franchising for fun and profit

No independent needs to be told that the mobile phone business can be a tough place to make money. A combination of ruthless competition, ever-shrinking margins and fickle customers makes it ever more difficult to turn a profit.

With things the way they are, it’s not surprising that some retailers are starting to wonder whether it’s time to try something different. And one way of countering increased competition – or simply starting afresh – can be to buy a franchise. What’s on offer?

Many well-known High Street brands are franchises; they include Thornton’s, the Body Shop and McDonalds. In essence, franchising is when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea.
If you have the right mindset and the necessary capital, buying a franchise can be a viable way of developing an existing business, or starting a new one.
The terms of franchise agreements vary enormously, but normally they let the franchisee trade under the franchisor’s name and sell their product or services. Additionally, the franchisee will usually be entitled to receive support and advice from the franchisor. Of course, this isn’t free: the franchisee typically pays an upfront fee, plus royalties on any sales.

Andy Berrow is a Business Advisor at Business Link London and an expert on franchising. He says, “The biggest advantage is that you’ve got a proven business idea already. Depending on whom you go with, you might have a brand name as well”. Starting a business is always risky, and buying into a proven concept is a clear way of improving the chance of success.
However, Andy does have some words of warning. Franchising certainly isn’t for everyone: “If you’re very independent, very entrepreneurial, then it may not suit you because you haven’t got the freedom that you want to actually grow your own business.”
The costs involved in setting up a franchise depend on many factors. Typically, a prospective franchisee is required to pay £5,000 – £10,000 directly to the franchisor. However, some require considerably more – and that’s before factoring in all the other expenses involved in starting a company.
What you get for the money varies too. As Andy says: “Do some due diligence work. Find out how long the franchisor has been running and look at how many franchisees they’ve got. Get the agreement of the franchisor to talk to some of their existing franchisees. That’s the best way to see how good the product and the support really is.”
Whatever the terms, a prospective franchisee should do some homework before making any sort of commitment. Franchise agreements can be complex, and it’s important to seek advice from a solicitor – preferably one who is a franchising expert.
For anyone looking at franchise opportunities in the mobile phone market, previous experience in the industry is an asset. However, it certainly is not essential. In fact, if you have little or no experience, becoming a franchisee can represent an easier way into the mobile phone market. With a proven business concept and big company backing, you’ve a head start over anyone starting from scratch. That doesn’t mean it will be straightforward, because you’re still taking on most of the risks that come with starting a company, but it certainly gives you an advantage.

Franchising at a glance
• Franchising is a marketing process used to improve and extend the distribution of an existing product or service.
• Franchising effectively means the owner of a business (the franchisor) grants a licence to you (the franchisee) to use their business idea.
• You receive advice and support from the franchisor, plus the chance to use their already-proven business concept.
• Buying a franchise is less risky than starting a business from scratch, but also gives you less freedom.
• The required investment varies, but is typically around £5,000 – £10,000 (paid to the franchisor). You will almost always incur significant additional costs on top.


Franchise that phone!
There are two main mobile phone franchises on offer:
• The Phone Works is aimed squarely at the business market. Its franchisees often work from home and sell to small and medium enterprises (SMEs). As a whole, The Phone Works wants 2% of the SME market within five years.
• O2 got into the franchise business a few months ago. It is of course consumer focused, and its franchisees run their own retail stores. Its target is to establish 50 new franchises across the UK in the next year.
Becoming a franchisee with The Phone Works requires an initial investment of anything between £7,500 and £40,000. Franchise agreements run for five years, during which time franchisees are guaranteed exclusivity over a particular geographical area. The location determines the size of the fee. According to Bob Marley, the company’s MD, the payment covers “all the tools [the franchisee] needs to get up and going”.
The promised support includes a week-long induction course, and every franchisee gets a tailored marketing plan to help them build their business, as well as ongoing monthly training and membership of business organisations like the local Chamber of Commerce. The company also handles back-end functions, such as setting up connections, billing and returns.
Bob Marley is clear about the skills required for success: “At the end of the day, our franchisees need to be sales people. They need to be customer-focused, and they need to have principally B2B sales experience.”
Franchisees for The Phone Works tend to work from home. With no need to rent premises or employ staff, it is possible to get started on a relatively small budget. The company had 20 franchises at the time of writing, and that number is increasing swiftly. However, it acknowledges that the brand isn’t particularly well-known. Bob says, “we’re not after, and we’ll never be after, national brand awareness.” In reality that might make positioning the franchise and securing business trickier, although the company is able to offer connections to all the major mobile phone networks: “We are able to offer the client a better deal because of that independence.”

The O2 option
While The Phone Works focuses on finding business customers, O2’s franchising programme is designed to help the company reach more consumers by getting each franchisee to open up their own O2 retail store.
The payment to O2 is £10,000, and there is a retainer fee of £1,000 a quarter. The franchise agreement runs for ten years, with a five year break clause. However, the overheads of premises and staff mean the additional costs are significant. O2 estimates that franchisees need around £140,000 in total to start-up.
O2 already has around 350 stores across the UK, and of course the vast majority are not run as franchises. Nikki Cooke, Recruitment and Marketing Manager for O2 Franchising, explained that they expected new franchisees to complement the existing stores by opening on “secondary sites”. These are “quite lucrative areas” and “prime franchise territory”, but also more affordable than the centre of big towns and cities.
According to Nikki, although O2 is “not looking to cannibalise existing business”, the franchising agreements don’t make any guarantees of territorial exclusivity. The locations for new stores are considered “on a case-by-case basis”, so it seems unlikely that a new franchise would be allowed to open next door to an existing one.
O2’s big strength lies in its brand. Nikki summed up the benefits: “O2 has a fantastic brand, and is very good at corporate marketing. If you marry that up with a franchisee who markets locally then you have a very strong relationship.
“To all intents and purchases, the consumer sees them as being an O2 store.”
The obvious downside to this is that the franchisee is unable to offer consumers connections to other mobile phone networks. Nikki claims their franchises offer consumers “very strong deals”, but things often change quickly in this market.
O2 promises substantial support. Each franchisee is assigned a designated business mentor who helps them put together a business plan, and the company offers advice on marketing, PR and recruitment.
Additionally, O2 puts a “very experienced manager” into new stores for the first two weeks of training, to help franchisees get through the “first hiccups”. But because O2 is relatively new to franchising, the nature of ongoing training is less certain. Nikki promises they are “finding out from existing franchisees what they want next.”

Last words
It’s clear that franchising can be a great way to start a business without taking on all the risk that comes with going it alone. And in the cut-throat mobile phone market, having a big name behind you with experience and resources can make the difference between success and failure.
Having said that, taking on a franchise does not guarantee success. As with any business venture, there’s a risk in involved. It’s usually your own money on the line, so work hard, do lots of research, and be certain of what you’re getting into before making any commitment.

Fancy a franchise? 
• Check what provision there is for an arbitration process if you get into a dispute.
• Check for any restrictions on other business activities in which you can get involved both during and after the life of the franchise agreement.
• Look at the facts of the business and always err on the side of caution. Ask to speak to other franchisees (and preferably visit their businesses too). In particular, find out whether the business model has proved to be sound.
• Look at what you get for the initial fee. Non-tangible assets such as the licence fee and right to use the brand and business system should account for less than 20% of the fee; the rest of the money should fund tangible things such as training and help with marketing and equipment to benefit the business in the long term. Avoid any franchiser who appears to be making a big profit upfront.
• What happens if you want to sell the business in the future? Some franchisers let you do this, some impose rigid restrictions, some will not allow that at all. Think long-term. Franchising generally doesn’t deliver big profits quickly; you will probably need to invest in market development, training etc before the business turns around.
• Before signing up to any agreement, seek professional advice. Most of the high street banks have their own specialist franchise sections, and specialist franchise lawyers will spot any pitfalls or unusual clauses in a contract.
The factors that need to be covered in any franchise agreement include …
• The precise nature and name of the activity being franchised. This includes details of any trade marks, recipes, specifications or processes associated with the product or service.
• Specific details of the franchise territory on offer.
• The duration of the agreement with any renewal terms and conditions.
• The franchise fee, royalties and all other payments to be made.
• What the franchisor agrees to offer in terms of training, marketing, the provision of materials etc.
• What the franchisee agrees to do – which may include specific minimum sales targets to be met.
• The conditions under which the franchisee may sell or assign the franchise to a
third party.
• The conditions under which the franchise can be terminated by either party and their obligations should that happen.

 
The British Franchise Association
(BFA) is a good place to start for advice, information and guidance on all aspects of franchising. (The BFA is also the single regulatory body for franchising in the UK; as it happens, neither O2 nor The Phone Works are members.)  Info: www.british-franchise.org.

 O2
• The proposition: Franchisees open up their own O2 store. This means finding premises and employing staff. The target market is consumers, although franchisees can offer business connections too.
• Costs: The minimum investment is £10,000, although O2 estimates that additional expenses (premises etc) push the typical total startup cost to around £140,000.
• Conditions: Franchisees sign a ten-year agreement with a five year break clause. Although there is no guarantee of territorial exclusivity, the company says it will consider all new store locations carefully.
• Support: O2 says it offers help and advice right from the start. Each franchisee is assigned an experienced business mentor, and the company sends in a manager to assist during the first two weeks of trading. The company is still finalising its ongoing support.
• More information
www.o2.co.uk/abouto2/franchising
0800 9 020202

 

Case study: O2
Andrew Murray was one of O2’s first franchisees. In partnership with his brother, he opened a store in Cleveleys, Lancashire. They considered a number of options: “My brother and I have several businesses. We wanted to branch out, and we looked initially at buying other independent businesses. That turned out to be a waste of time, so then we looked at franchises.”
While doing his research, Andrew discovered O2: “I didn’t realise O2 did franchising, but I gave them a call and was invited to a roadshow. I was interviewed, which I wasn’t expecting, but the next day they offered us a place on the franchising programme.”
Even with the combined knowledge of two experienced businessmen, it wasn’t all plain sailing. It took a long time to negotiate the terms of their lease, and Andrew’s advice for prospective franchisees is clear: “Research the site very carefully. You’re probably making a longer commitment to your lease than to the franchisor, so it’s important to get it right.” And he says finding staff can be tricky: “Recruitment is a pain to be honest. But you’ve got to do it, and you’ve got to get it right.”
The pair have received plenty of assistance from O2: “The support has been fantastic. Any problems you have, there’s always a solution. There’s a dedicated support line and they still get several calls a week from us.”
Although Andrew thinks that it might be difficult for people not used to working with big companies to “be under the umbrella of a large organisation”, he’s a believer in the power of brand recognition: “The O2 brand has helped us massively. They really believe in it, and that’s what we bought into. Everyone knows O2 – that’s part of the reason we did it.” In fact, things are going so well for these two siblings that they’re opening a second shop later this year, and are making plans for several more.

The Phone Works
• The proposition: Franchisees usually base themselves at home and sell to small and medium-sized businesses in their area. They can offer connections to any of the major networks. Generally the franchisees work alone, and do not employ other members of staff.
Costs: Minimum investment is £7,500, but that can go up to £40,000 depending on the size of the geographical area. There is also a monthly management charge of £250.
• Conditions: Franchisees sign a five-year agreement, and the money buys them exclusivity in their area, where other franchisees are not permitted to do business.
• Support: The company claims to offer excellent support to its franchisees. This includes a week-long induction programme, a tailored marketing plan, and monthly training in various aspects of the business.
• More information
www.thephoneworks.co.uk
08450 500545

Case study: Phone Works
Andy Barnett runs The Phone Works franchise in the DY postcode area. His business covers Dudley, Kidderminster, Stourbridge and Halesowen in the Midlands.
Andy’s background isn’t in the mobile phone business: “Prior to this, I worked in the hospitality industry for 24 years – managing operations and so on for large companies. I wanted to find something that would let me take the fundamental skills I’ve got from the past and use them in the future.”
He first spotted a business opportunity after receiving bad service from a mobile phone retailer and realising he could do better: “We were overcharged a lot of money. We were running around in circles every three months. We changed numbers, and the problems still kept happening.”
Andy’s company started trading three months ago, after what he says “wasn’t much of a ramp-up time”. He paid The Phone Works £10,000, and “worked with a solicitor and an accountant” to be sure everything was in order. He praises the franchisor’s approach: “There’s a structure, a strategy, and if you follow it everyday and don’t go off the tracks then things will work for you. It’s like having an instruction manual. If you follow it, it works, week in, week out.”
He’s built up a support network, relying on both the franchisor and some of his fellow franchisees. He likes the proactive approach favoured by The Phone Works: “They’re always feeding you with opportunities, and then they back that up once a month with a training session.”
Although the first three months have exceeded Andy’s expectations, the future looks less certain: “It’s a toughie. If someone had written my year, it would’ve seemed unbelievable. Our plan is to keep using the system, then when we’ve got 12 months out of the way, to work out other strategies. Ideally it’d be nice to take on some colleagues.” But he’s undoubtedly happy, describing his franchise as “an opportunity that’s unbelievable.”