A SECTION FOR ENTREPRENEURS: How To Play The Franchise System And Win

A SECTION FOR ENTREPRENEURS: How To Play The Franchise System And Win - Some business ideas lend themselves well to this branded operational technique, offering sound opportunities for making steady profits - if both sides are diligent and reliable, says Rebecca Hoar.

by Rebecca Hoar
Last Updated: 31 Aug 2010

Some business ideas lend themselves well to this branded operational technique, offering sound opportunities for making steady profits - if both sides are diligent and reliable, says Rebecca Hoar.

Russell Hand (left) and his brother Alistair run adjoining Dyno-Rod franchises from an office in Telford, Shropshire.

Wading through sewers to reach a blocked drain isn't everyone's choice of how to make a living. Even if you have the most hi-tech water-jetting equipment in the business, there's no changing the fact that you're ankle-deep in other people's flushings. So there has to be a pretty good reason why anyone would choose it as a job ... that old muck-and-brass mix.

Russell Hand has been unblocking drains in the West Midlands since 1994.

He used to work for a company that hired out heaters for marquees. Having decided he wanted more independence, he started to look into franchising.

He ended up buying a franchise from Dyno-Rod, the national drain-cleaning service with the distinctive Dayglo vans. The business model seemed straightforward.

Hand could buy the West Midlands franchise, which was up for sale, get his own van and all the kit, undergo two weeks' training provided by Dyno-Rod, and start trading.

'On that fateful first Monday when I got into my van, we had the first call by 9am and it didn't stop from that moment,' says Hand. 'I had a Dyno-Rod trainer with me for that first week and he never once got back to his hotel room before 8.30pm.'

The business hasn't slowed down since. Hand's brother has bought the adjoining Shropshire franchise, and they run the two areas from an office in Telford. In Hand's first year of trading, turnover was pounds 55,000. In 2002, the combined turnover for the Shropshire and West Midlands franchises was pounds 1.2 million. Not bad for an initial investment of pounds 20,000.

Like hundreds of other Dyno-Rod employees across the UK, Hand benefits from the company's franchise system. Franchisees buy an existing Dyno-Rod business and purchase the vans, uniforms and equipment that they need, for an average overall sum of pounds 70,000. In return, Dyno-Rod advises them on where to get good deals for the vans, provides ongoing training, and pays for marketing and national advertising and entries in the Yellow Pages.

It's not just the franchisees who benefit. For an entrepreneur, franchising can be the perfect way to expand a small business. The initial capital outlay is small and management is minimal.

According to the British Franchise Association (BFA), there are 677 franchise systems across the UK, between them running more than 30,000 business units. Franchised businesses vary from retail operations such as Bang & Olufsen and Body Shop, through fast food outlets such as McDonald's, and on to recruitment consultancies like Select Appointments. The franchise sector employs 326,000 people, and last year had a total turnover of pounds 9.5 billion. And it's attractive that at a time when the economic downturn is causing many small businesses to go under, 91% of new franchises claim to be profitable.

Simon Wise, deputy director of the BFA, stresses the advantages of the franchise system. For the franchisor, he says, 'it's a very cost-effective way to grow your business.' For the franchisee, 'you have the opportunity to start and run a business with a greater chance of success, because the experience is there and the mistakes have already been made.'

Banks support franchises too, and will often offer up to 70% of the initial capital needed. 'They like franchising because it's a tried-and-tested format with back-up and support from the franchisor,' explains Wise.

Someone who has benefited from franchising is Jim Zockoll, the founder of Dyno-Rod. Originally from Pittsburgh, Pennsylvania, Zockoll travelled the world as a Pan-Am pilot. He and his crew were stationed at the Kensington Palace hotel one night in 1962 on a trip through London. It was just before Christmas, and a drain was blocked, closing a wing of the building. It seemed the hotel's parquet floor would have to be ripped up to get to the blockage.

Zockoll had some drain-cleaning equipment of his own, back in the USA.

The equipment was unavailable in the UK, so he offered to fetch it. The hotel agreed, Zockoll returned a day later on another flight, and cleared the drain in 20 minutes. Dyno-Rod was born.

By the end of 1964, Zockoll's business was booming. Rather than dig into his pockets to open more Dyno-Rod centres, he decided to try franchising.

It was already popular in the States but hardly heard of in the UK. Zockoll held a meeting for anyone interested in franchising and managed to find three willing franchisees.

'Even though I didn't know a damn thing about franchising I didn't have a choice,' says Zockoll. 'Here was a business that I already had that I could sell to a franchisee and from there I would take the capital he gave me back and use it to expand some more.'

The Dyno Group now has 160 franchisees and a turnover of pounds 55 million.

Once franchisees have been hired and trained, they pay a royalty to Dyno-Rod at the rate of 25% on monthly returns. It's a not a bad way for an entrepreneur to make money.

But there are drawbacks to the technique. The most obvious is that once a business gets beyond a certain size, it could make more money if it were wholly owned. If a franchisee is making a 40% margin, perhaps only about half of that would go to the franchisor. With the right economies of scale, the franchisor could recoup more of that profit margin by owning the company outright.

One of the biggest headaches for franchisors is finding a good franchisee.

The right person can make your business run like a dream, but the wrong one can have a highly negative impact and may be hard to get rid of. As franchisors complain that it's getting harder to find the right people, some are relaxing their selection criteria for franchisees.

According to Zockoll, the best franchisee is 'someone who has just enough money to get in and is as hungry as hell and wants to work hard'. A bad franchisee is someone who thinks franchising is a get-rich-quick scheme and doesn't realise that the job will involve long hours and hard work.

Zockoll has had few awkward franchisees over the years. If anyone is caught fiddling the books, they have to leave immediately. But it's more complicated if someone just has a bad attitude. Zockoll will normally wait until there's a customer complaint before suggesting to the franchisee that they might like to sell their franchise on to someone else. 'You get bad franchisees, but it's just like having a bad employee,' he says.

Most franchisors audit their franchisees regularly. At Thorntons, the confectioners, franchise outlets are visited every six to eight weeks.

At Dyno-Rod, it's more likely to be once a year, but it's a detailed inspection.

Says Zockoll: 'Even with the standards, you still have to police it like hell, because a franchisee is always watching the bottom line.'

Franchisees may not appreciate such close evaluation, but it's better than ending up with a fly-by-night operator - still a hazard in the franchising business. According to the BFA's Wise, there are some underhand operators out there who are just after the capital that a new franchisee offers.

'There's no legislation in this country about franchising,' he says. 'You or I could put an ad in the paper tomorrow and start up a franchise business.' The BFA operates a code of ethics, but only a third of the UK's franchisors belong to the association.

And despite the high success rate trumpeted by fans of franchising, there have been notable failures. There are risks, as there are with running any business. The BFA estimates that there's a 7% failure rate across the board in franchising. John Stanworth, professor of enterprise studies at Westminster business school, says: 'Most franchisees enjoy a better survival rate than do franchisors. You need to grow very quickly in order to get enough royalties to be able to continue.' And if a franchisor goes belly-up, a string of unhappy franchisees will be left angry and out of pocket.

For those who think that franchising is an easy option, both Hand and Zockoll would testify otherwise. 'I wouldn't suggest doing it as just 'a job',' says Hand, who often works 12-hour days. 'The commitment is too heavy and the risk is quite high.'

Zockoll agrees. 'More than anything, it's just a lot of damn hard work and determination.'

Despite the possible obstacles and the sharks in the sector, most franchise workers are happy with their lot. 'Sometimes I think I'd rather be doing it on my own, usually when I'm signing the royalty cheque,' says Hand.

'But the question is: would we be doing the turnover if we were on our own? And I don't think we would.'

Says Zockoll: 'I've been in it for 40 years and I wouldn't do anything but franchising. It's hard work and it's endless hours, but if you've got sufficient funds and you're patient and you've got drive and the right franchisees, it can be magic.'

ENFRANCHISE YOURSELF

If you're thinking of expanding your own business through franchising:

- Make sure your business can be franchised. Not all translate well to the format, especially if your company's success relies on your personal expertise or contacts.

- Cover all the bases before you start. Think about how you'll manage the financial structure, support for franchisees, administration and trouble-shooting. There's more to it than meets the eye.

- Set aside capital to invest in branding, recruitment and training, advertising, and any unforeseen circumstances.

- Start small. Launch a franchise as a pilot scheme and run it for a year or so to find what works and what doesn't.

- Take legal advice. You'll need it for drawing up franchisee contracts and for protecting your brand.

- Attend a franchising exhibition. The British Franchise Association (www.british-franchise.org) has details of UK events, including seminars for potential franchisors.

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