Franchising can help you grow, but it’s no way to get rich quick - Sunday Times

Business owners must still invest their time and money if franchise agreements are to deliver expansion — and they should also ask if this approach will work for them

As a mentor and investor, I meet many British entrepreneurs who are standing at a crossroads. With a successful product, steady growth and a loyal customer base, they want to accelerate success and expand into new geographies. Should they go it alone, investing their own assets in a new country? Should they, alternatively, enter into a joint venture with a local partner? Or is there a role for franchising or licensing?

Some of these models will allow you to scale much faster than would be possible organically, and without the need to raise a large amount of capital.

For instance, Coca-Cola isn’t a single company but a network of almost 300 independent ones connected to the vast umbrella that is The Coca-Cola Company. It owns the drink’s secret ingredients but has at times sold bottling rights to partners across the world, reducing manufacturing, storage and distribution costs and remaining local while leveraging a powerful global brand.

Equally, Domino’s in the UK makes money by selling toppings, dough and other food ingredients to franchisees, supplied daily from its four manufacturing hubs.

Typically, a franchisor enters into an agreement with one or more franchisees to expand its model, providing support and training. In return, the franchisee pays an initial fee and royalties to use the brand and know-how. Investment and risk are shared and yet, because you are in front of far more customers with a highly motivated team of small business owners, you have all the advantages of running a larger business, including greater purchasing power.

But you still need to consider whether this approach is right for your business. For a start, you will need a brilliant service or product that can’t easily be replicated. The model also needs to be easy to expand without needing highly complex training.

Franchising works best when the goal is greater than merely extracting revenue — otherwise, you will attract the wrong sort of partners. There are a lot of franchised businesses that are under-capitalised, and a lot of entrepreneurs who see the model as a way of expanding fast with other people’s money. Inevitably, with insufficient profits shared between franchisor and franchisee — and without experienced operators — the business struggles.

Franchising is not about quick wins — as a business owner, you have to invest substantial capital and time — and if you love the day-to-day nature of your work, this growth model might diminish your natural enthusiasm for the business. Let’s say you have an innovative sandwich business that thrives on your attention to detail. The moment you decide to franchise, you are no longer just in the sandwich-making business; you need to nurture relationships for the good of the entire company, choosing trustworthy partners committed to upholding the highest standards.

You may also find it harder to recruit franchisees prepared to put their own money into your business than to find employed managers to run your local operation. That’s why companies often buy back franchises, preferring to run outlets themselves.

Thirty years after Pizza Express was founded by Peter Boizot in 1965, and three years after floating on the stock exchange, all 32 franchisees were bought out and brought back into the company in preparation for a rapid expansion (there are now more than 300 restaurants). With greater control, the owners have been more confident of offering a consistent and quality service.

In the early days of HomeServe, we operated with franchised plumbers. While this avoided the risk of employing them full-time and having to pay them even if there was not enough work, it also meant we didn’t have total control of quality. That is why we moved to an employed model, hiring plumbers onto our payroll while combining this with a network of high-quality sub-contractors to cover peaks in demand.

Many years later, we tried a franchised model for boiler installations, but we found it was better for us to acquire small heating-installation businesses and put them on a common software platform. That way, we didn’t have to share the value with franchisees.

In your home country, nobody will run the operation better than you, so you should hire, invest and run things. But when expanding abroad — especially into unfamiliar markets — consider a joint venture, master franchise or licensing model. It’s how American burger chain Five Guys has built its UK and European operation — thanks to the business-building acumen of Carphone Warehouse founder Sir Charles Dunstone (it now has about 300 branches). Indeed, the 50-50 joint venture is so successful that, in some cases, Five Guys branches generate more revenue than the neighbouring McDonald’s.

Under the joint-venture model, instead of the franchisor directly recruiting a franchisee, an experienced third party provides the finance, finds the sites and staff and operates the business. Their local contacts and knowledge are key to growing the business. It’s a faster and lower-risk way to scale but you will have to share the profits. This model has worked extremely well for Mansour Group, whose partnerships with General Motors, Caterpillar and McDonald’s have been hugely successful in the Middle East.

One solution might be to expand your business into a few key countries, hiring local management to run things under your guidance, and then use master franchising or joint ventures in more distant countries.

When seeking growth in uncertain economic times, the franchise model can offer stability — but only if your great product is topped with the secret ingredient that no successful entrepreneur can be without: hard graft.

Richard Harpin is founder and chairman of HomeServe and Growth Partner, and owner of Business Leader magazine