question everything and ask for proof of any claims made.”
With the opportunity to work from home in your own time, the typical low-cost franchise package can be a solution for many mums who want to earn extra cash while looking after their children at home.
The cheap price of the franchise can give the impression that it’s a less risky investment because a smaller amount of their money is involved. But the reality can be very different, as Roy explains: “Only 20% of low-cost franchises offer a genuine business format franchise.
This means that unless the prospective franchisee has researched the franchisors carefully and is able to identify a good opportunity where the franchisor is able to provide proof of support, training and previous franchisee success, they will be entering the most vulnerable sector of the franchise market.”
Lloyd Muhammad, central franchise project manager from a low-cost franchise option, Kumon Educational UK, says: “Kumon is a low-risk franchise model with low start-up fees. Our franchisees have inexpensive running costs as all our maths and English study centres are run from church halls or leisure centres that are hired for class time which is roughly six hours a week.
?We have low start-up costs because we have full confidence in our product as well as giving our franchisees easier access to business success. For the past 50 years, Kumon franchisees have been provided with all teaching materials, regular professional support and generous subsidies including 60% off their local marketing spend. ?
So does buying into a cheap franchise like Kumon mean that you are short-changed? Not according to Muhammad. ?Kumon has a significant budget for national advertising such as TV and online marketing. Once up and running Kumon franchisees pay royalties for each student studying at their centre. Royalties are ploughed back into the organisation to ensure a continued increase in the level of support we offer and general product development.”
To start your own Kumon franchise you will need to invest ?3,000. Out of this, ?400 will cover the cost of your Licence fee and training, and ?2,600 is earmarked for promotional activities for your centre over the first 18 months. This sounds like a very fair deal, as the average business start-up spend significantly less than that for marketing and promotion.
Jacqueline Rogers, managing director and co-founder of low-cost franchise The Athena Network, states her belief that prospective franchisees who choose a franchise because it is the cheapest are normally left disappointed and out of pocket: “In the past we have had prospective franchisees look elsewhere because they think The Athena Network fee of ?6,950 is too expensive! Later, they have returned to review their options with us because the other venture has fallen through and the franchisees have regrettably paid for a very expensive ‘how to’ manual.
“I find it distressing when I hear and read of companies who do not deliver what they promise. Although it is not just companies posing as franchisors that fail to deliver, but also those who charge a great deal for a franchise and fail to deliver adequate support.”
The vulnerability of the low-cost sector is not always the low-cost franchisors’ fault though, as Roy highlights with the sun bed industry.
“In recent years sun beds have become less popular due to research into the anti-ageing affects of sunbathing either outside or in a tanning booth and the associated increased risk of skin cancer. No one would have been able to predict this.
“Often franchisees in this situation are those who had the wrong impression of franchising in the first place. They expected the franchisor to become their long-term business partner rather than a safety net and feel let down when they are left to run their business independently once the training is completed.”
Karen Sherr the founder of low-cost children’s franchise Musical Minis has noticed that the most successful franchisees in her network are those who realised from the outset that running a business would be hard work. “If customers phone you to book into a class you have to return calls, you have to promote the business locally and administration needs to be done regularly,” she reflects. “The franchisees that are motivated, organised and want the business to succeed do. Franchisees who sit back and aren’t proactive have problems.”
One of the main decisions to make when investing in a low-cost franchise is whether or not it represents value for money. Part of the franchisor’s role is to provide ongoing training and support to its franchisee network, and with a minimal initial investment how are the franchisors able to do this and run a profitable business?
Some low-cost franchises have been able to sustain a franchisee network with a minimal initial investment fee below ?10,000. The main reason for their low price is minimal overheads because the venues are rented as opposed to being bought. Established in 1990 as a local group, children’s music group Musical Minis began franchising its successful concept in 1997. As a full British Franchise Association member with 17 franchisees in its network and a further 12 licences to Sure Start Children’s Centres the company measures its success on its franchisee renewal rate: in the past two years over 70 per cent of the franchisees and 68 per cent of licencees have renewed their franchise agreements.
Karen Sherr explains how Musical Minis can support a franchisee for an initial fee of ?8,000 plus VAT: “Most of the large costs in establishing Musical Minis were incurred when the business was set up, for example recording the music. Musical Minis has established an infrastructure of support that initially is time intensive but not overly costly. This includes the use of regional managers, a franchisee forum and a seven-day a week helpline. The initial training is conducted at a place chosen by the new franchisee and is provided either by head office or the regional manager.
“The franchise fee includes full training, comprehensive operating and training manuals, an initial advertising budget, music especially recorded at a pace that is suitable for young children through MCPS, CD player, musical instruments, lessons plans, puppets and stories.
Additional capital is likely to be extremely modest, perhaps another ?100 in the event of upfront payment for halls. The fee is low because the overheads are minimal given the business can be run from home and the location for the classes can be rented.
“I have intentionally grown the business slowly for two reasons. First of all I wanted to ensure Musical Minis was and is able to support every franchisee properly. Secondly, I wanted to balance the business with my family life. In the first year a franchisee’s earning potential is usually between ?4,000 and ?5,000 with the majority of franchisees recouping their initial investment within 18 months. On average a franchisee will earn ?15,000 per annum by year five although this figure depends on whether the franchisee runs most of the sessions or employs staff to run them.”
So on all accounts, it does seem that cheaper doesn?t mean poorer quality or less value for money when it comes to buying franchise. My main recommendation is that you make sure they are registered with the British Franchise Association (www.bfa.org.uk).
Lloyd Muhammad, Central Franchise Project Manager from Kumon Educational UK says: "Kumon is a low-risk franchise model with low start up fees. Our franchisees have inexpensive running costs as all our maths and English study centres are run from church halls or leisure centres that are hired for class time which is roughly 6 hours a week. We have low start up costs because we have full confidence in our product as well as giving our franchisees easier access to business success. For the last 50 years, Kumon franchisees have been provided with all teaching materials, regular professional support and generous subsidies including 60% off their local marketing spend. In addition Kumon has a significant budget for national advertising such as TV and online marketing. Once up and running Kumon franchisees pay royalties for each student studying at their centre. Royalties are ploughed back into the organisation to ensure a continued increase in the level of support we offer and general product development." To start your own Kumon franchise you will need to invest ?3,000. ?400 will cover the cost of your Licence fee and training, and ?2,600 is earmarked for promotional activities for your centre over the first 18 months.
