IFRC - Stanworth and Purdy Oct 2002 - Lloyds TSB I Franchised My Business So Can You

‘
I franchised
my business,
so can you.
’
Professor John Stanworth and David Purdy Lloyds TSB
Business
contents
Before you begin 1
1 Franchising: a system for growing your business? 2
The franchise contract 3
Working with your franchisees 4
How a business format franchise works 5
2 Will business format franchising be right for you? 6
The franchisee’s point of view 7
3 Bringing your franchise plans together 8
4 Your key resources 11
The main legal issues 15
5 Where you can find more information 17
6 Your alternatives to franchising 18
7 Key stages in growing your franchise 20
Franchising internationally 21
8 Tips for successful franchising 22
What can go wrong? 22
Appendix 1 Useful contacts/sources 24
Appendix 2 Further reading 26
Appendix 3 British Franchise Association membership criteria 27
Appendix 4 Sample cash flow forecast 29
Appendix 5 Franchisee diagnostic questionnaire 31
Appendix 6 Outline franchise agreement 39
Appendix 7 Glossary of franchise terms 44

before you begin
The undoubted growth of franchising over the last few decades has led many business journalists to hail its
‘success’ as a way of growing a business.
However, this method of operating is no easy option.
As a newcomer you will quickly discover the complications involved in:

● franchise contracts
● trade mark protection
● franchise system development.
For these reasons alone it’s essential to take professional advice if you’re considering this method of business
development.
In addition, to give your proposed franchise a realistic chance of survival – let alone success – we’d recommend
that before committing yourself to significant levels of investment you should:
● carefully research your business strategy and objectives and
● make sure it has sufficient resources for this method of expansion.
This guide should help you when you are considering your franchise plans. It outlines business format
franchising, one of the most common types of franchising. This is a means of closely replicating a business
operation at other locations.
We’ve included data from surveys of both franchisors and franchisees – primarily to illustrate the business
environment in which existing franchised systems are operating.
Franchising your business 1

1. franchising: a system for growing your business?
Franchising is a system that enables business people to develop some of the biggest brands around –
like McDonald’s, Dyno-Rod and Holiday Inn. As a result, a very wide range of businesses benefit from franchising
today, in almost every market sector.
Consumers, of course, are aware only of the brand names, not how the businesses are actually run.
The UK franchise market

In the UK, franchised businesses currently have a combined sales turnover of around £44 billion. Business format
franchising accounts for almost 20 per cent of this (figure 1).
Figure 1: Franchising trends in total UK sales (outlet sales, £bn), 1984-1996
The most common types of franchised systems are business services. These include training, fast print,
recruitment and a variety of out-sourcing activities such as cleaning, property management and distribution
(figure 2). In addition, businesses selling to consumers, from fast food to convenience retailing, use the
franchising system.
Figure 2: UK franchisors – sector breakdown (% of 566 systems)
A Business Services 19%

B Specialised 10%
C Food Franchising 9%
D Home Care Services 8%
E Motorist Services 8%
F Property Care 8%
G Walk-in Retail 8%
H Distribution Services 6%
I Cleaning Services 5%
J Health & Beauty 5%
K Estate Services 4%
L Leisure/Travel 3%
M Delivery/Haulage 2%
N Fast Print 2%
Lloyds Bank/IFRC ‘Franchising in Figures’, 1996 (n=566)
2 Franchising your business

If you’d like more detailed information about the different types of franchised systems, we’d suggest looking
through one of the franchise directories published each year by Franchise World or The Franchise Magazine.
You will find additional helpful information on Internet websites listed at the back of this brochure – see page 24,
useful contacts.
The world of franchising

In most developed economies franchising is widely used for operating businesses. The governments of some
developing countries actively encourage business people to take this route. In Malaysia, for example, it is used to
promote entrepreneurship.
Other economies have already taken to franchising in a big way – the United States and Japan, for example:
A mid-1990s survey of 36 countries that have franchise associations, with the number of franchise systems and
franchisees summarised in figure 3, showed just how widespread this way of growing a business has become.
Figure 3: Franchising worldwide – a comparison
Number of Franchisors per Country Number of Franchisees per Country

United States 3,000 United States 250,000
Canada 1,000 Japan 139,788
Brazil 932 Canada 65,000
Japan 714 Brazil 60,000
Australia/New Zealand 600 France 30,000
France 520 Britain 26,400
Germany 500 Australia/New Zealand 26,000
Britain 414 Mexico 18,724
Italy 400 Spain 18,500
Mexico 375 Italy 18,500
Arthur Andersen/World Franchising Council, ‘Worldwide Franchising Statistics: A Study of Worldwide Franchise Associations’, 1995
the franchise contract

Experts generally agree that franchising revolves around the franchise contract. This binding agreement usually:
● allows the franchisee to carry on a business for a specified period under a name promoted by the franchisor
● entitles the franchisor to control how franchisees operate their franchised outlets
● obliges the franchisor to support the franchisees with services such as training or merchandising
● requires the franchisees to pay for the right to operate the franchise, and sometimes for the goods and
services that the franchisor supplies as well.

working with your franchisees
The relationship between franchisor and franchisees can take any of the following forms:
● Manufacturer-retailer
The franchisee sells your products directly to the public. For example: car dealerships, petrol service stations.
● Manufacturer-wholesaler
The franchisee is an established business, distributing your products and sometimes packing them as well.
For example: bottlers licensed by soft drinks companies.
● Wholesaler-retailer
Franchisees act together to set up a business that will become the franchisor. For example, a group of convenience
stores acting as a co-operative for their mutual benefit.
● Business format franchise

Franchisees operate a business format franchise in a standard way under a common trademarked name.
For example: fast food restaurants, courier services, cleaning services, employment or estate agencies, kitchen
and bathroom installers. The franchise is typically run in one of the following ways – in ascending order of
initial investment:
– Job franchise
Usually a one-person self-employed business that the franchisee runs from their own home – such as local
deliveries, drain clearance, car repairs.
– Business franchise
This generally involves a larger investment in business premises and equipment, employing and training staff –
as with fast food restaurants, quick print outlets and card shops.
– Investment franchise
Here the franchisee is working for a return on their relatively large investment – for instance, in a hotel or major
retail franchise.

how a business format franchise works
With a business format franchise, the franchisees will be operating as satellite enterprises of an already proven
larger business under its established trade name. They sell its products or services along specified lines (figure 4).
Figure 4: A simple franchise structure
As a franchisor, you can expect to charge the franchisees:

● an initial fee: this brings them your knowledge and business system. You’ll also want to include training and
initial support
● a continuing management service fee, typically 5-10 per cent of their sales turnover.
The advantage to you as a franchisor is that you should gain national distribution for your business more quickly
than by trading on your own. As self-employed individuals the franchisees, who put up most of the necessary
capital, will usually be motivated to work hard at building up their businesses.
This in turn should ensure success for you.
In addition to running a business of their own, the franchisees gain these benefits:
● the use of an established trade name
● prime rights within a particular geographical area
● support and advice from head office covering central marketing, promotion and administrative backup
● continuous market research leading to further development of the product or service concerned.

2. will business format franchising be right for you?
A business format franchise offers you as a franchisor a number of advantages. Here we balance these against the
disadvantages, to help you move towards an informed decision.
We also look at the pros and cons of the system for the franchisees with whom you’d be forming a business relationship.
Advantages for you as franchisor

1. You’ll be able to increase the number of outlets for your product or service while committing only a limited
capital investment. The franchisees put up most of the capital required, through investment in their
franchised outlet or business.
2. It’s fair to expect your franchisees to be highly motivated to maximise growth and profitability – by contrast
with managers employed to run your outlets. You may incentivise the latter by adding a performance bonus to
their fixed salary. But they will not have made a personal financial investment in the business. That’s what
makes the difference to franchisees, whose success – measured by profits growth – contributes to your
success as a franchisor.
3. Local ownership could make a franchised outlet more acceptable to the local community. Bear in mind that
local people may not realise a nationally known brand is in fact owner-managed. However, your franchisees
will enjoy some status as members of their local business communities.
4. Your overheads – payroll, rent, administration – are kept to a minimum. Such operating costs are the
responsibilities of your franchisees.
5. You would expect to see a continuing income stream. This will come from your franchisees buying equipment
and stocks or supplies (for example, fast food ingredients) from, or through, you as franchisor.
And the disadvantages

1. While you can control and supervise managers you employ directly, franchisees are self-employed. So if a
particular outlet owner allows product or service quality to lapse, this might damage the franchise as a whole.
2. It may be difficult to check each franchisee’s level of business activity. Many franchisors use a central
accounting system to overcome this risk, but total success cannot be guaranteed.
3. A franchisee may lose motivation (perhaps for personal reasons) and not run their outlet efficiently. While they
are operating within the letter of the franchise contract there may be little you can do in the short term.
4. It may be difficult for a franchised business to respond quickly to competitor activity or changes in the business
environment. Conventional companies can often move fast to modify their sales strategies. But having to deal
with individually owned franchised outlets could make this process lengthy and cumbersome. You’d have to
handle changes carefully if the franchisees think these might affect their independence.
5. You may experience problems in getting fast, accurate feedback on sales and trading from franchisees.
This may be the result of their desire for independence, or simply because channels of communication are
not as well developed as with a chain of company-owned and managed outlets.
6. Franchising involves a paradox. By working with motivated franchisees, you hope to capitalise on the personal
attention and service they bring to an owner-managed business. On the other hand, each franchisee has to
give customers a sense of consistent quality by offering a standardised product or service in a uniform way.
The latter conflicts with the former.
7. You might find it hard to recruit franchisees who have all three of the required qualities:
● the ability to understand the attractions of franchising as a way of running a business
● motivation towards self-employment
● the necessary capital to invest.

the franchisee’s point of view
To gain an all-round appreciation of franchising, it’s worth thinking about its advantages and disadvantages from
the franchisee’s point of view.
Advantages
1. Each individual can run their own business while gaining the economies of scale and other benefits of
working with a larger company. These include; initial and ongoing training, centralised buying, ongoing
market research into and development of the product or service.
2. A high-profile franchised brand enables the franchisees to concentrate on running their local business.
They know that the franchisor will carry out sales and marketing activities, including advertising, to keep
the product or service at the forefront of the public’s mind.
3. Investing in a franchise often requires less capital than equipping a similar independent business. In addition,
the franchisees may look to the franchisor for help with raising finance, site selection, negotiating leases,
getting started and running smoothly.
4. The franchise contract may give exclusivity within a defined geographical area. (Of course, if a business does
well, this could attract other franchisors or conventional businesses to start competing.)
5. Unlike most conventional businesses, franchisees in your network will be able to give help and advice to
each other. It’s exceptional for conventional business managers to feel confident about discussing challenges
and problems with their colleagues.
Disadvantages
1. There may be too little scope for the franchisee to impose their own personality on the business because,
as a franchisor, you will want to exercise tight control over the presentation of your product or service.
2. When the investment level is high, the franchisee may decide they could start their own business without
tying their fortunes to a franchisor’s.
3. The shortcomings of other franchisees – or even mismanagement by the franchisor – could tarnish the image
of the franchise as a whole. So even a well-managed outlet may suffer.
4. The services you provide may seem expensive – especially if the franchisees find they could have bought
equipment, products or ingredients more cheaply elsewhere.
5. If sales and profit performance do not live up to expectation, the franchisee may become dissatisfied with the
franchise contract, as they may do if you have not fulfilled all your obligations as franchisor.
6. When a franchisee is ready to retire, the franchise contract may limit their freedom to sell or assign the business.

3. bringing your franchise plans together
We have adapted this chapter from the International Franchise Association’s How to be a franchisor. Certain details
of documentation, operational plans and financing will vary from one industry to another. But the following steps
are universal for all franchisors.
1 Getting organised
Collect all the knowledge you have acquired while building the success of your business so far. Put it down in a
logical, sequential way. Remember you are going to train prospective franchisees in a subject area about which
they may know little or nothing.
2 Pilot operation
Franchisees will expect you to demonstrate you have run a successful pilot operation that supports your claims for
the business. Investigate how you can give your business idea patent or trademark protection – not only in this
country but also in areas overseas where you might expand.
3 Ongoing pilot
It’s essential to stay on top of your changing market – and recognise what changes to introduce and when. So you
should continue to run one or more company-owned outlets.
4 Operating plan
You will need an operating plan that covers in detail all the programmes required for running a franchise system;
sales, servicing, training, site selection, pre, and post-training. This should also name the person responsible for
each area.
5 Financial plan
Develop a conservative financial plan that covers cashflow, profit and loss, and any extra sources of funding you
can introduce or make available. Prepare a similar plan to help franchisees.
6 Franchisee qualifications
Decide if your franchisees should be individuals or companies. Define the profile you are looking for – such as;
business experience and skills, personal education and qualifications, financial capabilities. For more about this
topic, see the franchisee diagnostic questionnaire, appendix 5.
7 Franchise type
Decide which type of franchise you will offer; individual unit, multiple unit, subfranchise, affiliation/conversion
franchise, or master franchise. For more about these, see legal considerations, page 15.
8 Franchise training
Decide what training your franchisees will need, how to train them, and who will do it.
9 Growth plan
Decide how your company is going to grow – slowly, quickly, regionally, nationally, internationally.
10 Franchise costs
Decide how much you should charge for the initial fee, royalty fees and advertising contributions.

11 Franchise sales
Decide how you will attract potential franchisees. Methods include your own sales team, franchise exhibitions,
direct mail, the Internet, word of mouth and advertising.
12 Franchise territory
Decide how much (if any) geographical exclusivity to grant your franchisees. The options include exclusive
territories, no competing units within an agreed area – or no protection. You may also have to decide whether
protection should be subject to volume quotas or performance standards, and for how long.
13 Franchise financing
Decide the best way to finance your own growth; with a public share offering, private offering, venture capital,
limited partnership, commercial banks, or from surpluses generated by your own company.
14 Tax planning
To protect yourself, you will need to plan the following; avoiding liability for your franchisees’ taxes, the net royalty
principle, capitalising sales expenses and initial franchisee fees.
15 Franchisee control
You will need to manage your franchisees, in particular corporate franchisees and their shareholders. Other issues
to consider include:
● whether a franchisee can assign their licence or pass it to their heirs
● rules about breakaway franchisees
● franchisee bankruptcy
● competing franchises
● limits on a franchisee’s size.
You will also need:
1. Credit control for the money franchisees owe you.
2. To select reporting systems and audit procedures.
3. Access to franchisees’ tax returns.
4. To decide which procedures and guidelines to use for securing deposits, prompt payment discounts and late
payment penalties.
16 Advertising
Decide how to advertise your franchise – national, regional, or local newspapers and magazines, direct mail,
leaflet distribution, radio and television. And how franchisees should fund it – paying a fixed percentage of gross
sales, or a fixed monthly fee.
17 Dispute procedures
Decide how to resolve any disputes that arise – with litigation, arbitration or mediation – where the dispute will
be resolved, and who will pay the legal fees. You should seek legal advice.

18 Employees
Expect to employ some staff directly – to carry out franchise sales, franchisee training, and central administration.
Write down their job specifications, qualifications and salaries. Develop a basic organisational chart.
19 Operations manual
You should develop and set out clearly all the methods and procedures that franchisees and their employees must
follow in running the business. Aim to include as much detail as possible about your franchise system in this manual.
20 Personal assessment
Before committing yourself to the franchise route, answer these questions honestly:
● are your goals realistic and attainable?
● if you need financial help, will you allow a lender to take a share in your business?
● do you have the patience, tenacity and self-discipline to develop a fledgling business or convert yours to
franchising?
● can you develop and sustain relationships with many different personalities – your franchisees?
● are you prepared to make the sacrifices that building a business can involve – including the effects on your
family and other areas of your life?
● are you ready to share some of your present independence by working with franchisees?
● can you attract, hire, train, manage and develop important staff who will respond to you personally?
● what type of personality are you?
● becoming a franchisor is time consuming and expensive – are you ready?

4. your key resources
Finance
Some franchisors expect the initial fees that franchisees pay to significantly outstrip their own investment from
very early on in the life of the franchised system. Both theory (figure 5) and practice (figure 6) show that you
should not expect to achieve such an optimistic result.
For instance, the expected scenario in figure 5 uses the example of a franchisor who starts with £150,000 of
long-term loan capital to supplement their own funds of £100,000. Despite this initial £250,000 of start-up
finance, the system’s further borrowing needs peak at almost £200,000 in year 4, and the franchisor moves
into the black only between years 5 and 6.
Figure 5: Franchise system start-up (illustrative example):

Borrowing requirement for ‘expected’ and ‘worst-case’ scenarios
We also show that it takes a relatively slight adverse change to push the system into a worst case scenario.
We assumed that total receipts would be 10 per cent lower than expected, and total payments-out 10 per cent
higher. Here the outcome is a peak borrowing need of £345,000 in year 4 – well over 70 per cent beyond the
anticipated requirement. The franchisor remains in the red beyond year 7.
Figure 6: Finance invested prior to first franchisee

by franchising experience

A survey of UK franchise systems shows (figure 7) how franchisors’ expectations of breaking even worked out
in practice. Experience scores over optimism every time. More than half the newest systems thought they would
break even with fewer than 11 outlets. But most system owners with 6-10 years’ experience recognised that they
would need 21-50 outlets to break even.
You’ll find more details about these aspects of running a franchise in appendix 4.
Figure 7: ‘Break-even’ franchise system size

by franchising experience
Franchisees
Cost of recruitment
Recruiting franchisees is usually an expensive process. A survey of franchisees attending a UK franchise exhibition
showed that you would typically spend £3,000-£10,000 for each franchisee recruited (figure 8). These costs are
arrived at by dividing total marketing expenses (advertising, exhibitions, interviewing and so on) by the number of
franchisees appointed.
Choosing franchisees
Recognising likely winners is not a simple job. A number of factors contribute to the problem.
● Most developing businesses considering the franchise route have much in common with the typical small
firm. So your management team may be able and committed in their own field, but is unlikely to possess
such specialist skills as personnel selection, a key task.
● Some franchisors prefer to rely on instinct when judging which candidates are likely to make good or bad
franchisees. They seem to feel that it would reflect badly on their own abilities to admit that personnel
selection can be difficult.
● Other franchisors fall into the trap of looking for people who are exactly like themselves with their weaknesses
as well as their strengths. They should really be recruiting franchisees who complement their skills.
● Recruitment may be made even more difficult by the fact that often a husband and wife will work together as
a franchise team. Any stress between them can turn a source of potential strength into a structural weakness.

Franchisee qualities
These qualities are considered to be essential for a good franchisee:
● able to cope with the isolation of self-employment
● self-discipline
● prepared to work long hours and under pressure
● ready to learn from failure
● set their own high, but realistic, standards
● will not flinch from taking unpopular decisions
● can resist impetuous or emotional behaviour
● takes a balanced view of events, whether good or bad
● can tolerate uncertainty
● will accept advice
● can demonstrate financial viability
● has the support of their spouse or partner
● can show a background of enterprise
● motivated to make profits
● sales ability
● receptive to franchisor’s training
● keen to grow their business
● happy to delegate
● takes the long-term view
● believes that individuals can ‘make things happen’.
To help you screen franchisee candidates, we’ve included a diagnostic franchisee questionnaire in appendix 5.
Figure 8: Estimated cost of franchisee recruitment

by length of time in franchising

Motivation
We carried out research amongst prospective franchisees visiting exhibitions to find out why franchising appeals
to them. This showed that previous experience of running their own business is a key differentiator (figure 9):
● those who had never been self-employed rated independence most highly
● those who were currently self-employed opted most strongly for the economic security of a proven system
(business format franchise)
● those with experience of being self-employed who were currently back in the labour market also tended to
prefer a proven business system.
These results show that you can target prospective franchisees from each of these segments more accurately by
using appropriate messages.
Figure 9: Main appeal of franchising (to prospective

franchisees): by employment status
Getting enquiries
We used a postal survey to ask UK franchisors which of 14 different communications methods they found most
cost-effective in recruiting franchisee candidates (figure 10).
The most popular, in rank order, were:
1. Franchise exhibitions
2. Franchise magazines
3. National advertising.
Figure 10: First choice preferences for franchisee

enquiry leads: by franchise experience

A small proportion (1-6 per cent) recommended:
● word of mouth
● customers
● local advertising
● direct mail
● out-placement courses
● employment and business transfer agencies.
The following methods received no first-choice selections:

● extended family
● seminars
● trade press.
the main legal issues

In the UK, the franchise industry is lightly regulated compared with the US. There the Federal Trade Commission
enforces disclosure rules for franchisors. The main legal issues for a firm operating in this country are:
● European Commission Block Exemption
This effectively deregulates franchising provided franchisors follow certain specified courses of action.
● Trading Schemes Act 1996

This excludes franchise systems provided they comply with specific conditions. For example, by registering all
franchisees for VAT, and operating only single tier (i.e. non-pyramid) systems.
● Community Trade Mark 1997

This gives a branded system copyright protection throughout the European Union.
The following summaries outline the other areas of law that will impact on UK franchisors.
● Contract law
This covers the franchise contract, which should include:
– granting the licence
– obligations of both franchisor and franchisee
– provisions for the franchisee’s death or incapacity through illness or accident or insolvency
– sale of the business by the franchisee
– terminating the agreement
– restrictions following termination.
The franchise contract should have viable property to licence (the business system). You should also avoid
including terms that may be deemed unfair. We give examples of typical acceptable clauses in appendix 6.

● Competition law
It is reasonable for the franchise contract to include restraint of trade clauses that cover geographical area and
post-termination restrictions. However, a larger system, aiming for a total turnover of more than £20 million
a year (franchisor and franchisees together) will need to clear its agreement with the Office of Fair Trading.
● Tax law
Income that you receive as initial licence fees is liable to corporation tax. Other franchisor income for the services
and materials you supply to franchisees is usually treated as revenue. For the franchisees, their initial licence fee
is not tax-deductible.
● Agency law
You will need to avoid inadvertently creating an agency relationship with your franchisees. This can happen
where a franchisor acts as a trustee for the franchisee. Exercising too great a control through the contract could
lead to this. It may also require you to disclose more about the business than you planned to.
In addition, a franchise system is subject to the same employment and data protection laws as any other business.
Before you go further we’d always recommend taking legal advice from a specialist firm of solicitors with
experience of franchising agreements.

5. where you can find more information
One of the principal sources of useful information for franchisors and franchisees alike is the British Franchise
Association (BFA). Originally set up in 1977 as primarily a franchisor organisation, this is now the industry’s trade
body. Its aims are:
● to develop and continuously improve standards of good practice in franchising
● to accredit franchisors who meet those standards
● to promote good franchising, as represented by accredited franchisors, to the general public, the business
community, government and the media
● to provide to the general public, as prospective franchisees, information and education to help them make
effective judgements in choosing the best franchises for them.
Membership of the BFA includes over 200 franchisors, plus accountants, banks, specialist consultants and
solicitors. Before becoming a member, a franchisor has to demonstrate that they have a proven and reliable
business that can be cloned. Potential franchisors can receive early development guidance.
Membership progresses from provisional to full status as the business develops. But all members can use the
appropriate BFA logo in their promotional material.
The BFA accredits UK franchisors against wide-ranging criteria, which include a European Code:
● Viability – a financial record that shows a sound business.
● Franchisable – a record of at least one successful franchised outlet, and no significant record of failures.
● Ethical – a franchise agreement and structure conforming to the European Code of Ethics.
● Disclosure – offer documents and brochures that reasonably represent the performance of the system.
If you are thinking of offering a business format franchise, you should consider joining the BFA. You’ll find more
details about the BFA and other useful sources in appendix 1.
guidance
6. your alternatives to franchising
Having read about franchising so far, you may feel that other methods of growing your business will suit you better.
Figure 11 sets out the advantages and disadvantages of various expansion stratregies. But here are outlines of the
main options you may want to consider:
● Distribution/dealerships
This is an agreement between two independent businesses: the vendor and the re-seller. The latter has a licence
only to stock the vendor’s products, so they won’t benefit from the ongoing support of a franchise system.
In addition, they will be legally obliged to hold sufficient stock and maintain their premises in a way that reflects
well on the brand or product concerned.
● Licences
With this arrangement you allow a licensee to use your brand name in exchange for a royalty on sales. There are
usually few restrictions on how the licensee may run the business, apart from maintaining the quality image of
your brand.
● Agencies
You agree to appoint an agent to act on your behalf, in exchange for commission on sales. The agent never buys
products on their own account, but arranges purchases by a third party – who will usually make direct payments
to you.
● Multi-level marketing
With this method groups of self-employed distributors build sales organisations of their own to work for a particular
manufacturer or supplier. Their financial rewards, which are paid by the supplier, are based on the total sales
value achieved by each distributor organisation. Pyramid selling is a type of multi-level marketing in which
higher levels of distributors receive payments for recruiting sales agents at lower levels. Despite bad publicity,
the concept remains legal in the UK, but governed by specific legislation.

Figure 11: Advantages and disadvantages of various business expansion strategies
Company options Advantages Disadvantages

Franchisee-owned ● may use franchisee’s capital to expand ● may lose some control
stores ● may be able to recruit higher level or ● may not teach franchisee to operate
more motivated managers unit as well as franchisor
● may permit more rapid expansion ● may be difficult to find qualified
because of greater advertising and franchisee
broader geographical presence. ● may have lower profitability per unit
because of franchisee’s share
● franchisee may pursue maximum
profit as goal whereas franchisor
wants maximum sales
● may generate higher legal costs and
lawsuits
● may have unmanageable growth if
franchisor is better at selling franchises
than at support.
Company-owned ● offers direct control ● rapid expansion may be limited by
stores ● able to change more quickly from top capital shortage, personnel availability
● may have higher potential profit ● units may not be run as well because
because there is no franchisee share. of lack of motivated managers.
Partnerships ● defined legal entity with body of law ● limited control over partner
● able to recruit complementary partner ● possible liabilities, legal/tax regulations
with skills or capital. ● difficult geographical expansion.
Licensing of right ● allows expansion easily ● limited control in how licensee
to use name ● low initial costs. runs business.
or product
Sales ● direct control over employees ● may be expensive to train and
Representatives ● less expensive than company office. maintain staff
● continued motivation, supervision
often difficult.
Co-operative ● may allow trade of information ● may be difficult to form and maintain
Association of ● cheaper group purchase of items. ● has limited function
Similar Businesses
● not designed to promote individual
unit growth.
Mail order/ ● easy to set up. ● not suitable for many products
0800 Number or services
● offers limited geographical presence.
Franchising’s Growing Role in the US Economy, 1975-2000, US Small Business Administration, Washington D.C., 1993

7. key stages in growing your franchise
There is a pattern to the development and growth of a franchise, although no two systems – nor the problems to
overcome – will be identical. These are the basic, underlying challenges you should expect to encounter on the
route to franchise success.
1. Finding a business idea

You may be running a business already – coffee shop, sign manufacturer, fast print, bookkeeping service –
that you want to use as your business idea. Or you may decide to devise an idea from scratch by brainstorming,
networking and researching a range of possible options.
2. Organising the first pilot operation

To build a franchise, you should consider devoting at least one year to piloting your basic business idea. This will
enable you to test your strategies for sales, marketing, product or service delivery, pricing and staffing. Virtually
every business start-up plan has to be changed during the first months of its implementation. High failure rate
figures, particularly during the first 30 months after start-up, confirm this. However, if you have an established
business which is doing well, you may decide to let this represent your pilot.
3. Establishing transferability
With the pilot in place, your next step will be to set up an identical outlet in a different location. This will test how
easy it will be to find new premises, hire new staff, organise a launch and all the other aspects of transferring the
skills and success of your original enterprise. It involves a steep learning curve, but there is no more certain test of
your business idea’s transferability.
4. Drawing up key documents

Before you can start looking for franchisees, you’ll need three essential documents:
● Operating manual: this puts on paper detailed instructions that will guide your franchisees in running their outlets.
● Franchise contract: this sets out the legal obligations of the franchisor and franchisee.
● Franchise prospectus: your marketing tool for recruiting franchisees.
Expect to put a great deal of time and hard work into each of these. You may also need to pay for external help
from management consultants, solicitors and accountants.
5. Arranging financial support

Setting up a franchise system is costly. You may have to invest over £50,000 in development costs to franchise
even the least expensive systems, before reaching break-even point. Trying to finance system development purely
from franchise sales and royalty fees seldom succeeds. When planning the financial side of your franchise, you
could consider bank loans, investment by business partners, or family members – in addition to your own funds.
6. Franchisee recruitment
The tried and tested methods of attracting the interest of potential franchisees are usually quite costly. But with
no previous track record or brand awareness to draw upon, spending this money may be unavoidable. Expect to
spend money on taking stands at franchise exhibitions and advertising in the national press. Expect to spend time
filtering down the 40 or 50 leads that are typically required to yield a single franchisee.
7. Establishing management control and field support systems

As you gain franchisees, to ensure that the system runs smoothly you will need to reinforce your own management
team in such areas as: franchisee training and support, advertising, setting up reliable supply lines, and
collecting royalties.
8. Achieving break-even
The franchise process is heavily front loaded, in that you need to have in place a tried-and-tested business
system, management team and fieldwork support well before a steady flow of money starts to come in from
franchisee fees and royalties. For most systems you can expect break-even only after 4-5 years and with
30-40 outlets trading.

9. Communicating with your franchisees
As your franchise continues to grow, business systems will come to replace the personal communications that
you used in the early days. For any business, two-way communications are essential – especially if you want to
introduce changes. You may need to set up a formal franchisor-franchisee advisory committee, publish company
newsletters and fact sheets, and hold national or regional conferences.
10. Surviving post-maturity

Your franchise will have reached ‘maturity’ when regular royalty fees are coming in from the franchisees. It may
take five years to reach this point, but this will be no time to relax. You need to be constantly alert for competition
in your chosen field, and to come up with improvements to your product or service that will help to keep you
ahead. As your army of franchisees continues to grow, the scale of your management support systems should also
grow. Here careful management is particularly important. If you expand your support systems too soon, you’ll
have to carry high overheads. But if you do so too late, you risk undermining the confidence and goodwill of your
franchisees.
franchising internationally
Looking further ahead, as your well-established franchise system faces a saturated home market, a logical route
to further expansion could be into overseas markets. It’s worth noting that the US government encourages
American franchisors to expand abroad and publishes reports on markets outside North America.
As you’d expect, franchising internationally is complex and demanding. Before you can exploit it, you’ll need to
address such issues as: intellectual property and trademark protection, market research, overcoming cultural
barriers, local taxation and protectionism.
Before investing time or money, look for professional guidance. The BFA can supply details of affiliate members
who may be able to help.
develop
8. tips for successful franchising
● Clonability: it should be easy to transfer your service expertise or know-how to franchisees.
● Competitiveness: think how to make your product or service unique, to attract both franchisees and
customers. What’s so special about another fast print, home-delivery pizza or cleaning franchise?
● Profitability: profit margins should be large enough to support both franchisor and franchisee.
● Specialist advice: to develop a sound franchise agreement, along with effective training documentation,
seek specialist help.
● Franchisee recruitment: be discriminating when you start out. Otherwise a weak foundation may wreck the
whole system.
● On-going support: To maintain your franchisees’ motivation it is essential to make sure you provide ongoing
support. Otherwise they will ask “What are we getting for our fees?” Do not under-estimate the resources and
effort required to sustain a network of franchisees.
● Ailing businesses: franchising is not the way to rescue a struggling enterprise. Payback time will be long,
initial investment high, and initial franchisee fees might cover only recruitment and training costs.
● Contingencies: changing circumstances can blow the best-prepared plan off course. Make sure that sufficient
additional finance is readily available.
what can go wrong?

Business specialists have recorded five key reasons why a franchise may fail. These are not generic business
problems, but specifically related to franchises:
● Business fraud
For example, using celebrities to attract franchisees to systems that were not well-founded – as happened in
the US during the 1960s and 1970s.
● Intrasystem competition
This occurs when outlets are located too closely together – or company-owned outlets are too near franchised
outlets. The result is that each outlet cannibalises the other’s sales, although the franchisor may only see this as
a way of earning the maximum level of royalty income, ignoring the long-term effects on the system.
● Insufficient support
If too little is invested in supporting franchisees – with pre-opening programmes, management assistance,
advertising and so on – the outlets may simply wither away.
● Poor franchisee screening

A mismatch between the criteria required for success and the qualities of franchisees actually recruited.
Sometimes this arises because a franchisee wants to maximise their initial fee income.
● Persistent conflict between franchisor and franchisee

Faults can arise on either side – inconsistency of support by the franchisor, or inattention to product or service
quality on the part of a franchisee.

From figure 12 you can track the fortunes of almost 140 US franchisors who started trading in the early 1980s.
After 10 years only a quarter of these newcomers were still franchising. Studies of franchise system withdrawals
in the UK show similar results.
Figure 12: Franchisors starting to franchise in 1983: Proportion still franchising in subsequent years
In theory US franchise systems should be less likely to fail. The law requires franchisors to give each potential
franchisee a detailed prospectus, so creating an additional hurdle before a franchise can be launched.
But even when franchisees commit themselves to a substantial initial investment, it seems clear that success can
never be guaranteed.
In our own postal survey of UK franchisors we asked what they thought were the greatest threats to a franchise
system’s survival during the first two years. The most frequently cited problems were:
1. Shortage of funds
2. Difficulties with franchisee recruitment
3. Difficulties in building the support network.
So if you intend to grow your business through franchising, there would seem to be two lessons:
● Be prepared to thoroughly research and understand the principles of franchising.
● Make sure that you can quickly arrange extra finance – for example, if system development progresses
more slowly than anticipated.

appendix 1
useful contacts/sources
Advice/Information
British Franchise Association (BFA) The BFA is the single regulatory body for franchising
Thames View in the UK. It is a non-profit making body responsible
Newtown Road for developing fair and ethical franchising through
Henley-on-Thames its member franchisor companies. The BFA has
Oxon RG9 1HG 160 franchisor members, with more than 10,000
franchised outlets, and it also has accredited over
Tel: 01491 578049 Fax: 01491 573517 70 professional advisors (lawyers, bankers,
accountants and consultants). It publishes guides
www home page: http://www.british-franchise.org.uk to help prospective franchisors and franchisees.
The Business Link network has numerous offices Assistance offered:
based around the country, primarily to aid business Developing your Business – developing business
development, usually free of charge: plans and strategies.
Selling and Marketing – marketing businesses and
“Business Links are open to all businesses great and products more effectively.
small and are run by private sector-led partnerships Developing You and Your People – improving skills
of Training and Enterprise Councils, Chambers of and effectiveness of managers and employees.
Commerce, Enterprise Agencies, Local Authorities, Doing Business Abroad – winning a share of key
Government and other providers of business support. overseas markets.
They’re staffed by dedicated teams of advisers and New Ideas, Innovation and Technology – identifying
specialists committed to help you succeed.” appropriate new techniques and managing
implementation.
www home page: http://www.businesslink.co.uk/ Quality – boosting standards of quality and
performance of products, processes and people.
IT & Computers – new developments in information
technology, computers, peripherals and software.
Money and Financial Management – planning
financial strategies and accessing available funding.
Legislation and Regulation – understanding and
complying with the plethora of complex commercial,
employment and financial law and legislation.
Starting a Business – supporting start-up business
at every stage including information, advice,
training and counselling.

Publishers of franchise magazines and directories
Franchise World Magazine: Franchise World
Highlands House Directory: Franchise World Directory
165 The Broadway
Wimbledon
London SW19 1NE
Tel: 020 8605 2555 Fax: 020 8605 2556
www home page: http://www.franchiseworld.co.uk

Franchise Development Services Ltd. Magazine: The Franchise Magazine
Franchise House Directory: The UK Franchise Directory
56 Surrey Street
NR1 3FD
Tel: 01603 620 301 Fax: 01603 630 174
www home page: http://www.franchise-group.com

Hands Down Publishing Magazine: Business Franchise
83-84 George Street
Richmond
Surrey TW9 1HE
Tel: 020 8332 9995 Fax: 020 8332 9307
www home page: http://www.businessfranchise.com
Exhibition organisers
Venture Marketing Group The British Franchise Exhibitions
111 Upper Richmond Road, (BFA-sponsored)
Putney, London SW15 2TJ
Tel: 020 8394 5288 Fax: 020 8785 3388
Research into franchising issues

International Franchise Research Centre Researchers and publishers of academic and
University of Westminster commercial research. The University maintains
35 Marylebone Road a website with information about franchising and
London NW1 5LS also showing links to other franchising-related sites,
include the International Franchise Association (IFA)
Tel: 020 7911 5000 Fax: 020 7911 5059
www home page: http://www.wmin.ac.uk /~purdyd/
Lloyds TSB
Lloyds TSB Franchise Unit Lloyds TSB Franchise unit maintains a watching
Business Banking brief on the Franchise Industry, helping managers
PO Box 112 understand the special circumstances that both
Canons House franchisors and franchisees are faced with. We are
Canons Way happy to give help to potential franchisors as well
Bristol BS99 7LB as point you in the direction of specialised
assistance when appropriate. We also maintain a
Tel: 0117 943 3089 Fax: 0117 943 3990 database of UK franchisors, accessible via
computers based at our branches.
You can contact us through your business manager/
corporate manager or directly on 0117 943 3089
www home page:

http://www.lloydstsb.com/success4business

appendix 2
further reading
Further reading
Franchisors Guide Both comprise a variety of useful material to inform
Franchisees Guide both sides of franchising – sponsored by Lloyds TSB.
published by: British Franchise Association
Franchising: A Legal & Commercial Guide A useful guide to the legal aspects associated with
By Gordon D. Harris (1993) franchising (116pp, unpriced).
published by: Wragge & Co., 55 Colmore Row,
Birmingham B3 2AS
International Franchising: A Checklist A checklist of issues (over 20pp), including:
Lex Mundi World Reports, Goals and Motives (business objectives, methods,
Supplement No. 12, January 1992 options, resources), Feasibility, Legal Barriers
(regulatory costs, economic barriers) and Business
By Andrew C. Selden, Esq. Issues (management issues, economic concerns).
Briggs and Morgan, 2400 IDS Center,
Minneapolis, Minnesota 55402, USA
http://www.hg.org/supp12.txt
[via Hieros Gamos – Legal and Government Web Site]
The Guide To Franchising
By Martin Mendelsohn
published by: Cassell
Taking Up A Franchise
By Colin Barrow and Godfrey Golzen
published by: Kogan Page

appendix 3
British Franchise Association membership criteria
In joining the British Franchise Association, Members, both Associate and Full, commit themselves to comply
with the terms of the following policies and procedures as published by the Association:
● the Code of Ethical Conduct
● the Disciplinary Procedure
● the Complaints Procedure
● the Appeals Procedure
● the Terms of Annual Re-Accreditation.
Members also agree to comply with the Code of Advertising Practice as published by the Advertising
Standards Authority.
In addition Members also agree to provide to the Association any non-confidential information relating to their
franchise business, or relating to the standing and qualifications of its Directors, as may be requested by an
authorised official of the Association.
Members also agree to provide a full-time official of the Association, so authorised by Council, access (at reasonable
times and on reasonable notice to confidential information relating to the franchise and its standing, on the
understanding that such information remains confidential to the authorised official.
The Association offers a conciliation service and an Dispute Resolution Scheme which is available to franchisors
and franchisees who jointly agree to use the service.
Members of the Association also seek to comply with the spirit and intent of the Guidelines to Best Practice
as published by the Association from time to time.
In respect of both the foregoing general conditions of Membership, and the following specific terms, whilst the
Association will use its best endeavours to establish the eligibility of an applicant, the onus for demonstrating
that the criteria have been met on initial accreditation or re-accreditation lies finally with the applicant.
Summary of membership criteria and categories

1. Viable
2. Franchisable
3. Ethical
4. Disclosed
5. Proven trading and franchising record
} Associate
and Full Members
Full Members
The following specific terms of Membership apply to both Associate and Full Members. Each term sets out a
general condition that the applicant must fulfil. Each general condition is followed by examples of how applicants
will ordinarily be expected to demonstrate that the condition has been met.

1. Demonstrate that the Business itself is Viable – The production of 24 months recent audited accounts,
including trading accounts, which show that the business is capable of being run at a profit that will support
a franchised network.
2. Demonstrate that the Operating Units in the Business can be Successfully Replicated – The production
of 12 months recent audited accounts for a managed arms-length pilot franchise, or a fully fledged pilot
franchise, which show a trading performance at least in line with the business plan set for it and which
is supported by a developed operating system.
3. Demonstrate that the Contractual Terms to be offered to Prospective Franchisees comply with the
Association’s Code of Ethical Conduct and such other terms as it may publish from time-to-time –
Lodge with the Association for its accreditation, and to be available for inspection by appointed franchisees,
a copy of the then current agreement and any changes thereto.
4. Demonstrate that the Offer Documents to be used with Prospective Franchisees Present a Full and
Realistic Picture of the Franchise Proposition – Lodge with the Association for its accreditation, and to be
available for inspection by appointed franchisees, a copy of the then current offer documents and any
changes thereto.
Applicants who comply with the foregoing general conditions of membership and the specific terms 1 to 4 set
out above will be eligible for admission as an ‘Associate Member of the British Franchise Association’.
Applicants who comply with the following, additional specific condition will be eligible for admission as a
‘Full Member of the British Franchise Association’. Associate and Full Members may refer to themselves as such
in their offer documents, advertising and other published material. Only Full Members are entitled to use the
Association’s logo.
5. Demonstrate that the Franchise Network has Developed over Time with a Proven Trading and Franchising
Record – Provide a record of franchise openings, withdrawals and disputes (which required external
intervention to resolve) together with evidence of the profitability of individual units and of the network as
a whole sustained over a period of 24 months.
Franchise operations which form part of a larger group or company will be required to submit evidence
concerning the franchised network, on a confidential basis if necessary, which is confirmed by a Director of the
company as representing a true and fair picture of the franchised network. Additionally such franchised operations
will be required to provide a statement from the holding company or group confirming its intention to maintain
the franchised operation for at least the forthcoming year.
Overseas Franchisors franchising directly into the UK, and the Master Licensee of Overseas Franchisors are
eligible to apply for Associate or Full Membership in respect of their UK operation. Additionally Overseas
Franchisors seeking only to operate through a Master Franchisee are eligible to apply for ‘Overseas Membership’.
To gain admission their overseas operation must comply with the general conditions of Membership and the
specific conditions applicable to a Full Member (excepting any terms of the Association’s Code of Ethical Conduct
which would not be recognised by an Association of similar standing in the Country concerned). July 1990.

appendix 4
sample cash flow forecast
The following cash flow example is not intended to represent any given franchise system, but is to illustrate the
timing and extent of the finance that might be needed when launching a new system. A ‘worst-case’ scenario has
also been included to convey an indication of the additional finance that would be needed to allow the system to
continue until it reached ‘break-even’.
At the outset, it has been assumed that the owners invested £100,000 in the system and also obtained a 5 year
loan of £150,000. If everything goes as expected, then a peak borrowing requirement of a further £199,000 will
be needed. Alternatively, if the ‘worst-case’ outcome materialised, then the peak requirement will rise to £345,000.
Other assumptions
● Franchisee initial fee £8,500 plus VAT.
● Franchisee ongoing fees (management service fees) 7% of turnover.
● Franchisee sales turnover:
Year 1 £100k
Year 2 £120k
Year 3 £140k
Year 4 £155k
Year 5 £165k
Year 6 £175k
Year 7 £185k.
● All franchisees open at the start of each year, rather than the usual phased openings.
● Variation for worst case, income –10%; costs +10% from Year 2 onwards. No franchisee opened in Year 1.
● Two year capital repayment holiday on 5 year bank loan.
● No failures of franchisees.
● All figures rounded to nearest £1,000 for clarity.

Expected scenario Set-up period Year 1k Year 2k Year 3k Year 4k Year 5k Year 6k Year 7k
Franchisees recruited 1) 4) 8) 13) 15) 11) 8)
Total franchisees 1) 5) 13) 26) 41) 52) 60)
Receipts
Franchise fees (initial) £10k) £40k) £80k) £130k) £150k) £110k) £80k)
Management service fees (from franchisees) £7k) £15k) £99k) £208k) £348k) £476k) £591k)
Owners’ share capital £100k
Bank loan (5 year term) £150k
Total receipts (A) £250k £17k) £55k) £179k) £338k) £498k) £586k) £671k)
Payments
Capital expenditure £35k
Development expenditure £150k
Franchisee recruitment costs £3k £20k) £24k) £39k) £45k) £33k) £24k) £24k)
Loan repayments (24 month capital repayment holiday) £50k) £50k) £50k)
Loan interest £15k) £15k) £10k) £5k) £2k)
Direct costs £4k) £20k) £52k) £104k) £164k) £205k) £240k)
Staff costs £44k) £49k) £71k) £74k) £79k) £84k) £104k)
Overheads £20k) £22k) £30k) £31k) £32k) £32k) £40k)
ACT (Advance Corporation Tax) £20k)
VAT (£26k) £6k) £12k) £20k) £23k) £17k) £12k)
Professional fees £2k) £4k) £8k) £13k) £15k) £11k) £8k)
Dividends £100k)
Overdraft interest £4k) £6k) £7k) £5k) £3k)
Total payments (B) £188k £79k) £144k) £278k) £349k) £403k) £376k) £548k)
Net cash flow (A) – (B) £62k (£62k) (£89k) (£99k) (£11k) £95k) £210k) £123k)
Opening balance £62k) £0k) (£89k) (£188k) (£199k) (£104k) £106k)
Bank balance credit (overdraft) £62k £0k) (£89k) (£188k) (£199k) (£104k) £106k) £229k)
Worst case scenario (see accompanying notes for explanation)
Total receipts (C) £250k £50k) £161k) £304k) £448k) £527k) £604k)
Total payments (D) £188k £80k) £156k) £305k) £381k) £439k) £410k) £436k)
Net cash flow (C) – (D) £62k (£80k) (£106k) (£144k) (£77k) £9k) £117k) £168k)
Opening balance £62k) (£18k) (£124k) (£268k) (£345k) (£336k) (£219k)
Bank balance credit (overdraft) £62k (£18k) (£124k) (£268k) (£345k) (£336k) (£219k) (£51k)

appendix 5
franchisee diagnostic questionnaire
Introduction
The question of who will make a good franchisee is one which exercises the minds of all franchisors.
The statements below, plucked from various franchise articles, quite clearly spell out the overriding importance
of franchisee selection:
● “Franchising is a partnership. A franchise’s major asset, once established, is its franchisees.”
● “A model franchise company will recruit as franchisees people who are not only qualified financially, but also
by ability, energy and enthusiasm to make the most of the opportunity available to them.”
● “Setting up a franchise is less difficult than managing it later on – you have to live with your earlier mistakes
and a lot of those are people you pick when the urge for rapid growth takes over from all other considerations.”
Picking winners
Picking winners is not a simple task and the difficulties inherent in the situation tend to be compounded by a
number of additional factors:
● Most developing franchises have much in common with the typical small firm, in that they have only a few
key staff members undertaking a multitude of tasks. These may be very able and committed people but,
usually, none of them is expert in the field of personnel selection and management, which is the relevant
specialism here.
● Some franchisors may feel that they can rely on ‘instinctive’ or ‘gut’ feelings to signal good or bad franchisee
prospects. Just as few people would admit to being a bad driver, so they feel it reflects badly upon them to
admit to difficulties in selection of personnel.
● Very often people fall into the trap of looking for people exactly like themselves when what they may be best
advised to do is look for people who complement rather than duplicate their own abilities and weaknesses.
● In as much as franchising is a team effort, one of the key front line teams is the franchisee husband/wife team.
If this team is not operating effectively, then a source of potential strength can descend into a weakness.
Costs and conversions

For businesses having four or more years experience of franchising, research has indicated that nearly 60 per cent
report an average recruitment cost in excess of £5,000 per franchisee (1994 prices).
This cost is a reflection of appreciable numbers of applicant rejections and most of the more professional franchise
companies convert no more than 4 per cent of initial enquiries for franchise prospectuses into sales. Even this
is judged by some to be, if anything, on the high side with 2 per cent being a better target figure. But why should
this figure be so low?
One reason is that self-employment is a pipe-dream for quite a large army of people who like to indulge in
‘half-way-house’ experiences. They may subscribe to small business magazines, attend seminars, join business
clubs and, in this way, get an arm’s-length thrill of a ‘share of the action’.
Some of these people may, eventually, take the plunge, should they lose their job, or come into money, etc.
But, in the meantime, they are not serious prospects.

Another reason is that self-employment is a widely held desire in our society, albeit one that is often associated
with very little knowledge of precisely what is involved. Grand notions abound of independence – ‘doing your own
thing’, ‘no one looking over your shoulder’, ‘being able to play a round of golf midweek when the course is empty’.
Thus, the bait is strong enough to at least initially interest a great many people.
Finance is often thought to be no great problem by potential franchisees since, as they see it, the clearing banks
exist to address precisely this problem. However, many prospects will never have raised bank loans before and
the idea of having to offer security or collateral (their house perhaps) can often come as a shock to them.
Psychologists
Some psychologists have made an industry out of attempting to devise tests which will predict those likely to
make a success of running their own small business and those who are unlikely to do so. Whilst success in the
field of psychological profiling here has been very limited, it is perhaps worth mentioning a couple of the more
hopeful approaches.
Probably the best known is that associated with Professor McClelland and his attempts to measure
‘achievement-need’, or ‘the desire to do well for the sake of an inner feeling of personal accomplishment’.
In the 1960s this was used in many countries for selection and training purposes but, after some initial
claims of success, has come in for increasing criticism.
Another psychological test is the so-called ‘locus of control’, which is based upon the proposition here that
potentially, entrepreneurs will have a high ‘locus of control’ or, in other words, believe that they can control their
own behaviour and that their behaviour determines what happens to them. Put simply, this amounts to a belief
that they control their environment rather than the reverse. Again, there have been some successes claimed here
but ‘locus of control’ testing is still not widespread in the field of entrepreneurial selection. Also, knowing that
many people who become self-employed have been ‘pushed’ by environmental circumstances, e.g., redundancy,
a ‘locus of control’ test would not appear very appropriate.
There appears to be a common misconception amongst franchisors that franchisees are very different animals
from conventional independent small business people. However, research shows that around one-third of
franchisees have previously been conventional small business people and around half of all potential franchisees
attending franchise exhibitions have current or previous experience of conventional self-employment.
Looking through the eyes of potential franchisees

It is important to keep in focus the goals of potential franchisees. Their prime aim in life is not, and will never be,
to make your firm ‘the biggest in its market’. Potential franchisees will have their own goals and these will vary
with their past experience.
For instance, we now know that people without any previous experience of self-employment have goals
practically identical to most other people in their situation. Thus, their main goal is the search for independence
and autonomy, achieved through structuring their own time and efforts rather than being directly supervised
and controlled by others.
For potential franchisees with previous experience of self-employment, the lure of franchising as a proven
business system takes prominence. Thus, goals such as ‘security’, ‘access to a known tradename’ and
‘business backup’ assume great importance.
Some guidelines for the franchisor

Some franchise companies may wish to explore the possible advantages of psychological profiling in depth.
If so, they would be well advised to seek specialist help. Short of this, what do the lessons of research and
management theory generally hold to assist the franchisor in improving franchisee selection methods?

In a nutshell, they offer three main messages for the franchisor:
● First we know that people who have either first hand experience of self-employment themselves or, alternatively,
come from a family which has such experience, are statistically more likely to take up franchises than people
randomly drawn from the population. Thus, ensure that you are addressing this question at an early stage.
● Make use of standard personnel selection techniques to ensure that your interview and selection techniques
are as scientific as possible and protect you against subjective or whimsical judgements. For instance,
you should develop a proper franchisee role description outlining the purpose, functions, responsibilities,
conditions and prospects linked to the role.
● Then, you should have a proper franchisee specification which should outline the kind of person best suited
to the role. This document should be based upon the answers to two questions:
– which attributes are essential in a franchisee and
– which are desirable.
● In addition to the above, you should develop your own diagnostic questionnaire schedule, suited to your own
franchise operation (see below).
Whilst it remains true that there is no single foolproof formula, or litmus paper test, that will guarantee a
franchisor 100 per cent success in selecting good franchisees, the more scientific the approach used, the better
your choices should be, thus bringing long-term benefits for franchisors and the franchise network. The remainder
of this paper will concentrate upon assisting franchisors to develop their own diagnostic questionnaire schedule.
The diagnostic franchisee questionnaire

The following diagnostic questionnaire was developed by Professor John Stanworth of the University of
Westminster’s International Franchise Research Centre. It can be used in exactly the form outlined below or,
alternatively, can be modified to fit any franchise company’s precise needs.
When should it be used?

The timing of the franchisor’s use of the Diagnostic Questionnaire can be organised to suit the needs of individual
companies but the possibilities are numerous:
● It can be sent out with the company’s initial information pack as part of a first response to enquiries.
This can have the advantage of making prospects think through their own position whilst spelling out some
of the issues involved in being a franchisee. This initial educational function can be useful in ‘cooling down’
some of the ‘dreamers’. Franchisors might even suggest that potential franchisees not only complete the
exercise for themselves but also get other people who know them to complete it for them as an aid to
checking out the image others have of them. Both versions should then be returned to the franchisor for
discussion at the interview stage.
● Its use can be delayed until, say, the first interview stage when the franchisor has the choice of allowing the
prospective franchisee to complete it in private unprompted, or with the franchisor administering it as part of
a face-to-face interview.
● It can be used when discussions are well advanced and then used to the advantages of both parties as an
additional check of their understanding of one another.
Which of the above alternatives is preferable depends on the franchisor’s other selection/recruitment techniques
but, on balance, the first probably has most to offer since it makes the prospective franchisee think through
his/her situation as well as providing the franchisor with valuable information later on.

Questions
Twenty questions are listed below and these are designed to get the potential franchisee to analyse his/her ability to:
● Cope with the isolation of self-employment (Q1)
● Exercise self-discipline (Q2)
● Work long hours under pressure (Q3)
● Learn from failures (Q4)
● Compete with self-imposed standards (Q5)
● Take unpopular decisions (Q6)
● Resist impetuous or emotional behaviour (Q7)
● Take a balanced view of events (Q8)
● Tolerate uncertainty (Q9)
● Accept advice (Q10)
● Demonstrate financial viability (Q11)
● Demonstrate support of spouse (Q12)
● Demonstrate enterprise background (Q13)
● Demonstrate profit motivation (Q14)
● Demonstrate sales orientation (Q15)
● Demonstrate receptiveness towards franchisor’s training (Q16)
● Demonstrate growth orientation (Q17)
● Demonstrate a favourable attitude towards task delegation (Q18)
● Take the long-term view (Q19)
● Demonstrate belief that individuals can ‘make things happen’ (Q20)
Interpreting replies
The marking scheme, contained in the body of the questionnaire and presented in square brackets [ ], should,
in practice, be separated out if the franchisor does not wish the prospective franchisee to be able to conduct
his/her own marking. A good score for the exercise in its present form would be 25+ of a possible maximum
score of 40 marks. It is worth remembering that no exercise like this can ever be totally efficient in predicting
success. It is essential that it is used in association with other personnel management techniques. With that
proviso, it should pay good dividends.
The twenty questions, along with marks in brackets [ ] are presented overleaf. These are ‘forced choice’ questions
where the respondent is asked to opt for one of a choice of 3 possibilities: (a), (b) and (c) on each of 20 questions.
This ‘forced choice’ format is designed to stop people sitting on the fence. It is quick and easy to administer,
whilst giving the franchisor leads on issues that can be followed up in greater detail later.
If you the franchisor wish to use this exercise essentially to inform a prospective franchisee of whether or not they
are likely to be suitable material, you may provide them with the marking scheme to facilitate self-assessment
and, in the process, allow them to see which statements are regarded favourably by you, in terms of relevance
to your franchise.
On the other hand, if the main reason for running the exercise is to get information from the prospective
franchisee in as accurate a form as possible, you the franchisor should mark the completed questionnaire.
If the prospect does not know which statements carry most marks, he/she is less likely to be tempted to
deliberately select the statements attracting most marks. It is worth, in any case, stressing the point that
giving dishonest answers in order merely to accumulate points is a fruitless exercise from all points of view.

Twenty questions
Q1 Are you regarded by those who know you as:
(a) Generally a fairly self-contained person? [2]
(b) Generally a rather gregarious person? [0]
(c) Somewhere in between (a) and (b)? [1]
Q2 Are you regarded by those who know you as:
(a) Frequently frustrated by tasks you find boring? [0]
(b) Able to endure a reasonable amount of boredom and frustration? [1]
(c) Generally good at concentrating on whatever tasks face you? [2]
Q3 Would you say that:
(a) You possess an excess of mental and physical stamina and enjoy excellent health? [2]
(b) You find that you tire easily if you work long hours and your health is not always of the best? [0]
(c) You estimate that your health and stamina are about average for a person of your age? [1]
(a) You find mistakes and setbacks very demoralising? [0]
(b) You feel that mistakes can be a very useful way of learning as long as they are not repeated? [2]
(c) You try to learn from your mistakes but often find it easier said than done? [1]
Q5 Which of the following most accurately describes you?
(a) You set yourself targets and almost obsessively chase after them? [2]
(b) You get fed up if you find yourself ‘on the go’ all the time? [1]
(c) You like to take life at a modest pace and respond to pressures as and when they arrive? [0]
(a) You find it almost impossible to make tough decisions, particularly if they involve people? [0]
(b) You can make tough decisions when necessary but it takes a lot out of you emotionally? [1]
(c) You see tough decisions as a fact of life – you don’t necessarily enjoy them but, on occasions,
see no alternative? [2]
(a) You do not suffer fools gladly and make little effort to hide your feelings? [0]
(b) You have notable patience and self-control? [2]
(c) You are situated in between positions (a) and (b)? [1]
(a) Your mood is very influenced by events? [0]
(b) Your mood is very little influenced by events? [1]
(c) You tend to adopt a policy of ‘taking the rough with the smooth’? [2]
Q9 Are you regarded by people who know you as:
(a) A person who needs to know exactly where they stand? [0]
(b) A person who can live with uncertainty? [2]
(c) A person who can endure a reasonable amount of uncertainty? [1]
Q10 If you go into business would you:
(a) Resent people who appear to be telling you how to run your own business? [0]
(b) Regard the views of others as a potential source of useful information and guidance? [2]
(c) Be willing to listen to others when you had the time but likely to ‘take it all with a pinch of salt’? [1]
Q11 Would you say that your total personal assets and savings together:
(a) Exceed the full buy-in cost of the franchise? [2]
(b) Exceed two-thirds of the full buy-in cost? [1]
(c) Amount to less than two-thirds of the full buy-in cost? [0]
Q12 Do you feel that your spouse:
(a) Feels that how you earn a living is very much your own affair? [0]
(b) Would prefer to see you doing something you enjoy? [1]
(c) Is very keen on you taking a franchise and willing to back you very strongly? [2]

Twenty questions continued
Q13 Which of the following is true of you?
(a) There is no prior history of self-employment in your family involving either yourself or close relatives? [0]
(b) Though you have not personally been self-employed previously, there is some history of
self-employment in your family via close family and/or relatives? [1]
(c) You have personally been self-employed previously? [2]
Q14 Is your main reason for wanting to be a franchisee:
(a) To achieve a good standard of living? [2]
(b) Because most of the alternative options for making a living appear closed? [0]
(c) For the independence and autonomy involved in having your own business? [1]
Q15 Do you feel that, in taking a franchise:
(a) You would have a tried and tested product/service which should sell itself? [0]
(b) No matter how good the product/service, customers still respond to sales effort? [1]
(c) Selling would still be a key activity? [2]
Q16 Is your prior work experience:
(a) Unrelated to the franchise in question? [0]
(b) Very closely related to the franchise in question? [2]
(c) Marginally related to the franchise in question? [1]
Q17 In running your own business, would you:
(a) Prefer to stay small? [0]
(b) Wish to grow as big as circumstances allowed? [2]
(c) Just grow to a size where you could begin to take more time out of the business? [1]
Q18 Do you feel that:
(a) To get a job done properly, you must do it yourself? [0]
(b) Delegation allows you to spend more time doing what you are best at? [2]
(c) Delegation is a necessary evil? [1]
Q19 Do you feel that it usually pays to:
(a) Take a long-term view of things? [2]
(b) Make hay whilst the sun shines? [0]
(c) Adopt the medium-term view? [1]
Q20 Do you feel that
(a) Your future lies largely in your own hands? [2]
(b) You can at least partly influence your own future? [1]
(c) The individual is merely a puppet on the end of a string and can do little to influence events? [0]
The points behind the questions

To add more ‘meat to the bone’, what follows here is a more detailed background on the issue being investigated
in the questions above:
Q1 Franchisees need to be able to survive feelings of isolation. In contrast to being an employee, they have no
immediate boss, or peers, who can give help, advice or moral support.
Q2 Franchisees need to be able to exercise self-discipline. In running their own business they will be responsible
for a wide range of tasks. Some of these will almost certainly prove satisfying whilst others will prove highly
frustrating. The franchisee will be responsible for allocating his/her own time and can, at their peril,
neglect tasks such as paperwork, financial control, invoicing and chasing payment. Although these tasks
are sometimes viewed by franchisees as stopping them from getting on with the ‘real job’ of producing and
selling, no business can survive without them.

Q3 Franchisees will usually need to work harder than they have ever worked before. This requires both mental
and physical stamina. In the early days of building up a franchise, there will be little time for leisure activities,
holidays or illness. Some advisers go as far as recommending that anyone considering setting up in business
should consult their doctor first.
Q4 Franchisees need to be able to learn from failure. Disappointments are inevitable in business and can lead
to demoralisation. A good businessman/woman, however, must possess the resilience to survive setbacks
and learn from them.
Q5 Franchisees need to be able to compete with self-imposed standards. When working on your own, targets
and standards need to be set which act as goals reinforcing motivation. If these goals are set too low they
will have little motivating value. If they are set unrealistically high, they will not be achieved and a sense of
failure and demoralisation will result. Thus, modestly ambitious, though not unrealistic, goals need to be
set and used as markers of achievement.
Q6 Franchisees need to be able to take unpopular decisions. It is impossible to remain popular at all times and
any attempt to do so is likely to have costly consequences for your business.
Q7 Franchisees must be able to resist impetuous or emotional behaviour. It is tempting, especially when you are
your ‘own boss’, to exercise the associated independence by reacting to frustration in what might later be
seen as a whimsical manner that is not in the longer term interests of the business. This may be emotionally
satisfying in the short term but should be resisted at all costs.
Q8 Franchisees should be able to take a balanced view of events. In business it is easy to yield to the temptation
of feelings of euphoria or depression in response to good or bad news. This can prove extremely stressful
and wearing. A successful businessman/women needs to be able at all times to take a a balanced view of
events and to set an attitude of ‘taking the rough with the smooth’.
Q9 Franchisees, running their own outlets, need to have a facility for surviving uncertainty. The setting up of a
new business entity is a creative venture and requires a facility for coping with ambiguity. People with a low
stress tolerance may find difficulty in running their franchise.
Q10 Franchisees must have a facility for taking advice. Having gone into business with ‘independence’ one of
their main goals, franchisees need to avoid maximising that independence by resisting advice whether it be
from the franchisor or some other expert source.
Q11 Franchisees must demonstrate financial ability. Though the clearing banks tend to lend to would-be franchisees
more readily than to would-be conventional small business start-ups, it needs to be remembered that all
loans have to be repaid, with interest. A large financial repayment overhead in the early days of trading can
impose additional pressures.
Q12 Franchisees should, ideally, be able to demonstrate support from their spouse. Most franchise outlets work
long hours involving domestic disruption. Anything less than positive spouse support here can have very
negative consequences.

Q13 Franchisees should, ideally, be able to demonstrate an enterprise background. Despite the desire for
self-employment being quite common, only a minority make the jump from aspiration to reality. Those who
have previous direct experience of self-employment or, alternatively, have a close relative self-employed
(usually a father) appear to find the transition easier. Some evidence exists to suggest that they may also
be more successful in terms of business growth.
Recent analysis suggests that newer franchisors are keen on franchisees having prior experience of
self-employment, but franchisors with a longer track-record are less inclined to do so.
Q14 Franchisees should demonstrate profit motivation. Amongst small business people generally, profit
motivation is of a relatively lower order than other goals such as independence and autonomy.
Profit motivation tends to promote greater growth.
Q15 Franchisees should demonstrate sales orientation. Despite national advertising and promotion of brand
awareness by the franchisor, sales skills on the part of the franchisee can still make a substantial difference
to levels of local market penetration. Local advertising and good interpersonal skills and service at the
customer interface can be crucial.
Q16 Franchisees should demonstrate receptiveness towards the franchisor’s training. Franchisors are inclined to
the view that ‘starting with a clean sheet’ is the best basis for initial training rather than competing with
previous training that a potential franchisee may already have previously received in the field of operation.
Q17 Franchisees should demonstrate growth orientation. The income of the franchisor is directly related
to the growth of franchisees. Thus, franchisees easily satisfied with low levels of growth may require
considerable motivation.
Q18 Franchisees should demonstrate an ability to delegate rather than attempt to undertake all jobs themselves.
Failure to delegate will limit business growth and lead to the franchisee spending time on tasks that could
be performed by less key staff.
Q19 Franchisees must be capable of taking the long-term view. In an economy suffering endemic ‘short-termism’,
long term planning and goal setting is likely to pay dividends by giving an edge over the competition.
Q20 Franchisees should have an ability to ‘make things happen’. People with an ‘internal locus of control’ tend to
believe they personally can influence their environment. This belief can become a self-fulfilling prophecy.
Change to suit your company

Obviously, any company using this technique can add additional questions, drop others and even reallocate the
points on certain questions in line with their own specific requirements.
By way of example here, Q1 refers to the ability of an individual to cope with feelings of isolation. Depending upon
the precise nature of your franchise, and also the stage of its development, this factor may be upgraded or reduced
in its importance. Also, many franchisors express a preference for potential franchisees coming from outside the
line of business in question. Others, however, may see advantages in recruiting people from similar lines of
business (Q16). Further, some companies look for franchisees who are very ambitious and wish to grow (Q17).
Others, selling what may be called ‘job franchises’ better suited to a one-person operation, may feel that such
ambition could be stifled or counterproductive.
Changing the points scheme to accommodate such in-house preferences is a relatively simple matter.

appendix 6
outline franchise agreement
Main headings and notes
This has been derived from an agreement intended for use by a company acting as franchisor and wishing to
enter into a formal agreement with an individual or a partnership as a franchisee.
The original agreement was developed by Wragge & Co., solicitors based in Birmingham. The notes are based
on a commentary in ‘Franchising: A Legal & Commercial Guide’, prepared by a partner in the firm, Gordon Harris.
It should be noted that the exact wording in any agreement will be strongly influenced by the circumstances of
the given franchise system.
This is only a specimen and prospective franchisors should seek independent legal advice from a lawyer
experienced in franchising.
Clause headings:
1 Definitions
2 Grant of the franchise
3 Duration of this Agreement
4 Renewal of this Agreement
5 Payment
6 What the Company must do
7 Intellectual property, trade marks
8 Records and accounts
9 Equipment and products
10 Control of standards and training
11 What the franchisee must do
12 Marketing, advertising and promotion
13 Insurance and vehicle formalities
14 Improvements
15 Force majeure
16 What happens if the franchisee wants to sell the business
17 What happens if the franchisee is ill, becomes physically or mentally
incapacitated or dies
18 Termination of the Agreement
19 What happens after termination
20 Restrictions after termination
21 Partnership and agency
22 Waiver
23 Incorporation
24 Entire Agreement
25 Independent advice
26 Notices
27 Severance
28 Law and jurisdiction
29 Set-off
30 Restrictive Trade Practices Act and Schedules

1 Definitions
Contains descriptions and meanings of important expressions, such as the ‘advertising fund’, ‘franchise fee’,
‘intellectual property’, ‘know-how’, ‘marketing materials’, ‘management services fee’, ‘premises’, ‘operations
manual’, ‘territory’ and ‘training’.
Also, ‘Substantial Term’ means a term or condition of the agreement which is listed in an appended schedule
and which is considered to be of particular significance.
2 Grant of the franchise

This additionally notes that an exclusive territory is not being granted to the franchisee (should the franchisor later
‘reasonably consider’ that a single franchisee cannot service the given territory, then the franchisor has the right
to reduce the size of that territory). The franchisee may not sub-franchise or use the premises for other purposes
without prior consent.
3 Duration of this Agreement

An initial term might be five years, with one or more options to renew for a similar period. The provisions for
termination are shown later in the agreement.
4 Renewal of this Agreement

Requires careful drafting not only to permit the removal of recalcitrant franchisees, but also to provide an incentive
to renew for those who comply substantially with the agreement. The BFA’s code of ethics provides that no fee
should be paid on renewal.
5 Payment
This covers the ongoing management services fee and also any payments towards advertising funds. Also specified
will be the steps that the franchisor will be allowed to take in the event of late payment by the franchisee.
6 What the Company [franchisor] must do

The franchisor’s obligations are described so that the franchisee can assess what support he or she will get.
An active interest in the franchisee, by the franchisor, should be to the benefit of both parties. It commits the
franchisor to provide the initial and subsequent training, and also to supply an operations manual. Marketing
support is to be supplied as the franchisor thinks appropriate, but franchisee requests for such support will be
met only at the franchisee’s expense. National and/or local meetings for franchisees are to be provided at the
franchisor’s expense (but excluding the franchisee’s out-of-pocket expenses).
7 Intellectual property, trade marks

An important section, setting out the franchisor’s intellectual property rights and the licensing of the same to the
franchisee. The franchisee is not to infringe these rights – for example, by trading using a ‘confusingly similar name’
– and he/she must acknowledge the confidentiality of the operations manual and any associated ‘know-how’.
8 Records and accounts

The main purposes of this section are to determine the operating efficiency of the outlet and to deter/detect fraud.
This will require the franchisee to maintain ‘full and accurate’ records, and also to provide the franchisor with
regular management accounts and a copy of any VAT returns submitted by the franchisee to H.M. Customs & Excise.
9 Equipment and products

Requires the franchisee to purchase goods and services from nominated suppliers, but the use of alternative
suppliers of at least a comparable standard and cost may be permitted, at the franchisor’s discretion. The franchisee
is required to purchase or lease additional equipment as the franchisor considers reasonably necessary. Inspections
of the franchisee’s operation by the franchisor are permitted at any time, without notice. Minimum prices to
customers are to be recommended, but not set, by the franchisor, except in the case of ‘national account customers’.

10 Control of standards and training
As one of crucial importance, this section is considered to be a ‘substantial term of the agreement’, whereby a
failure to comply can lead to the franchisee being removed.
The franchisee must comply with all of the procedures set out in the operations manual. Premises must be kept
clean and tidy, and such as refurbishment and alterations reasonably stipulated by the franchisor are to be made
at the franchisee’s expense. Employees of the franchisee failing to maintain the requisite standards must be
removed. Failure by the franchisee to reach the minimum standards necessary to successfully complete the initial
training programme results in the franchisor having the right to terminate the franchise agreement, however,
the franchisee will usually receive a predetermined part-refund of fees. Changes to the nature of the business,
introduced by the franchisor and requiring additional franchisee training, will be provided at the franchisor’s
expense (but will not cover ‘out-of-pocket’ expenses, such as salaries, travelling or accommodation).
All ‘material’ customer complaints are to be notified to the franchisor. Inventory (equipment) and stock checks are
to be conducted at a specified frequency.
11 What the franchisee must do

The franchisee’s main obligations are noted here, including a requirement to comply with the operations manual.
He/she must “devote whatever time and attention to the Business as is necessary to carry out and procure the
greatest volume of business consistent with the provision of a good service to Customers”, and do “everything that
he/she possibly can to promote and expand the Business”. The franchisee must not compete with the franchisor,
nor borrow money using the franchised outlet’s business as security without prior consent. Comprehensive customer
records are to be maintained, for supply to the franchisor upon request. Cover for the franchisee is to be arranged
in case of absence and prior permission is to be obtained if any self-employed person is to be engaged.
12 Marketing, advertising and promotion

The advertising fund is to be used as the franchisor thinks fit, but an audited report will be available to franchisees
upon request. Prior permission will be needed for the use of ‘non-standard’ marketing material by the franchisee.
13 Insurance and vehicle formalities

A copy of each of the franchisee’s insurance certificates and policies is to be supplied to the franchisor, or the
franchisor themselves may set up a group policy and the franchisee may be expected to participate in that.
14 Improvements
All suggestions for improvements to the franchised service must be supplied to the franchisor. The rights to any
improvements will be licensed on a perpetual worldwide royalty fee basis.
15 Force majeure
In the event that either party is prevented from complying with the terms of the agreement and/or operating the
franchised outlet for reasons beyond their control – such as the usual ‘war, act of God, national emergency’ types
of occurrences – it is important that they are able to withdraw from the agreement and mitigate their losses.
16 What happens if the franchisee wants to sell the business

Prospective purchasers need to be just as strictly vetted as the original franchisee, and so the franchisor’s prior
consent is required. So, when framing the conditions here, a balance has to be reached, whereby there is still an
incentive for the franchisee to build up the value of the business so that it can be sold on, whilst also ensuring
that a reliable and effective replacement is introduced.

Permission to sell is not to be ‘unreasonably withheld’ by the franchisor, provided that the necessary conditions
are met. No information in the operations manual or any other ‘know-how’ can be conveyed to a prospective
purchaser until a confidentiality agreement has been signed. The franchisee is liable to pay the franchisor’s legal
and other expenses associated with the transfer, and also 5 per cent of the purchase price to the franchisor
in respect of administrative expenses. If the franchisor is asked to find a suitable candidate, then a reward of
15 per cent of the purchase price (including the 5 per cent for administrative expenses) will be paid to the
franchisor. Also, the franchisor will be given the option to purchase the franchise outlet on the same price and
terms as the proposed purchaser.
17 What happens if the franchisee is ill, becomes physically or mentally incapacitated or dies
For the franchisor, there is a need to ensure that the franchise outlet continues to function if the franchisee is
incapacitated. Nonetheless, the franchisee needs to ensure that his business interests are not unduly compromised.
In the case of illness rendering him/her unable to operate the franchised outlet, the franchisee must notify the
franchisor and appoint an approved stand-in. In the absence of a stand-in being appointed, the franchisor is
entitled to appoint someone else to ensure that the franchised outlet continues to operate as normal.
Permanent incapacity would mean an inability to operate the outlet satisfactorily for a period of 6 months or longer.
Should this arise, the franchisor will be able to terminate the agreement or purchase the franchised outlet at an
agreed market value less 20 per cent.
18 Termination of the Agreement

Careful consideration is needed to ensure that there is a clear distinction between those circumstances which
warrant an immediate termination, and others which will allow time for the franchisee to remedy any breaches
of the agreement.
Circumstances warranting immediate termination include: breach of a ‘substantial term’ by the franchisee,
failing to open the outlet as agreed, the termination of any licence needed for the outlet to function, the franchisee
ceasing or threatening in writing to cease operating the outlet, the franchisee being convicted of a criminal offence
which materially affects the outlet, the franchisee being served with a genuine bankruptcy petition, or the
franchisee providing false or misleading information to the franchisor.
19 What happens after termination

Should the need arise, it is important that upon termination the franchisor is in a position to operate the outlet
itself immediately, so as to avoid the system falling into disrepute or being perceived as ailing.
All monies owed to the franchisor by the franchisee must be paid immediately. The franchisee is to provide
the franchisor with a list of customers and existing contacts. The operations manual and any copies are to be
returned to the franchisor.
20 Restrictions after termination

During the life of the agreement, the franchisor will probably have divulged substantial information about itself,
its finances and vital details required for the efficient operation of a retail business. This presents an opportunity
for the former franchisee to become a significant competitor to the franchisor, and so ‘restraint of trade’
conditions are applied.
The franchisee agrees not to be engaged in another business, in any capacity, which competes with the franchisor’s
business in the designated territory for a fixed period, e.g. within 6 months of termination. The franchisee must
not solicit business from any customer of the franchise outlet within 24 months of termination. Also, the franchisee
must not disclose any information about the franchisor or copy any part of the operations manual to any third
party at any time after the termination.

21 Partnership and agency
A barrier between the franchisor and franchisee is needed, so as to prevent a franchisee’s financial liabilities
falling upon the franchisor. “This Agreement does not constitute a partnership between the Company [franchisor]
and the Franchisee. The Franchisee must act solely as an independent trader and must not act or purport to act
as an agent for the Company.”
22 Waiver
A clause is shown here to protect either party’s right to pursue a remedy for a breach of the agreement which
was previously overlooked.
23 Incorporation
Subsequent incorporation of the outlet by the franchisee as a limited liability company is only possible with the
prior permission of the franchisor.
24 Entire agreement
That for the avoidance of any doubt, this clause makes it clear that only the agreement itself together with
any documents incorporated in it by reference, apply to the franchisor/franchisee relationship and that any
representations or statements made by the franchisor prior to the signature of the agreement are not binding
on the franchisor save for those which have been made fraudulently.
25 Independent advice
“The Franchisee acknowledges that he has been advised by the Company [franchisor] to take independent
professional advice on the terms of this Agreement and his purchase of the Business, prior to entering into
this Agreement.”
26 Notices
A detailed clause lays down a specific mechanism for the issuing and serving of notices by either party.
27 Severance
In the event that any clause in the agreement is deemed invalid, a clause here permits the remainder of the
agreement to remain in force.
28 Law and jurisdiction

This specifies the jurisdiction of the agreement and the forum for the resolution of disputes, i.e. the English courts.
29 Set-off
This is to prevent the franchisee from withholding monies due to the franchisor by claiming that he/she is due
to receive monies owed by the franchisor.
30 Restrictive Trade Practices Act

In any agreement where two parties trading in the UK accept restrictions, the contract may need to be registered
under the Restrictive Trade Practices Act 1976. This clause ensures that if the agreement does fall within the
registration provisions of the Act, then the agreement does not come into effect until the day after it has been
registered with the Office of Fair Trading.
Schedules
1 Franchise fee apportionment
2 Start-up package
3 Substantial terms
4 Territory
5 Trade marks
6 Training
7 Telephone number transfer letter
8 Trade mark licence

appendix 7
glossary of franchise terms
Advertising levy/fee
May also be called promotional levy/fee, marketing levy/fee. An identified charge on the franchises by the
franchisor, over and above the management fee, the purpose being to promote the business on a national or
regional basis. The combined funds of all the franchisees make a greater impact than any single outlet could
achieve. It is usual for such a fee to be identified separately in the franchise agreement, a separate fund set up,
and a guarantee given that the monies will be spent on the specified activity with provision for an audit and
independent examination of the fund by the franchisees.
Advisory council
Sometimes called franchises association or review council. The name given to a representative body of franchisees
within a specific franchise nominated by the franchisor or elected by the franchisees. The purpose is to explore
new ideas and opportunities through regular meetings with the franchisor. Usually such bodies are formed at the
instigation of the franchisor but have also been formed by dissatisfied franchisees with the objective of bringing
pressure to bear on the franchisor.
Assignment
A clause, common in franchise contracts, giving the franchisee the right to assign the agreement usually to a
person approved by the franchisor.
Bank franchise finance package

Working primarily with franchisors, bank franchise managers and their staff examine franchise opportunities
and will often offer a funding scheme enabling the prospective franchisees to purchase the franchise. Up to
70 per cent of the total cost of the franchise may be available. These schemes are effected through the branch
network and may be a combination of facilities including term loans, overdrafts and delayed terms for capital
and/or interest repayments.
Blueprint
A term used in franchising to describe the format (as in business format) or plan developed by the franchisor to
describe the complete system for the successful operation of the business.
British Franchise Association (BFA)

The franchisor’s trade association founded in 1977 by eight of the early UK franchising companies with the
objective of raising the profile of ethical franchising in the UK.
Business-format franchise
A franchise term where the franchisor provides a complete formula, blueprint, plan or format for operating the
total business, where the franchisor is actively involved in establishing the franchisee’s business both initially and
ongoing, and the franchises can build equity in the business.
Company-owned units/outlets
See also pilot operations. Outlets owned, operated and managed by the franchisor, they may be used for training
as well as a testbed for new ideas and programmes. They can, more simply, be a continuing source of income
to the franchisor.

Competition laws
Competition laws applicable in the UK include the Fair Trading Act 1973, the Restrictive Trade Practices Act 1976,
and, in the EU, the Treaty of Rome, Article 85, dealing with competition, and Article 86, dealing with monopoly
situations. The purpose of competition law is to increase competition between companies or organisations
through the removal of restraints on trade or monopoly situations. The clauses in franchise contracts most likely
to cause problems with competition laws are full-line forcing, tied-in-sales and restricted or exclusive areas.
Continuing fee
See franchise fee.
Contract – franchise contract

The agreement between the franchisor and the franchises describing the terms of the agreement, the rights and
obligations of both parties.
Disenfranchise
The withdrawal of the rights of the franchise, whether it be a franchise to vote or to operate a business format
business system.
Ethical franchise
A franchise that is operated according to ethical business standards usually referring to the ethics as promulgated
by the British Franchise Association.
European Franchise Federation (EFF)

The EFF comprises the National Franchise Trade Associations in different European countries which includes
the British Franchise Association. A secretariat rotates around the membership, e.g. the BFA held the EFF
secretariat in 1996.
Exclusive area
A territory assigned to franchises with undertakings that the franchisor will not trade in the area nor will other
franchisees be appointed or allowed to trade within the area. There is a difficulty in giving total exclusivity within
the Restrictive Trade Practices Act 1976.
Fast-food franchise
Food outlets usually offering a limited menu, served quickly. Encompasses counter service, table service and
take-away outlets. Wimpy and Kentucky Fried Chicken were the first in the UK, McDonald’s is the largest.
First-generation franchise
Usually used to identify early franchises – car manufacturers, oil companies and soft drink bottlers who used
franchising principally as a means of distribution.
Fixed fee
See franchise fee.
Fractional franchise
Where the franchise is only a part of the franchisee’s interest. Usually related to premises, a franchise shop within
department stores is a good example.
Franchise fee
There are two types of franchise fee common in franchising: the initial fee and the ongoing fee. The initial fee,
sometimes called the front-end fee, is a one-off payment designed to cover the costs of the franchisor in recruiting
and setting up the franchises. The ongoing service fee, sometimes referred to as royalties or management fees
and most commonly based on a percentage of sales turnover, is the usual way for the franchisor to obtain his
continuing income from the franchises. Occasionally a franchisor will choose to charge a fixed fee on a weekly
or monthly basis.

Franchisees
The individual, company or partnership which buys a franchise or licence from the franchisor. Variously referred
to as licensee, franchise owner or associate.
Franchisee association/advisory council

See advisory council.
Franchisor
The company which operates the franchise and sells franchises to franchisees. In some cases the franchisor can
be a franchisee of a franchisor himself, in other words an intermediary franchisee – see master licensee.
Front-end fee
See franchise fee.
International Franchise Association (IFA)

The Franchise Trade Association for the USA.
Investment franchise
‘Investment’, ‘job’ and ‘business’ franchises are terms coined in an attempt to classify franchising. An ‘investment’
franchise is more expensive than the others but has never been quantified.
Job franchise
A term coined in an attempt to categorise franchising along with investment and business. A ‘job’ franchise is
usually described as low-level investment where the franchisee works in the business.
Joint venture
A method whereby a franchisor, usually from overseas, will seek to establish a legal relationship with a partner in
a foreign market and share the costs of setting up a franchise organisation. Commonly the franchisor initiating the
idea will contribute the know-how and expect the host country partner to provide the funds and management.
Know-how
The intellectual property – the systems, methods and expertise of the franchisor. Usually referred to as know-how
in the contract.
Licensee
See franchisee.
Licensing agreement
See franchise agreement.
Location franchise
A franchise operating from fixed premises where the premises tend to be an important part of the business
operation, i.e. retail premises where customers visit.
Management service fee

See franchise fee.
Mark
The name by which the franchisor’s business is known and which the franchisee will be permitted to use.
Marketing levy
See advertising levy.

Master licensee
A franchisee who usually has responsibility for more than one outlet and is commonly totally responsible for the
development of the franchised business (through other franchisees) in an area. As an example, the UK arm of
ServiceMaster was originally a master licensee in Europe.
Mobile franchise
Usually a vehicle-operated franchise which goes out to serve customers, e.g. windscreen replacement, car tuning
and cleaning services. The opposite to a location franchise.
Monthly fee
See franchise fee.
Multiple franchise
Commonly refers to a franchisee who operates more than one, of a specific franchise, outlet.
Network
Usually used to describe the whole franchise organisation. Could be a UK network or worldwide network.
Non-exclusive area
Theoretically the opposite of exclusive areas but usually qualified to assure the franchises of some protection.
Operations manuals
Now a generic term used to describe all the manuals provided by a franchisor to a franchisee to operate the
business. These will include administrative as well as actual operational manuals.
Pilot unit
The term used to describe the test model or outlet set up by the franchisor. See also company-owned units/outlets.
Promotional levy
See advertising levy.
Pyramid selling
Pyramid selling is a marketing system, erroneously associated with franchising in the past, which involves selling
distributorships through a tiered structure. The founders of such schemes rely primarily on selling distributorships
rather than products. Several Acts of Parliament govern pyramid selling in the UK.
Review council
See advisory council.
Royalties
See franchise fee. The use of this term within a franchise may raise questions with the Inland Revenue.
Traditionally royalties are paid on copyrighted works of art such as literature and music and different tax
arrangements may apply.
Second-generation franchises
A term commonly used to describe the franchises which started in and since the franchise boom of the 1950s.
Service fee
See franchise fee.

Service mark
The mark registered by a service organisation applied to services rather than products. A few years ago it was not
possible to register service marks in the UK and the British Franchise Association and its members lobbied MPs
and produced a turn-around in Government thinking on this.
Sub-franchises
A term used to describe franchises set up by an existing franchisee, usually a master franchisee.
Territorial rights
The rights granted by the franchisor to the franchisee within the area allocated. Franchisees will usually seek some
understanding that they will not be in competition with other franchisees or the franchisor within their territory.
Turnkey operation
Basically an expression for a business format franchise where the franchisee turns the key in the door with the
business ready to run.
Up-front fee
See franchise fee, initial fee.
(© John Stanworth and Brian Smith, 1991.)

Please contact us if you’d like this in Braille,
large print or on audio tape.
www.lloydstsb.com/success4business
Professor John Stanworth and David Purdy are affiliated with the International Franchise Research Centre at the University of Westminster.
Due care and attention has been paid to the collection and selection of the information and advice contained herein, and as such, it is
offered in good faith. We regret, however, that neither the Bank, the authors, nor any of the contributors to this publication are able to
accept any liability for losses or damages which could arise for those choosing to act upon the advice or information contained herein.
Competent professional advice should be sought when developing a franchise system.
In order to continuously improve our service and to ensure security for our customers and staff, when you contact us or we contact you by
telephone, calls may be recorded and monitored.
Lloyds TSB Bank plc Registered Office: 71 Lombard Street, London EC3P 3BS. Registered in England and Wales no. 2065.
Lloyds TSB Scotland plc Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH.
Registered in Scotland no. 95237.
Regulated by the Financial Services Authority and signatories to the Banking Codes.
Printed by Belmont Press, Northampton.
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‘

1 Franchising: a system for growing your business? 2

The franchise contract 3

Working with your franchisees 4

How a business format franchise works 5

2 Will business format franchising be right for you? 6

The franchisee’s point of view 7

3 Bringing your franchise plans together 8

4 Your key resources 11

The main legal issues 15

5 Where you can find more information 17

6 Your alternatives to franchising 18

7 Key stages in growing your franchise 20

8 Tips for successful franchising 22

What can go wrong? 22

Appendix 1 Useful contacts/sources 24

Appendix 2 Further reading 26

Appendix 3 British Franchise Association membership criteria 27

Appendix 4 Sample cash flow forecast 29

Appendix 5 Franchisee diagnostic questionnaire 31

Appendix 6 Outline franchise agreement 39

Appendix 7 Glossary of franchise terms 44

However, this method of operating is no easy option.

As a newcomer you will quickly discover the complications involved in:

Franchising your business 1

The UK franchise market

Figure 1: Franchising trends in total UK sales (outlet sales, £bn), 1984-1996

Figure 2: UK franchisors – sector breakdown (% of 566 systems)

A Business Services 19%

Lloyds Bank/IFRC ‘Franchising in Figures’, 1996 (n=566)

2 Franchising your business

The world of franchising

Figure 3: Franchising worldwide – a comparison

Number of Franchisors per Country Number of Franchisees per Country

the franchise contract

Franchising your business 3

● Business format franchise

4 Franchising your business

Figure 4: A simple franchise structure

As a franchisor, you can expect to charge the franchisees:

This in turn should ensure success for you.

Franchising your business 5

Advantages for you as franchisor

And the disadvantages

6 Franchising your business

Franchising your business 7

8 Franchising your business

You will also need:

1. Credit control for the money franchisees owe you.

2. To select reporting systems and audit procedures.

3. Access to franchisees’ tax returns.

Franchising your business 9

10 Franchising your business

Figure 5: Franchise system start-up (illustrative example):

Figure 6: Finance invested prior to first franchisee

Franchising your business 11

Figure 7: ‘Break-even’ franchise system size

12 Franchising your business

Figure 8: Estimated cost of franchisee recruitment

Franchising your business 13

Figure 9: Main appeal of franchising (to prospective

Figure 10: First choice preferences for franchisee

14 Franchising your business

The following methods received no first-choice selections: