Running your own business using the expertise of others

FRANCHISES: Starting a business from scratch is a dream for many entrepreneurs. But for people who want to run their own business and bypass some of the start-up hassles involved - brainstorming for a marketable idea, securing a loan from a financial institution, establishing a customer base - the answer may be to buy a franchise.

Some of the world's most famous franchises are fast-food restaurants such as McDonald's, Burger King and KFC, and Irish examples include Supermacs and Eddie Rockets. But franchising is also used to replicate the success of profitable businesses in industries such as car rentals, hairdressing salons, printing and copying services, and clothing retailers.

In the US more than 320,000 franchised businesses employ more than eight million people, with sales by franchises representing almost half of the US retail market. The trend is expected to be repeated to the same extent in other parts of the world by 2010.

Franchising is the business method where a company licences the right to use its operational systems, trademarks and know-how in exchange for ongoing fees. The average royalty payment in the Republic is 6.5 per cent of the turnover, according to a survey by the Irish Franchise Association, although there may be an additional marketing levy.

The franchisor provides training, a complete blueprint for the business and marketing support, while the franchisee puts in the initial investment.

"There are benefits for the franchisor and the franchisee," says Mr Brody Sweeney, chief executive of O'Briens Irish Sandwich Bars, the Republic's fastest growing franchise. The chain has 170 franchises in the Republic, Britain, the US, Australia and Asia.

Using somebody else's capital to expand is the one of the main benefits for the franchisor, he says.

"Franchising is the agreed best way to extend a network as quickly as possible," agrees Ms Martina Byrne, public affairs manager for Statoil.

Statoil managing director Mr Tony Murray describes franchising as a "win-win" situation. Since September 2001, the company has been searching for franchisees to operate outlets of its convenience retail brand, Fareplay, which already has 43 shops in operation on Statoil forecourts.

"We have a number of pilot projects going, but it is about quality not quantity," Ms Byrne says.

The company plans to sign deals with around 20 franchisees by 2004 but promises to be very selective in its recruitment of franchisee partners. Although no previous experience in the sector is required, most people who have approached Statoil have a background in retailing.

The success of a franchise agreement ultimately depends on the relationship between the franchisor and the franchisee. The fact that higher profits means a better return for the franchisee influences their performance, according to O'Briens Mr Sweeney.

"It is much better to have a committed owner-operator running the business. In theory they will give a better service than a salaried manager because they are more highly-motivated," he says.

The franchisees also recruit their own staff, saving on the need for a centralised human resources office. Some franchisees own multiple outlets, which is welcomed by O'Briens because it encourages "ambitious franchisees".

An unmotivated franchisee can cause problems. "Sometimes with franchising we feel we don't have the same level of control over the business. If a franchisee isn't pulling their weight, if they run a dirty store or don't get out of bed too early in the morning, it can be difficult," says Mr Sweeney.

As well as the initial on-site training, most franchising companies will conduct ongoing shop assessments to ensure each outlet boasts the same consistent quality of service as well as stocking the range of products that customers expect to find. "Mystery shoppers" will sometimes test franchisees to see if they are following the set of procedures laid out in the operations manual.

The International Franchise Association warns that people who are "extremely entrepreneurial", in the sense that they prefer to be able to run free with their own ideas instead of conforming to somebody else's formula, should be wary about buying a franchise. Long-term franchisees may come to resent close supervision by the franchisor.

The main attraction of buying a franchise is that it is a low-risk investment, suitable for first-time business owners.

"The chances of making it on your own are quite slim," says Mr Sweeney.

"It's estimated that something like one in five businesses will be in business in five years time but there is only a one in 10 chance of failing in a properly constructed franchise."

The franchisor knows how to market a product that has already proved a success.

"The franchisee doesn't have to invent the wheel because the franchisor has already been there and made all the mistakes. The franchisee can buy into the goodwill of an established brand name," he explains.

They also benefit from group advertising and purchasing power as well as more substantial clout with landlords. In some franchise operations the franchisee controls the lease, but in others, including O'Briens, they are sublet by the company to the franchisee.

"If you haven't been in business before, the landlord might turn around and say no, we want to sell this space to an established retailer," says Mr Sweeney.

"We also want to be careful about where we choose to locate. In the beginning we expanded through the four main cities - Dublin, Cork, Limerick and Galway. Now we're moving into the smaller towns like Castlebar in Mayo, which has a very small population. We would never have dreamed of locating there four or five years ago but the brand is known so well nationally now we can."

O'Briens is a member of the Irish Franchise Association, a voluntary association representing franchisors. It aims to promote the Republic as a location for franchise opportunities for international and home-grown companies and ensure that franchisors comply with an industry code of ethics.

In the US, franchisees have encountered problems such as "encroachment", where sales are damaged by the franchisor overcrowding a particular region with outlets. Potential franchisees are now checking the terms of their contracts for exclusive rights to a certain amount of territory to prevent the franchisor from selling another franchise on their doorstep.

"We would be looking to see that franchise agreements are properly constructed and that companies are adhering to the Advertising Standards Authority and not telling fibs, basically, because that's not good for any of us," says Mr Alistair Kay of Franchise Direct. "Quite often the franchisee would have left managerial or sales jobs to buy a franchise, so they need to know what they're getting into."