Week two: Franchising as a business model for growth

TRUE, THE jukeboxes don’t always work, but the neon lights shouting “eat”, the faux red-leather seats, the chocolate malts and the cheesy fries are always the same, whether you’re sitting in an Eddie Rocket’s American- style diner on Dublin’s Dame Street or Limerick’s O’Connell Street.

Why? Because all franchisees in the group – investors who pay to trade under the Eddie Rocket’s corporate identity – must run their restaurant according to a “reference bible” or operating manual, that outlines exactly how all aspects of the business must be carried out.

For some entrepreneurs, this approach is overly restrictive as they will be unable to put their individual stamp on the business. However, the key advantage of sticking to a tried and tested franchise model, rather than starting your own business from scratch, is that it has a much greater chance of succeeding.

In the past, one of the most commonly quoted statistics relating to franchising was that more than 90 per cent of franchises continued to trade successfully after five years, compared to just 50 per cent of stand-alone start-ups. The economic climate has changed considerably in the last two years, though, with some high-profile franchises getting into difficulty.

The Irish business of O’Brien’s Sandwich Bars failed and was taken over by another franchise, Abrakebabra, last year.

Is the franchise model more fragile than others in recessionary times, given that individual franchisees don’t have the power to adapt their business rapidly to changes in the marketplace? Or is there still safety in numbers, and are franchise networks more robust than other types of business models during downturns?

David Killeen, chairman of the Irish Franchising Association, strongly believes that the latter is true. “In recessionary times, franchising tends to come into its own for a number of reasons,” he says.

Firstly, many people who have been made redundant and have received severance packages consider going into business for themselves. Franchising is an option such individuals often explore because they may not have enough funding to start their own business from scratch, but may have sufficient capital to get themselves established by buying a franchise.

It all comes down to the support and advice provided, Killeen believes. Franchisees get fully trained initially in how to run the business, then continue to have access to the expertise of the franchiser.

“That can be very encouraging for people to get started in a franchise business, because when you’re starting on your own, it can be a very lonely road,” he says. “At least within franchising, there are a number of ‘touchpoints’ that franchisees can actually engage with.”

If you look at the franchising section of www.eddierockets.ie, you’ll get a better idea of what this means in practice. The site mentions that Eddie Rocket’s provides strong back-up and support services to the franchise network.

Specifically, experienced personnel from Eddie Rocket’s are available to provide “ongoing advice and guidance on any aspect of their method of operation”. The company also holds international gatherings of franchisees “to exchange ideas for mutual benefit”.

Regardless of what type of business an entrepreneur is hoping to start, there is one major problem at the moment – lack of capital. Banks are no longer lending the same level of money as in the past, with the result that it is particularly difficult to get the funding in place to establish a higher “cost-of-entry” franchise such as a restaurant.

On top of the initial franchise fee (which allows them to trade under the franchise’s trademark), which varies but can be as much as €100,000, franchisees have to raise enough money to fit out their restaurant and they need sufficient working capital to keep the business ticking over until it starts generating revenue.

Not surprisingly, Killeen has seen an increase in the level of lower cost-of-entry service-based franchises. He describes these as mainly “van-based enterprises”, for example domestic and commercial cleaning services or fitness-related franchises such as personal trainers.

Aspiring franchisees, however, must be on the alert for “get-rich-quick” schemes packaged as viable franchise opportunities. “It surprises me as to how easily people will part ... with money without doing due diligence on potential franchise offerings.”

Google “franchise opportunities” and you will find ads for franchises “guaranteeing” profits of say $100,000 a month, with an entry cost of an amazing $4.95. Franchises can offer many things, but unfortunately one thing they can’t do is guarantee riches.

Watch Michael Kearney and Ed Murphy of Home Instead Senior Care outline their experiences with franchising at irishtimes.com/ business/education or on eoy.tv, the dedicated website for the series.

Next week: Characteristics for entrepreneurs and motives for enterprise