The concept of franchising dates back to the 1500s when tax collectors would take a cut of debts recovered on behalf of wealthy landowners. The right to recover debts throughout an estate was highly lucrative. Franchising didn’t take off until the late 1800s when John Pemberton created a ‘brain tonic’ and sold the bottling rights to avoid bankruptcy. That tonic was Cola-Cola. These days everything from fast food to funeral homes uses a franchise model.
Franchising is a business model geared for growth. It heavily favours the franchisor (brand owner) and allows the franchisee to trade as the brand. It can also be used as a way to enter an overseas market with relatively little risk. Some businesses sell franchises to help establish the brand short term with a view to buying sites into corporate ownership later on. The franchisee commits to selling the franchisor’s products/services in a predefined format. To maintain the brand’s image customers should receive the same item in the same way regardless of which outlet they bought from. Franchisors require uniformity of quality, content, logos, apparel, shop fixtures and fittings to ensure brand continuity. The level of freedom a franchisee has is dependent on the franchisor they represent. Some have been known to regulate supplies down to the fragrance of floor cleaner!
The Debt Collector’s Brief
Franchises generate revenue in two ways for the franchisor. The franchise fee (also known as a buy-in) covers start-up expenses, training and materials. This can be a one-off cost, or subject to a renewal fee after a fixed period. Franchise fees can be as little as a few hundred pounds for a will writing service, and breach £500K for a gym. Royalty fees (also known as commission) is payable throughout the course of trading as a cost of using the brand. An operating manual and training manual dominate how the franchisee runs their business and interacts with the franchisor.
A good franchise will be indistinguishable from a corporate site when visited by the customer. Efficient debt recovery is dependent on making that very distinction. Identifying the correct target debtor should be as much part of your onboarding process as it is our collections process. Even though a franchisee may be compelled to do things in a certain way and buy certain items, they are ultimately liable for the debts they incur. Just because a franchisee trades as a well-known brand, it does not guarantee their ability to pay debts as and when they fall due. In most instances when a franchisee says the franchisor is liable for the debt, it’s a delaying tactic. If the franchisor really is liable, there is an obligation on the franchisee to make this clear to the supplier before goods/services are provided.
Advocate’s debt recovery process is just as effective against a franchisee or franchisor. The threat of court proceedings is a powerful motivator. A County Court Judgement can make the difference between a franchise being renewed or withdrawn. Some franchise agreements state a course of mediation between both parties, and others will place a structure on the franchisee’s own debt collection process. Advocate has recovered payment from a range of franchisees such as leisure centres, logistics, and chartered surveyors. We’ve also recovered payment on behalf of franchisors for royalty fees in the cleaning, pet care, and communications industries. The franchise industry remains self-regulating in the UK with legal precedents sighted as reference points in litigation. Disputes are rarely brought to trial because agreements are so heavily weighted in favour of the franchisor. We’ll now explore the virtues and vices of franchising, but this is by no means an exhausted discussion.
Virtues of Franchising
No business is guaranteed to succeed, but new franchises do have a much higher survival rate than start-ups over 3 years. The most successful franchise opportunities boast a 98% success rate, although these tend to require a larger buy-in and receive extensive support from the franchisor. Remember, after paying the franchise fee and royalties the remaining profit is yours. The ability of a brand to promote local franchises through national advertising campaigns can be worth its weight in gold. Franchising is a proven business model where the franchisor has already overcome mistakes and perfected the customer offering. Any teething issues you experience will have a solution waiting in the manual! A franchisee can normally obtain supplies and equipment cheaper by harnessing the buying power of the franchisor’s brand. Need new premises or machine? The franchisor will have preferred suppliers geared up for your needs. Brand loyalty is a big advantage of franchising. Consumers are more willing to spend £5 on a coffee from Starbucks or Costa than they are an independent unknown coffee shop with unfamiliar branding. Plus, most high-street chains operate a loyalty scheme. Franchisees are more than an extra person between brand and consumer. They are customer and brand liaisons on the front line of feedback, with the power to shape product development and improve the buying experience.
Vices of Franchising
Franchises are great in the right market conditions. A franchise will typically have a patch or operating area to prevent franchisees from competing over the same customer base. Sometimes a brand will prioritise the revenue generated from selling franchises over that from royalties. The market will be saturated by oversupply if there are not enough customers to sustain all the franchisees. This was witnessed by ADIs of a now-defunct driving school where the instructors (franchisees) struggled to generate enough money to cover the high weekly franchise fee. A loyal customer base of learners followed their instructors who in return, saw decent profits from going it alone as independents. If you want a blank page with the commercial and creative freedom to grow a brand and set your own pricing, then a franchise is probably not for you. As alluded to above, the franchise fee can be eye wateringly high and require some serious capital. If you’re going to put the house as collateral to secure funding, then you can’t be investing on a whim or banking on the franchisor’s coattails to guarantee success. If the franchisee’s business goes south and ceases trading, the franchisor will take a hit but walk away largely unscathed. If the franchisor ceases trading, the franchisee is jettisoned from the brand which ceases to exist.
Not Just Franchise and Fries!
Franchising is more than fast food, a quick coffee and convenience stores. Business coaching, commercial cleaning and automotive franchises regularly make up the UK top 20. Many of the world’s most prominent and successful brands built their empires on the backs of franchisees who took the plunge and invested – just look at the likes of Anytime Fitness, Snap-on Tools, Hertz, Kumon, Marriott International and Pirtek. Make no mistake, owning a franchise is not for the faint of heart but the rewards can convert even the most committed pessimist. It will require time, money and a passion for your chosen industry. The late payment legislation Advocate uses to recover its costs from the debtor applies to all business models and industries. Although creditors and debtors are intertwined in different ways, the legal principle behind free commercial debt recovery remains unchanged. Whether you are a franchisor, franchisee or trade creditor please get in touch to see how Advocate can recover your unpaid invoices on a no cost to you basis.