‘FRANCHISING IN BRITAIN’ SERIES

L
NA
The Lloyds Bank Plc/IFRC Franchising in

FR
O

AN
I
AT
Britain series comprised 3 volumes:

CH
RN

IS
TE

E
IN
Vol.1
RE

E
TR
SE
1 Prospective Franchisees, (Hatcliffe,
AR

N
CE
CH
Mills, Purdy & Stanworth), 1995

2 Franchising in Figures, (Purdy,

Stanworth & Hatcliffe), 1996

THE INTERNATIONAL FRANCHISE 3 Secrets of Success, (Silvester,

RESEARCH CENTRE (IFRC) 1993-2007
University of Westminster, London, UK.
"The International Franchise Research
Centre (IFRC) is committed to
improving the understanding of
franchising. This is achieved by the
publication of impartial research and
by the encouragement of informed
debate."
Franchising operates in a dynamic environ-
ment, with new issues and challenges
emerging, including: globalisation, coping
with competition, disclosure, industry
regulation, managing relations with
franchisee associations, franchisee
recruitment & market saturation.
Stanworth, Purdy & Hatcliffe), 1996
Vol.2
1 Cloning Success, (Silvester,
Stanworth, Purdy & Hatcliffe), 1997
2 Franchising Your Business: Getting
Started, (Stanworth, Purdy &
Hatcliffe), 1998. A more recent version
- I franchised my business, so can you
(2002) - is also available.
3 Franchisee Success: Perceptions &
Barriers, (Nunn, Stanworth, Purdy,
Thomas & Hatcliffe), 1998
Vol.3

Against this backdrop, the IFRC was
established in 1993 by Professor John
Stanworth (Director of the Future of Work
Research Group at the University of
Westminster), supported by Brian Smith (ex-
BFA Chairman, franchisee, franchisor and
author), and Chair of its Steering Group.
FOUNDER MEMBERS
Founder members and sponsors included:
Barclays Bank, the British Franchise
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
(now Lloyds Banking Group), Mail Boxes
Etc., Midland Bank (now HSBC), Prontaprint,
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
and Wragge & Co.
1 Fifth Annual Strategy Seminar:
Breaking Out Of The Home Market,
(Stanworth & Purdy, Eds., papers by
McCosker, Scott, Hoy & Harris), 1998
2 Franchising: The Gender Dimension,
(Nunn, Purdy, Stanworth & Hatcliffe),
1998
Web versions
The above reports are now available online,
in Acrobat format, published January 2011,
via http://www.scribd.com/SME_Research
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.

International Franchise Research Centre Lloyds Bank Franchising In Britain - Web Versions 2011 p.1
OTHER PUBLICATIONS
The IFRC published extensively, including
journal articles, book chapters, conference
papers and a Special Studies Series (also
available via http://www.scribd.com/
SME_Research):
1 The Blenheim/University of
Westminster Franchise Survey: Spring
1993, 1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, 1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, 1994
4 The Impact of Franchising on the
Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, 1994
5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data, 1995
6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, 1995
7 Franchising as a Source of
Technology-transfer to Developing
Economies, 1995
8 Aspects of Franchisee Recruitment,
1996
9 Business Format Franchising:
Innovation & Creativity or Replication
& Conformity ?, 1996
10 London: A Capital City For Franchisee
Recruitment, 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
1997
12 Franchising: Breaking Into European
Union Markets, 1998
13 Succeeding As A Franchisor,
published jointly with Business Link
London Central), 1998
International Franchise Research Centre
14 Direct Selling: Its Location in a
Franchise Typology, 1999
15 Unravelling the Evidence on
Franchise System Survivability, 1999
16 Survey: Professional Services For
Franchising In The U.K., 2001
ACADEMIC LINKS
Close links were fostered with universities in
Rome and Pisa (Italy), Haute Alsace
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
collaboration. Professor Pat Kaufmann of
Atlanta, Georgia, addressed our inaugural
annual strategy seminar, in 1994. Overseas
speakers in subsequent years included
Cheryl Babcock, Director of the Franchising
Institute, University of St. Thomas,
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Francine Lafontaine, University of Michigan
(1997), Professor Claude Nègre, University
of Haute Alsace (1997), Colin McCosker,
University of Southern Queensland (1998),
Professor Frank Hoy, University of Texas at
El Paso (1998), Professor Jack Nevin,
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Professor Wilke English, University of Mary
Hardin-Baylor (2000).
IFRC members were active supporters of the
International Society of Franchising, and
hosted the ISoF 2005 conference in London.
The IFRC ceased its research activities in
2007, when John Stanworth took retirement.
John Stanworth, Emeritus Professor,
University of Westminster
http://www.westminster.ac.uk/schools/
business
David Purdy, Visiting Fellow,
Kingston University
http://business.kingston.ac.uk/sbrc
January 2011
Lloyds Bank Franchising In Britain - Web Versions 2011 p.2
Lloyds Bank plcllFRC Franchising Your Business: Getting Started

1.Franchising: An Overview , , , , , ,, , , , ,
2 We see many messages proclaiming the 'success' and
Franchising: U.K. ......... , ,, , , , , ,, , 2 'growth' of franchising. However, this method of doing
business is no easy option. For a newcomer, especially,
Franchising: Worldwide , , ,,, , ,, , . . . 2
there is much more to franchising than first meets the
Franchise Agreement, .......... ,, ........ 2 eye. Complexities include franchise agreements, trade
mark protection and franchise system development.
2.Business Format Franchising: The need for professional advice when developing a
Pros & Cons., . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 franchise system is therefore ofparamount importance.
Advantages & Disadvantages to
Our view is that to stand a realistic chance of survival,
the Franchisor. . . . . . . . . . . . . . . . . . . . . . . . . 5 a prospective franchise system must be adequately
Advantages & Disadvantages to researched and resourced before any significant level of
the Franchisee ,,, , ,
................ 5 expenditure is undertaken.

3.1s Franchising For You ? . . . 7 , , ,, , , ,, , ,, ,

The aim of this guide is to provide an introduction to
Piecing a System Together
Business Format Franchising - a means of closely
........7 , ,,, , ,,
replicating a business operation at other locations -
Key Resources: Finance & Franchisees, 9 ,
which will lead to informed decision-taking. References
Legal Considerations 12,, , , ,, , , , , ,,, , ,
to a number of surveys of franchisors and franchisees
The British Franchise Association (BFA) 13 ,, ,, ,, have been included, primarily to illustrate the
Alternatives to Franchising . . . . 13 , , ,, ,, ,
environment in which other franchise systems operate.
Acknowledgments
4.Steps To consider . . . . . . . . . . . . . . . . . . . . . 15
Growth Stages .... , , ..... 15 Thanks are due to the following contributors for
8 Franchising Tips .......... , , ,, , , 16 allowing us to adapt and reproduce material: The
Franchising Internationally . . , ,, ,, ,, , 16 International Franchise Association (extract from How
Risks & Threats . . . . . . . . . . .
, ,,,, ,,,,, , . 16 To Be A Franchisor); Business Link London Central
(Franchise Idea Assessment Questionnaire); Gordon
Harris, Wragge & Co. (Outline Franchise Agreement);
5.Check-listTo Help Assess An Idea For John Stanworth and Brian Smith (Glossary).
A kmchise System .,,. . . . . . , , , , 18

6.Sources of Assistance , ,, , , 20
The British Franchise Association (BFA) ' ,,, ,,, 20
Franchise Consultants ........ , , 20
Solicitors ...
, ,
..... . . . 20

Appendices . . .........
,, , ,,....... 21
Useful Contacts/Sources . . . . . ,,, , 21
Further Reading .... , , , ,, 23
BFA Membership Criteria ..... , ,, , , ,, 23
Sample Cash-flow Forecast , ,, , ,,, 26
Franchisee Diagnostic Questionnaire ,, 27
Outline Franchise Agreement , , , , , , ,, 34
Glossary . . . . . . . . . . .
, , , 38

Disclaimer
lE Due care and attention has been paid to the collection and selection of the information and advice contained herein, and as such,
it is offered in good faith. Lloyds Bank Plc regrets, however, that neither the Bank, the authors, nor any of the contributors to this publication are
I able to accept any liability for losses or damages which could arise for those choosing to act upon the advice or information contained herein.
1 Competent professional advice should be sought when developing a franchise system.
l
Lloyds Bank plc/IFRC Franch~smgYour Busmess Gettlng Started (1998)
I B Un~vers~ty
of Westmmster & Lloyds Bank Plc 1998

The public at large might readily recognise such names
as McDonald's, Dyno-Rod and Holiday Inn, although
they may not necessarily be aware of their association
with franchising. So, what sort of businesses are
franchised, and how much franchising is there ?
FRANCHISING: U.K.
In the U.K., franchising in its broadest sense, has a
combined sales turnover of £33 billion, of which,
business format franchising accounts for some £6
billion (Figure 1).
In terms of different types of franchise systems, the
most predominant are business services, which
include such activities as training, sign-making,
suppliers of personnel, and cost-reduction services
Figure 2). Further details about the various systems
can be found in the annually-updated franchise
directories, or via Internet 'web-sites' (world-wide-
web).
FRANCHISING: WORLDWIDE
In the developed world, franchising has become
increasingly commonplace. The same is applying to
developing areas, too, and in some of these,
government support for franchising is evident (in
Malaysia, for instance, under the banner of promoting
entrepreneurship). A 1995 survey of 36 countries,
Figure 1: Franchising Trends i n Total U.K. Sales (Outlet sales, fbn), 1984-1996
E5bn
f4bn
L2bn - _ _ - I
&" -,,--.'
flbn
60.9bn
LQbn
1984 1985 1986 1387 1988
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started
revealed an average of 333 franchisors and nearly
25,000 franchisees per country (Figure 3).
Approximately 40 franchisors per country were
franchising across national borders. For some
countries, the data extended beyond business format
franchises and also included, for example, petroleum
and automobile sales. In its broadest definition,
franchising in the US. accounts for around a third of all
retail sales, but in the U.K., a 1997 estimate suggested
that it is around a fifth.
FRANCHISE AGREEMENT
Many definitions abound, but franchising revolves
around the franchise agreement, which is a
contractual licence granted by the franchisor to the
franchisee and which usually:
permits or requires the franchisee to carry on, for a
specified period, a business under a name associated
with the franchisor
entitles the franchisor to exercise continuing control
over the franchisee regarding the manner in which
the outlet functions
obliges the franchisor to provide the franchisee with
assistance in certain aspects of the franchisee's
outlet (such as training or merchandising)
Current Prices Ibn
__rc H.lbn
/-
A t 1990 Prices
Current Price (at time of respective survey):
-
NatWestiBFAAnnual Franchise Surveys 1984 1996
19W 1990 1991 1992 1993 1994 19% 1996
YEAR
Lloyds Bank plcllFRC Franchising Your Business: Getting Started

-
Figure 2: U.K. Franchisors Sector Breakdown (% of 566 systems)

Fast P r i n t
Leisure/Travel 2%
3%
Delivery /Haulage
Estate Services 2%

Health & Beaut

5%

Cleaning Services
5%

Distribution Services
6%

Walk-in Retai
8%

me Care Services
Motorist Services
8% Lloyds BanMFRC 'Franchising in Figures', 1996 (n=566)

requires the franchisee periodically to pay the Wholesaler-retailer - e.g. where a co-operative of
franchisor money in consideration for the franchise, retailers form a wholesaling company to act as
or for goods/services supplied by the franchisor franchisor and then contractually oblige the retailer to
purchase through the co-operative
Franchisor-franchisee relationships
Trademark, trade name, licensor-retailer
Franchising can straddle different types of businesses: ('business format') franchise - where the franchisor
has a service or product which is marketed under a
Manufacturer-retailer - where the retailer, as common trade name, generally by means of a standard
franchisee, sells the product directly to the public e.g. operation e.g. fast-food outlets. This group may be sub-
car dealerships, petrol service stations divided by the size of initial investment:

Manufacturer-wholesaler - e.g. soft drink companies Job franchise - where the franchisor is creating a
who license inde~endentbottlers as franchisees job for the self-employed man, e.g. Dyno-Rod or

Figure 3: Franchising Worldwide - A Comparison

Number of Franchisors per Country
United States :..................................................... 3,000
Canada ...................................................................... 1,000
Brazil ........................................................................ 932
Japan ........................................................................... 714
Australia/NZ ..................................................... 600
France ....................................................................... 520
Germany ............................................................... 500
Britain ...................................................................... 414
Italy ............................................................................. 400
Mexico ..................................................................... 375
Number of Franchisees per Country
United States ................................................. 250,000
Japan ........................................................................ 139,788
Canada .................................................................. 65,000
Brazil ....................................................................... 60,000
France .................................................................... 30,000
. .
B n h n ................................................................. 26,400
Australia/NZ ................................................... 26,000
Mexico .................................................................. 18,724
Spain ................................................................... 18,500
Italy .......................................................................... 18,500

Arthur Andersen/World Franchising Council, Worldwide Franchising Statistics:

A Study of Worldwide Franchise Associations', 1995
 Lloyds Bank plcllFRC Franchising Your Business: Getting Started

Figure 4: A Simple Franchise Structure

Franchisor A

Franchisor
a n
4

.- Company Pilotls
(testing & development)
Franchisees
4
4
. I I

Business franchise - normally a larger investment

involving business premises and employing
additional staff, e.g. McDonald's Restaurants or Kall-
Kwik.

Investment franchise - a relatively large

investment where return on investment is the prime
incentive, e.g. Holiday Inn Hotels.

A common fee arrangement for business format

franchises is for the franchisee to pay an initial 'up-
front' fee, plus an ongoing management services or
royalty fee, typically 5-10%of their sales turnover.
In practice, the franchise relationship involves satellite
enterprises (run by franchisees, Figure 4) operating
under the trade name and business format of a larger
organisation (the franchisor) in exchange for a
continuing service fee. The franchisee sets up his/her
own business, operating along lines specified by the
franchisor and trading in the product or service
previously market tested by the franchisor. The main
advantage of franchising to the franchisor is that it /'
enables him/her to achieve national coverage for
his/her product or service more quickly. Most of the
necessary capital is put up by franchisees and the latter,
being self-employed, are usually motivated,to work
hard in building up their businesses which, at the same '

time, ensures success for the franchisor.

The franchisee, on the other hand, gets the chance to
run his/her own business, use of an established
tradename, prime rights to a particular geographical
territory where appropriate, head office advice and
administrative backup, plus the benefits of continuous
market research and product or service development.
Lloyds Bank plcIlFRC Franchising Your Business: Getting Started
ADVANTAGES AND DISADVANTAGES TO THE
FRANCHISOR
Advantages
Franchising enables the franchisor to increase the
number of distributive outlets for his/her
organisation's product or service with limited capital
investment. It is the franchisees who provide much
of the capital with their stakes in the business.
Since the franchisee owns his/her own business,
he/she is assumed to be highly motivated to
maximise growth and profitability. This situation
may be compared to that of a manager of a retail
outlet who is a direct employee of the parent
company. Generally, such a manager earns a fixed
salary (with possibly an element of bonus incentive
incorporated) and lacks the extra incentive to
succeed which may result from a personal financial
investment in the business. A successful franchisee,
with increasing profits, can be expected to
contribute to the success of the franchisor.
A franchise unit, being locally owned, is claimed to
be readily accepted by the community as being a
local business. It is not clear how far this is true,
however, since very often local people may not be
aware that a franchised unit is in fact owner-
managed.
The franchisor has limited payroll, rent and
administrative overheads, because the very nature
of the operation requires franchisees to be self-
employed. Franchisees are themselves responsible
for the staffing arrangements and operating costs of
their particular outlets.
As well as the franchisors achieving a wider
distribution network for their product or service, the
nature of most franchise contracts ensures that
franchisees are in some measure 'tied' to the
franchisor. They are often obliged to purchase
equipment from or through the franchisor, plus, as in
the case of fast food franchise restaurants, the
necessary ingredients that are needed for the final
product.
Disadvantages
It may be difficult for the franchisor to exercise tight
control over the franchisee simply because he/she is
not a direct employee of the franchisee and cannot
be closely supervised. In turn, the poor reputation of
one outlet, in terms of product quality or service, can
be damaging to the general trade name and
reputation of the franchisor and, in turn, the whole
franchise organisation.
A franchisor cannot always be certain that a
franchisee is declaring his/her true level of business
activity. Many franchisors employ a central
accounting system to combat this, though no system
can be expected to be totally successful in this
respect.
If the franchisor believes that a franchisee has
become demotivated and is not running hidher
outlet efficiently, there is relatively little that can be
done in the short term as long as the franchisee is
operating within the terms of hidher contract. The
management of a franchising company is limited in
its flexibilitv. Conventional com~aniescan move
more quickiy to exploit market *potential when a
modified selling strategy is required. However, to
bring about changes can be a lengthy and
cumbersome operation when dealing with
individually-owned franchised outlets. Any changes
need to be carefully handled to avoid conflicts
stemming from perceived threats to the franchisee's
independence)
There may be problems of information feedback
from the franchisee to the franchisor. This can result
from the franchisee's desire for independence or
simply from channels of communication not being as
well-developed as they might be in company-owned
and managed outlets.
The franchisor is faced with a paradox. The franchise
method of business tries to capitalise on the personal
attention and service that characterise the owner-
managed business. However, the franchisor's need
for a standardised product or service, together with
a uniform presentation, needed to give customers a
sense of reliability and dependability, clashes with
the former.
The franchisor may have difficulty in recruiting
suitable franchisees who: 1) see franchising as an
attractive method of doing business, 2) are
motivated towards self-employment, and also, 3)
have the necessary capital available for investment.
ADVANTAGES AND DISADVANTAGES
TO THE FRANCHISEE
Advantages
It is possible for an individual to run his/her own
business yet gain the advantages and economies of
scale of a larger company. Here the advantages
range from initial and on-going training, to
centralised buying, on-going product/service and
market research.
If the product or service has already achieved brand
awareness, this relieves the franchisee of many of
the normal demands of the sales and marketing
function and allows him/her to concentrate on other
aspects of the business. Most franchisors undertake
 Lloyds Bank plc1lFRC Franchising Your Business: Getting Started

both national and local advertising campaigns to

keep franchisees' products or services firmly in the
public mind.

It is claimed that franchisees require less capital than

would be the case to equip a business independently.
The franchisor may help with raising finance, site-
selection, head leases on properties, and getting the
business open and running smoothly. However,
franchise investment levels tend to be fairly high and
it could be argued that one could start a business
successfully for a similar investment (or less
perhaps) without the obligations imposed by a
franchisor.

Many franchisees operate within a defined territory

which involves the franchisor giving an undertaking
not to set up another competing outlet within a given
geographical radius. However, there is nothing to
stop another franchisor, or other conventional
competition, moving into the same area if it appears
attractive and lucrative.

There are other franchisees in the same network

with the same challenges and problems and so any
individual franchisee can use them as a source of
non-threatening help and advice.

Disadvantages
The tight control exercised by the franchisor in
order to regulate the way in which the product or
service is presented to the consumer may leave little
opportunity for the franchisee to impose his/her
personality on the business.

Should the trade name of the franchise become

tarnished, perhaps through mismanagement by the
franchisor, or the shortcomings of other franchisees,
then there is the possibility that the franchisee may
suffer simply because he/she is seen by the public
as a representative of the franchise organisation in
question.

The service provided by the franchisor may

constitute a heavy expense to the franchisee. The
franchisee may be obliged to purchase equipment
and ingredients from the franchisor which he/she
could have bought more cheaply from other sources.
Also, management service fees and charges may be
high.

There is the possibility that the franchise agreement

may not fulfil the franchisee's expectations, both in
terms of anticipated sales and profits and also
possibly in terms of the franchisor not fulfilling
hidher obligations.
Lloyds Bank plcllFRC Franchising Your Business: Getting Started
PIECING A SYSTEM TOGETHER
The following has been adapted from a publication
produced by the International Franchise Association,
How To Be A Franchisor (1989). Certain aspects of the
documents, operational plans, and financing
requirements will vary from industry to industry, but
the following steps are universal for all franchisors:
Figure 5: Piecing A Franchise System Together
1 Organisation: Organise the body of knowledge that
has permitted you to be successful - in a logical and
sequential way. Remember you are going to train
prospective franchisees in a subject area in which they
may have little or no knowledge.
2 Pilot Operation: Franchisors must operate a
successful pilot or prototype operation to demonstrate
that their representations about the business are
supported by their deeds. Investigate the applicability
of patent and/or copyright protection, both at home,
and in areas overseas into which the franchise might
expand.
3 Ongoing pilot: To allow constant modification of a
programme and to stay on top of changing markets,
franchisors should continue running a company-owned
operation or operations.
4 Operating Plan: Develop an operating plan which
encompasses all the plans and programmes needed to
launch the franchising company. The plan should cover
sales, servicing, training, and all key subdivisions of
these areas, as well as site selection, pre-training
activities, post-training, and who will be responsible for
each area.
5 Financial Plan: Develop a conservative financial
plan which includes cash flow, profit and loss, and extra
sources of funding which can be made available if
necessary. A similar pro forma should be developed for
franchisees.
 Lloyds Bank plcllFRC Franchising Your Business: Getting Started

6 Franchisee Qualifications: Decide who your
franchisees will be: individuals or companies. What
type of profile are you looking for - experience,
education, financial capabilities, skills required, and
personal qualifications. [See also the section referring
to franchisee recruitment and the diagnostic franchisee
questionnaire in the Appendices.]
7 Franchise Type: Decide on the type of franchise
you will grant: individual unit, multiple unit,
subfranchise, affiliation/conversion franchise, or
master franchise [see 'Legal Considerations']
8 Franchisee Training: Decide in what areas you will
train your franchisees, how you will accomplish the
training, and who will do it.
9 Growth Plan: Decide how your company will grow
- slowly, quickly, regionally, nationally, and/or
internationally.
of gross sales independently for advertising ?Will there
be a fixed monthly fee for joint advertising ?
17 Dispute Procedures: How will you resolve
disputes if they arise: litigation, arbitration, mediation ?
Where will the dispute be resolved ? Who will pay the
legal fees ?
18 Employees: Decide on which functions they must
carry out; i.e., franchise sales, franchisee training, and
what you will pay people to perform these tasks.
Decide on their qualifications and write job
descriptions. Develop a basic organisational chart.
19 Operations Manual: The methods and
procedures to be followed by franchisees and their
employees in the operation of the franchised premises
must be developed and clearly written in an operations
manual. It is advantageous to place as many details
about the franchise system in this manual as possible.

10 Franchise Cost: Decide on the initial fee, royalty
fees, and advertising contributions.
11 Franchise Sales: How will you sell the franchise -
employees, your own sales department, franchise
exhibitions, direct mail, the Internet, word of mouth, or
advertising.
12 Franchise Territory: How much (if any)
territorial protection will you grant your franchisees ?
Are you going to give exclusive territories, locations
with promises of no competing units within a fixed
territory, protected, exclusive, or open territory ? Will
they be subject to volume quotas, or performance
standards ? For how long a period of time ?
13 Franchise Financing: How will you finance your
growth - public share offering, private offering, venture
capital, limited partnerships, commercial banks, or
from surpluses generated by your own company ?
2 0 Personal Assessment: Entrepreneurs embarking
on franchising need to look at themselves carefully. Ask
yourself - honestly - are your goals realistic and
attainable ? If you need financial help, will you allow a
lender an equity position ? Do you have the patience,
tenacity, and self-disciplineto start a fledgling business
or convert yours to franchising ? Can you develop and
sustain relationships with many different personality
types ?Are you willing to make the necessary sacrifices
and contend with the effects on your family and other
areas of your life ? Can you give up some of your
independence to franchisees or get them to "work" with
you ? Can you attract, hire, train, manage, and develop
important staff who will respond to you personally ?
What type of personality are you ? Being a franchisor is
time-consuming and expensive. Are you ready ?

14 Tax Plan: Important matters to address are

avoiding liability for franchisees' taxes, net royalty
concept, capitalising sales expenses, and capitalising
initial franchise fees.

15 Franchisee Control: Decide on restrictions on

corporate franchisees and their shareholders,
assignment restrictions, inheritability controls, and
rules regarding breakaway franchisees, franchisee
bankruptcy, competing franchisees, franchise size, and
discrimination. How will you make sure you are paid
what you are owed ?What reporting systems and audit
procedures will you use ? How do you get access to tax
returns ? What procedures and guidelines will you
establish for security deposits, prompt payment
discounts, and late payment penalties.

16 Advertising: Decide on the type of advertising you

will need national, regional, or local newspaper; direct
mail; flyers/throwaways; radio; TV; regional or national
magazines. Will the franchises pay a fixed percentage
Lloyds Bank plcllFRC Franchising Your Business: Getting Started
KEY RESOURCES: FINANCE & FRANCHISEES
Finance
Some franchisors expect franchisee 'upfront' fees to
significantly outstrip their own expenditure from very
early on in the life of the franchise system. This rarely
works out in practice. Positive net cash inflows can lag
by several years, and the theory (Figure 6), is borne
out in practice (Figure 7).
In the illustrative example above (Figure 6, and see also
the accompanying details in the Appendices), the
franchisor starts up with £150,000 longer-term loan
capital plus £100,000 owners' funds. In addition to this,
the system needs a bank borrowing facility which
peaks at very nearly £200,000 in year 4, before the
account finally moves into credit between years 5 and 6.
However, to indicate the perhaps surprising sensitivity
to just a modest adverse change in circumstances, we
have added a Worst-case Scenario' to this 'Expected
Scenario' cash-flow.
The 'worst-case' basically assumes that the total
receipts are 10%less than expected and, likewise, total
payments 10%higher. The outcome is a peak bank
borrowing of £345,000 in year 4 - well over 70%beyond
the 'expected' borrowing requirement - and with the
franchisor still in deficit beyond year 7.
Figure 7 is based on a survey of U.K. franchise
systems, as is Figure 8, showing perceptions of break-
even system size against length of experience in
franchising. It appears that the less experienced
franchise systems were unduly optimistic in expecting
a low break-even size - over half of the youngest
systems thought that break-even was achievable with
fewer than 11franchise outlets, whereas an appreciable
proportion of older systems (6-10 years) felt that break-
even lay in reality between 21-50 franchise outlets.
Franchisee Recruitment
Costs - Recruiting franchisees can be a rather more
costly process than many might imagine. Depending as
to which communication strategy is adopted, a
combination of low enquiry-to-franchisee appointment
ratios and associated marketing costs (advertising,
exhibiting, interviewing and so forth), produce costs
falling typically in the range £3,000 to £10,000 per
franchisee (Figure 9, based on a survey of franchisors
attending a U.K. franchise exhibition).
Franchisee Characteristics - Picking winners is not a
simple task and the inherent diiculties tend to be
compounded by a number of additional factors:
Most developing franchises have much in common
with the typical small firm in that they have only a
few key staff members undertaking a multitude of
tasks. These may be very able and committed people
but, usually, none of them is expert in the field of
personnel selection and management, which is the
relevant specialism here.
Some franchisors may feel that they can rely on
'instinctive' or 'gut' feelings to signal good or bad
franchisee prospects. Just as few people would admit
to being a bad driver, so they feel it reflects badly
upon them to admit to diiculties in the selection of
personnel.
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Figure 7: Finance Invested Prior to First Franchisee

By Franchising Experience

Proportion
o f Sample/
Sub-sample
CLength o f
Franchising
Experience)

Lloyds BanMFRC 'Secrets of Success', 1996 (n=139)

Very often people fall into the trap of looking for
people exactly like themselves when they may be
better advised to look for those who complement
rather than duplicate their own abilities and
weaknesses.
In as much as franchising is a team effort, one of the
key front line teams is the franchisee husband/wife
team. If this team is not operating effectively, then a
source of potential strength can descend into a
weakness.

Figure 8: 'Break-Even' Franchise System Size

By Franchising Experience

Proportion
of Sample/
Sub-sample
(Length of
Franchising
Experience)

3LloydsBanMFRC 'Secrets of Success', 1996 (n.139)

+-- ALL
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Figure 9: Estimated Cost of Franchisee Recruitment

By Length of Time in Franchising

Proportion
of Sample/
Sub-sample
(Time in
Franchising)

Franchisees need to be able to: A diagnostic franchisee questionnaire has been

included in the Appendices by way of example of the
0 Cope with the isolation of self-employment sort of questions to be asked in order to help screen
0 Exercise self-discipline prospective candidates.
0 Work long hours under pressure Motivation - Research into the appeal of franchising to
0 Learn from failures prospective franchisees visiting exhibitions has
0 Compete with self-imposed standards revealed that prior self-employment experience can
0 Take unpopular decisions influence their attitudes (Figure 10).
Resist impetuous or emotional behaviour
Those who had never previously achieved self-
Take a balanced view of events employed status opted most strongly for 'Independence
0 Tolerate uncertainty ...', By way of marked contrast, those currently self-
0 Accept advice employed opted most strongly for the economic
Demonstrate financial viability security of a 'Proven Business System'. Those who had
Demonstrate support of spouse been previously self-employed but were currently
0 Demonstrate enterprise background back in the wider labour market were very much in the
middle, opting firstly for 'Proven Business System'.
0 Demonstrate profit motivation Thus, when targeting prospective franchisees from just
0 Demonstrate sales orientation one of these backgrounds, the message to them can be
0 Demonstrate receptiveness towards made more attractive by incorporating the appropriate
franchisor's training theme.
0 Demonstrate growth orientation
Sales leads (to find prospective franchisees) - U.K.
0 Demonstrate a favourable attitude Franchisors were asked, via a postal survey, to identify,
towards task delegation from 14 different methods of communicating with
Take the long-term view prospective franchisees, which methods for them were
0 Demonstrate belief that individuals the most cost-effective (Figure 11).The most popular
can 'make things happen' options were:
1.Franchise Exhibitions
2. Franchise Magazines
3. National Advertising
 Lloyds Bank plc1lFRC Franchising Your Business: Getting Started

Figure 10: Main appeal of Franchising (to Prospective Franchisees):

by Employment Status

Proportion
of Sample/
Sub-sample
CEmploym m t
Status)

IFRC 'Blenheim Group PldUniversity Of Westminster

Franchise Survey: Spring 1993' ( ~ 2 9 7 )

Other methods chosen by 1-6% of the franchisors LEGAL CONSIDERATIONS

surveyed were:
With regard to franchising, the U.K. can be considered
- Word of Mouth to be lightly regulated - compared to the U.S., where for
- Customers example formal franchisor disclosure rules are
- Local Advertising enforced by the Federal Trade Commission. In reality,
- Direct Mail though, there is ample legislation to consider:
- Re-settlement Courses
- Employrnent/Business Transfer Agencies. European Commission Block Exemption 1979
- which effectively deregulates franchising provided
Finally, Extended Family, Seminars and Trade Press that certain courses of action are followed.
received no first choice selections.

Fiqure 11: First Choice Preferences for Franchisee Enauirv Leads:

Proportion
ef SampleE
Sub-sample
(Length of
Franchising
Experience)

Franchisees 0-2years
lFRC Unpublished, 1996 (11-139)
' ALL
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started
Trading Schemes Act 1996 - franchise systems
are excluded provided that they comply with several
conditions. For instance, by having all franchisees
registered for VAT, or, by operating 'single tier'
systems.
0 Community Trade Mark 1997 - which affords
European Community-wide protection.
There are other areas of law which impinge, to a lesser
or greater extent, on franchising in the U.K. The
following summaries are not exhaustive, but key issues
include:
The Law of Contract - this concerns the franchise
agreement, which should cover: the granting of the
licence, the obligations of both franchisor and
franchisee, provisi&s relating to death or incapacity
of the franchisee, the sale of the business by the
franchisee, termination of the agreement and post-
termination restrictions. A franchise agreement
should have viable property to licence and should
also avoid the inclusion of 'unfair' terms. An example
of the typical clauses included in an agreement is
shown in the Appendices.
Competition Law - 'restraint of trade clauses',
concerning territorial and post-termination
restrictions, are to be expected in a franchise
agreement. But a larger system, aiming for a
combined annual turnover in excess of E20m
(franchisor and franchisees together), will need to
clear its agreement with the Office of Fair Trading
under the Restrictive Trade Practices Act.
Tax Law - Any franchisor income from franchisees
relating to a 'licence fee' (e.g. as an element of the
franchisee initial fee), is liable to corporation tax.
Other franchisor income for services or materials
provided to franchisees is usually treated as revenue
income. However, for franchisees, the 'licence fee'
element is not tax deductible.
Agency Law - The inadvertent creation of 'agency'
relationship between the franchisor and a
franchisee, where franchisor acts as a trustee for the
franchisee, is to be avoided. Excessive control
exercised over franchisees could lead to this, and in
turn, may require the franchisor to disclose more
about the business than had been envisaged.
Other areas, for example, include employment and data
protection (as they apply to businesses at large). It is
therefore important that professional advice is sought -
and ideally that of a legal firm with experience of
franchising agreements - to ensure that the system
does not fall foul of any of the above legal issues.
The British Franchise BRITISH
FRANCHISE
Association (BFA) ASSOCIATION
This is the U.K. trade body for the industry, launched
in 1977 and originally set up primarily as a franchisor
organisation. Its aims are:
0 to develop and continuously improve standards of
good practice in franchising
to accredit franchisors who meet those standards
to promote good franchising, as represented by
accredited franchisors, to the general public, the
business community, government and the media
to provide to the general public, as prospective
franchisees, information and education to help them
make effective judgements in choosing the best
franchise for them
It encompasses business format franchisors with a
membership of 160 franchisors, plus accountants,
banks, consultants and solicitors. Membership
requires franchisors to demonstrate they have proven
and reliable businesses which can be cloned. Potential
franchisors can receive early development guidance.
Membership progresses from 'provisional' to 'full'
status as the business develops, and members of all
grades can use the respective grade logo in their
promotional material.
The BFA accredits U.K. franchisors against wide-
ranging criteria which include a European Code:
Viability - A financial record showing a sound
business
Franchisable - A record of at least one successful
franchised outlet and no significant record of
failures
Ethical - A franchise agreement and structure
conforming to the European Code of Ethics
Disclosed - Offer documents and brochures which
reasonably represent the performance of the
system
Business format franchises should seriously consider
membership as an objective.
Further details on the BFA can be found in the
Appendices.
ALTERNATIVES TO FRANCHISING
A distributorship/dealership is an agreement between
two legally independent parties, the vendor and
purchaser. The purchaser only has a licence to stock
the vendor's product and does not gain the benefits of
the ongoing support of a franchise system. The
purchaser is required by the vendor to hold adequate
stock and maintain their premises in a way that will
reflect well on the vendors product.
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Figure 12: Advantages & Disadvantages of Various Business Expansion Strategies

CQMPGNY
o@@~J?s ' AlXmAGGES DISADVANTAGES

Franchisee- 0 May use franchisee's capital to 0 May lose some control

owned stores expand
0 May be able to recruit higher
level or more motivated
managers
0 May permit more rapid
expansion because of greater
advertising and broader
geographical presence
0 May not teach franchisee to
operate unit as well as
franchisor
0 May be difficult to find qualiied
franchisee
0 May have lower profitability per
unit because of franchisee's share
0 Franchisee may pursue
maximum profit as goal whereas
franchisor wants maximum sales
0 May generate higher legal costs
and lawsuits
0 May have unmanageable growth
if franchisor is better at selling
franchises than at support

Company-owned stores 0 Offers direct control 0 Rapid expansion may be limited

0 Able to change more quickly
from top
0 May have higher potential profit
because there is no franchisee
share
by capital shortage, personnel
availability
0 Units may not be run as well
because of lack of motivated
managers

Partnerships 0 Defined legal entity with body 0 Limited control over partner
of law 0 Possible liabilities, legal/tax
0 Able to recruit complementary regulations
partner with skills or capital 0 Difficult geographical expansion

Licensing of right 0 Allows expansion easily 0 Limited control in how licensee

to use name 0 Low initial costs runs business
or product

Sales 0 Direct control over employees 0 May be expensive to train and

Representatives 0 Less expensive than company maintain staff
office 0 Continued motivation,
supervision often difficult

Co-operative 0 May allow trade of information 0 May be difficult to form and

Association of Similar
Businesses
0 Cheaper group purchase of items maintain
0 Has limited function
0 Not designed to promote
individual unit growth

Mail order/0800 Number Easy to set up 0 Not suitable for many products
or services
0 Offers limited geographical
presence

Franchising's Growing Role in the US. Economy, 1975-2000,

US. Small Business Administration, Washington,D. C., 1993
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started
Licences
An arrangement whereby a licensor grants a licence to
a licensee enabling them to use its brand name in
exchange for a royalty on sales. There are rarely
restrictions on the way the licensee runs the business.
Agencies
This is an arrangement where an agent acts on behalf
of a supplier and receives commission from the sale of
the supplier's product. The agent does not purchase
the product themselves but sells it on to a third party.
Multi-level Marketing
This is where groups of self-employed distributors
build sales organisations of their own, and financial
rewards are paid by the supplier of the product based
upon the total sales of the distributors organisation.
Pyramid-selling falls under multi-level marketing, often
offering payments for the recruitment of sales agents
into a multi-tiered structure. In spite of previous bad
publicity, the concept is still legal, but it is governed by
specific legislation in the U.K.
GROWTH STAGES
Key Stages Of Franchise Development And
Growth - The following is a guide to the key stages
involved in the development of a franchise system. No
two systems are identical, nor are the hurdles facing
them. However, there are basic underlying challenges
which almost inevitably need to be overcome on the
route to franchise success. These are:
Finding a Business Idea. You may already have
a business, such as a coffee shop, a sign
manufacturing business, a fast print shop, a book-
keeping service, and the intention may be to use
this as your business idea. On the other hand, you
may have to devise an idea from scratch by means
of brainstorming and researching and networking
a whole range of possible options.
Organising the First Pilot Operation. Any
entrepreneur wishing to build a franchise should
consider devoting at least one year to piloting their
basic business idea in terms of testing out their
ideas on sales, marketing, product/service
delivery, pricing and staffing strategies. After all,
every small business start-up plan inevitably
requires considerable modification during the
initial months of its implementation. High failure
rate figures, particularly during the first 30 months
after start-up, verify this fact. Again, if you already
have an established and thriving business (rather
than a failing or 'distressed' one), you may consider
this step unnecessary.
Establishing the Transferability of the
Business Concept. Having established a basic
business concept, you should then, ideally,
establish an identical outlet in a different location.
The process of finding new premises, hiring new
personnel, organising a launch and all the others
tasks accompanying a new outlet opening, is an
essential test of the owners' ability to replicate the
success achieved in the founding unit in a new
location, involving different staff and the transfer of
skills. Again, there will be a steep learning curve
here.
Drawing Up Key Documentation. Three
essential documents need to be drawn up prior to
beginning franchising. Firstly an operating
manual, committing to paper detailed instruction
for the guidance of franchisees when running
franchised outlets for themselves; secondly, a
franchise contract, stipulating the legal
obligations of both parties - franchisor and
franchisee - and, finally, a franchise prospectus
for use as a marketing tool in recruiting
franchisees. All three documents require a good
deal of time, hard work and, often, expensive
external help from outside management
consultants, solicitors and accountants.
Arranging Financial Support. Setting up a
franchise system is a costly business. For even the
least expensive systems, some £50,000-plus of
invested resources will be absorbed in
development costs before break-even point is
reached. Some new franchise systems try to
finance their system development purely from
franchise sales fees and secondly royalty fees, but
these seldom succeed. It is time to clearly plan your
finances if you are to succeed. In addition to your
own funds, you may consider bank loans, taking
partners, gaining financial support from family, and
so forth.
Franchisee Recruitment. This again is liable to
prove expensive and time-consuming since your
new franchise system will have no previous
experience or public awareness to draw upon.
Taking stands at franchise exhibitions, or the most
popular alternatives, advertising in the national
press or trade journals, are typically quite costly.
The process of filtering down the 40 or 50 'leads'
typically required to yield a single franchisee is
resource-intensive.
Establishing Management Control and Field
Support Systems. At this stage, the management
needs of the system will be expanding and your
management team will need reinforcing. You will
need new management control systems for
franchisee training and support, advertising,
establishing reliable lines of supplies and, not least,
collecting royalties from franchisees.

8. Achieving Break-Even.The franchise process is
heavily 'front loaded' in the sense that a business
system has to be tried-and-tested and a
management team, and fieldwork support system
put in place, well ahead of any substantial income
flow in to the franchisor maturing in the form of
franchisee royalty fees. For most franchise
systems, break-even is estimated to take 4 5 years
to attain and to require the establishment of around
30-40 outlets.
9. Setting up a franchisor-franchisee commun-
ication system. As your business continues to
grow, business systems will increasingly replace
personal communications. Communications will
require more formal planning and this may involve
setting up joint franchisor-franchisee advisory
committees, company newsletters or fact sheets
and, not least, national or regional conferences.
10.Surviving Post-Maturity.It may have taken you 5
years to reach this point but, if you have, this is no
time to relax. You will have to constantly be aware
of competition in your field and the need for
product/service improvement. Also, the process of
keeping the scale of management support systems
in line with a growing army of franchisees will need
careful management. If you expand your support
systems prematurely, you will incur the penalty of
stiff financial overheads. On the other hand, if you
do it too late, you will undermine the confidence
and goodwill of your franchisees.
FRANCHISING INTERNATIONALLY
For a well-established franchise system, which is facing
the prospect of a saturated home market, then the
opportunity to expand into overseas markets could be a
logical progression. Indeed, the U.S. government has
encouraged American franchisors to expand abroad for
some while now, and has published numerous reports
Lloyds Bank plcIlFRC Franchising Your Business: Getting Started
on franchising markets outside the U.S. However,
franchising internationally is a complex and demanding
type of business opportunity to exploit, and needs to
address a range of issues. These can include: the
protection of intellectual property and trademarks,
overcoming cultural barriers, local taxation and
governments protective towards indigenous
businesses.
Inevitably, sound professional guidance is crucial. The
British Franchise Association should be able to supply
details of affiliate members who fall into this category.
RISKS AND THREATS
The reasons for franchise failures due to franchising-
related factors, as opposed to 'generic' factors, have
been seen by academics as falling essentially into five
key categories:
Business fraud, such as the use of celebrities to
attract franchisees to ill-founded franchise schemes
in the U.S.A. during the 1960s and 1970s
Intrasystem competition, involving franchise
outlets being located too close together and
cannibalising each other's sales whilst maximising
the franchisor's sales-based royalties. Also,
company-owned outlets may be sited close to
franchisee-owned outlets
Insufficient support of franchisees, en-
compassing advertising support, pre-opening
programmes and ongoing management assistance
Poor franchisee screening (possibly fuelled by a
drive to maximise front-end fees), resulting in a
mismatch between franchisee's attributes and
criteria for success
Persistent conflict between franchisor and
franchisee
Lloyds Bank plc1lFRC Franchising Your Business: Getting Started

Figure 13: Franchisors Starting to Franchise in 1983: Proportion Still Franchising in Subsequent Years

Figure 13 traces the fortunes of nearly 140 US.
franchisors having commenced franchising in the early
1980s. However, a decade later, only a quarter of these
newcomers were still franchising. Studies of franchise
system withdrawals in the U.K. appear to be reasonably
consistent with this.
It should be noted that legislation in the US. dictates
the supply of specific prospectus details to potential
franchisees, and so there is an additional hurdle to
clear before a franchise system can be launched. Even
so, with arguably the more serious candidates prepared
to commit themselves to the corresponding additional
expenditure, the prospects of success are by no means
guaranteed.
Our previously mentioned postal survey survey of U.K.
Figure 14: Greatest Threats to Franchise System
Survival During First 2 Years:
By Franchising Experience
franchisors enquired into the greatest threats to
franchise system survival during the first two years of
franchising (Figure 14). The most frequently cited
threats were:
1. shortage of funds
2. Difficulties with franchisee recruitment
3. Difficulties in building the support network
There appear to be two messages here for
They must be prepared to research, and
understand, franchising thoroughly
An ability to access extra 'contingency' finance
- for example, when system development
progresses more slowly than first expected -
can be of paramount importance.

Shortage of &nds (during first 2 years)

G~rttingthe brandname h o w

Competitionfrom other franchise system

ALL
Lloyds BanMFRC 'Secrets of Success', 1996 (n=139)
 Lloyds Bank plcIlFRC Franchising Your Business: Getting Started

- Franchise & Licensing Advisory Panel can help would-

be franchisors. The service is not intended as a
substitute for professional advice, but primarily to
provide a low-cost 'leg-up' for promising franchise
systems.
he following set of questions have been developed by Contact details for the BLLC Franchise & Licensing
the Business Link network, to help the assess whether ~ dpanel are
~ showni in the~~ ~~ ~ ~ ~ ~~ d i ~
or not the BLLC (Business Link London Central)

1 2 3 4 5 6
Tick the appropriate box to show the points awarded for each question <Weak Strong >
Does the idea appear fundamentally sound ?
Mark 1-6 here with ideas such as 'selling horse shoes on the M l ' o r
fashionlwhim ideas such as 'hula-hoops' as 1

Rate the strength of existing competition

Mark 1-6 here with ideas such as 'yet another home delivery pizza' as 1

How concrete is the idea now ?

Mark 1-6 here with 'just an idea' scoring 1; 'has a thriving business
with more than one outlet' = 6

Could franchisees be trained in less than 3 months ?

Mark 1-6 here on a scale of 6 months = 1; 5 months = 2; 4
months = 3, etc.

Would franchisees require specialist background knowledge ?

Mark 1-6 here with highly specialist knowledge required = 1; 'only
business acumen required' = 6
Would start-up requirements for franchisees be less than
£20,000 ?
Mark 1-6 here with less than f 10,000 = 6; over f 100,000 = 1

Would outlets be capable of yielding net profits in excess

of £50,000 ?
Mark 1-6 here with over £50,000 = 6; less than f 10,000 = 1

Do you have experience in the operational line of the

intended franchise ?
Mark 1-6 here with 6 years = 6; 1 year = 1

Do you have general management experience ?

Mark 1-6 here with 6 years = 6; 1 year = 1

Do you have a partner with good background experience ?

Mark 1-6 here with strong partnerlmanager = 6; totally on own = 1

Do you have a business plan which allows 4-5 years

to break-even ?
Mark 1-6 here with expect to take 5 years to break even = 6;
'harvest-time now' = 1

Do you have more than £100,000 to invest in your franchise

concept ?
Mark 1-6 here with f 100,000+ = 6; 'bootstrapping' = 1
(heavily reliant upon 'front-end' fees from franchisees)

Total points for each column (Questions 1-12)

'GENERAL' SCORE FOR APPLICANT 72 points maximum [A] I points

Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

2 4 6 8 1012
N.B. The points awarded are DOUBLE for this section e Weak Strong >

Is the existing business trading profitably ?

Yes = 12; No, but any losses were predicted as part of a start-up
and there is now a clear path through to profitability in the
next twelve months = 8; No = 2

Do you have any experience of running your own business ?

Yes = 12; No, but can demonstrate management experience in
career to date that is indicative of an ability to help the franchise
expand = 10; No = 2

Do you have a reasonable amount of cash to invest ?

Adequate, with more, if needed = 12; Adequate, but
banklinvestors finance availablellikely = 8; Marginal = 4; No = 2

Do you have a plan for developing the franchise system ?

Yes, including: historic information + last audited accounts
(+ latest management accounts if financial year-end was more
than 6 months ago) = 12; Yes, but incomplete = 6, No = 2

Do you have a detailed cash-flow forecast for

developing the system ?
Yes, including profit & loss and cash flows and balance
sheets for at least three years = 12; Yes, has same information,
but for a shorter period = 8; No = 2

Total points for each column (Questions 13-17)

'FINANCIAL' SCORE 60 points maximum [B] points

OVERALL ASSESSMENT 132 points maximum [A] + [B] = points

ELlGlBlLlTY FOR BLLc ASSISTANCE Yes 0 NO 0

'Yes' if score = 80 points or more
 Lloyds Bank plc1lFRC Franchising Your Business: Getting Started

A postal survey of U.K. franchisors asked which

sources of information they used when entering the
field of franchising (Figure 15). Multiple choices were
allowed, and the most frequently cited sources were:
1.The British Franchise Association
2. A Franchise Consultant
3. A Solicitor
The British Franchise Association (BFA) - given their
role as the trade association for franchising in the
U.K., this result is perhaps to be expected.
Franchise Consultants - in general, would-be
franchisors may be able to use experienced
consultants to help establish their system.
Specifically, they can help with feasibility studies,
preparing a business plan, assessing the likely
financial requirements, and recruitment and
training.

Solicitors - specialist advice when formulating a

practical franchise agreement is critical.

Other sources -The other types sources noted in the

survey - such as accountants or local offices of the
government 'help' agencies - should be considered,
too. Readers should also be aware that Lloyds Bank,
via its branch network, maintains a database of
franchisors.

Accredited consultants, solicitors and other

professionals can be found via the BFA (see the
Appendices for contact details).
Figure 15: Information Sources Used By
Franchisors Prior To Franchising:
By Franchising Experience

British Franchise Assnciation

Franchise Consultant

Clearing Bank (1 or mar

Charnber of Commer
... .~
ALL Lloyds BanMFRC 'Secrets of Success', 1996 (n=139)
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

ND
USEFUL CONTACTS/SOURCES

British Franchise Association (BFA) The BFA is the single regulatory body for franchising in
Thames View the UK. It is a non-profit making body responsible for
Newtown Road developing fair and ethical franchising through its
Henley-on-Thames member franchisor companies. The BFA has 160
Oxon franchisor members, with more than 10,000 franchised
RG9 1HG outlets, and it also has accredited over 70 professional
advisors (lawyers. bankers, accountants and
Te1.....01491 578049. Fax.....01491 573517 consultants). It publishes guides to help prospective
franchisors and franchisees.
WWW home page: http://www.british-franchise.osg.uk
Business Link London Central Ltd.
Centre Point BLLC Franchise & Licensing Advisory Panel - offering
103 New Oxford Street early-stage advice and support for promising
London franchisors. This service is available nationwide, via the
WClA 1DP local Business Link offices (see below).

Te1.....0171 316 1000 Fax.....0171 316 1001

WWW home page: http://www.London-
central.businesslink.co.uk/
The Business Link network has numerous offices
based around the country, primarily to aid business
development, usually free of charge:
"Business Links are open to all businesses
great and small and are run by private
sector-led partnerships of Training and
Enterprise Councils, Chambers of
Commerce, Enterprise Agencies, Local
Authorities, government and other providers
of business support. They're staffed by
dedicated teams of advisers and specialists
committed to help you succeed."
WWW home page:
http://www.businesslink.co.uk/
Assistance offered:
Developing your Business - developing business
plans and strategies
Selling and Marketing - marketing businesses and
products more effectively
Developing You and Your People - improving skills
and effectiveness of managers and employees
Doing Business Abroad - winning a share of key
overseas markets
New Ideas, Innovation and Technology - identifying
appropriate new techniques, and managing
implementation
Quality - boosting standards of quality and performance
of products, processes and people
IT & Computers - new developments in information
technology, computers, peripherals and software
Money and Financial Management - planning financial
strategies and accessing available funding
Legislation and Regulation - understanding and
complying with the plethora of complex commercial,
employment and financial law and legislation
Starting a Business - supporting start-up business at
every stage including information, advice, training and
counselling
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Miller Freeman Business Publications Magazine: Business Franchise

630 Chiswick High Road Directory: Franchise Handbook
London
W4 5BG

Te1.....0181 742 2828 Fax.....0181 742 0387

F
Franchise Development Services LM. Magazine: The Franchise Magazine
Castle House Directory: The UK Franchise Directory
Castle Meadow
Norwich
NR2 1PJ

WWW home page:

http://www.fi-anchise-group.com
Franchise World Magazine: Franchise World
James House Directory: Franchise World Directory
37 Nottingham Road
London
SW17 7EA
Te1.....0181 767 1371 Fax.....0181 767 2211
WWW home page:
http://www. franchiseworld.co.uk

CII The British Franchise Exhibitions

105 Lancaster Road {BFA-sponsored)
London
W114LR

Te1.....0171 727 7380 Fax.....0171 221 4529

Miller Freeman The National Franchise Exhibition
630 Chiswick High Road {BFA-sponsored)
London
W4 5BG

Te1.....0181 742 2828 Fax.....0181 742 0387

International Franchise Research Centre Researchers and publishers of academic and

University of Westminster commercial research. The University maintains a
35 Marylebone Road web-site (Internet) with information about
London franchising and also showing links to other
NW15LS franchising-related sites, including the International
Franchise Association (IFA)
Te1.....0171-911 5000 Fax.....0171-911 5059
WWW home page:
http://www.wmin.ac.uk/-purdyd/
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Lloyds Bank Franchise Unit Lloyds Bank Franchise unit maintains a watching
Business Banking brief on the Franchise Industry, evaluating franchises
PO Box 112 and helping Managers understand the special
Canons House circumstances that both franchisors and franchisees
Canons way are faced with. We are happy to give help potential
Bristol franchisors as well as point you in the direction of
BS99 7LB specialised assistance when appropriate. We also
maintain a database of UK franchisors, accessible
Te1.....0117 943 3089 Fax.....0117 943 3990 via computers based at our branches.

You can contact us through your Branch Manager/
Lloyds Bank Commercial Service Manager
or directly on 0117 943 3089
WWW home page: http://www.lloydsbank.co.uk/franchis
Lloyds Bank has sponsored the University of
Westminster to produce a range of reports, studying
various aspects of franchising, to date these include:
"Prospective Franchisees', 'Franchising in Figures',
'Secrets of Success' (VoLl), and 'Cloning Success'
(Vol.2)

Franchisors Guide £44 and £25 respectively (1997) - both comprise a

Franchisees Guide variety of useful material to inform both sides of
pub. British Franchise Association franchising (Sponsored by Lloyds Bank Plc)

Franchising: A Legal & Commercial Guide A useful guide to the legal aspects associated with
By Gordon D. Harris (1993) franchising (116pp, unpriced)
pub. Wragge & Co., 55 Colmore Row,
Birmingham. B3 2AS
International Franchising: A Checklist A checklist of issues (over 20pp.), including: Goals &
Lex Mundi World Reports, Motives (business objectives, methods, options,
Supplement No. 12, January 1992 resources), Feasibility, Legal Barriers (regulatory
costs, economic barriers) and Business Issues
By Andrew C. Selden, Esq. (management issues, economic concerns).
Briggs and Morgan, 2400 IDS Center,
Minneapolis, Minnesota 55402, USA
http://www.hg.org/suppl2.txt [via Hieros Gamos
- Legal and Government Web Site1

The Guide To Franchising

By Martin Mendelsohn
pub. Cassell
Taking Up A Franchise
By Colin Barrow and Godfrey Golzen
pub. Kogan Page

BRITISH FRANCHISE ASSOCIATION Members also agree to comply with the Code of
MEMBERSHIP CRITERIA Advertising Practice as published by the Advertising
Standards Authority.
In joining the British Franchise Association Members,
Associate and Full, commit themselves to comply with In addition Members also agree to provide to the
the terms of the following policies and procedures as Association any non-confidential information relating to
published by the Association: their franchise business, or relating to the standing and
qualifications of its Directors, as may be requested by
The Code of Ethical Conduct an authorised official of the Association.
The Disciplinary Procedure Members also agree to provide a full-time official of the
The Complaints Procedure Association, so authorised by Council, access (at
The Appeals Procedure reasonable times and on reasonable notice to
The Terms of Annual Re-Accreditation confidential information relating to the franchise and its
standing, (on the understanding that such information
remains confidential to the authorised official).

The Association offers a conciliation service and an
Arbitration Scheme under the auspices of the Institute
of Arbitrators which is available to franchisors and
franchisees who jointly agree to use the service.
Members of the Association also seek to comply with
the spirit and intent of the Guidelines to Best Practice as
published by the Association from time to time.
In respect of both the foregoing general conditions of
Membership, and the following specific terms, whilst
the Association will use its best endeavours to establish
the eligibility of an applicant, the onus for
demonstrating that the criteria have been met on initial
accreditation or re-accreditation lies finally with the
applicant.
SUMMARY OF MEMBERSHIP C m R I A
AND CATEGORIES
1. Viable ) together with evidence of the profitability of
2. Franchisable ) Associate
3. Ethical ) and Full Members
4. Disclosed 1
5. Proven trading and Full
franchising record Members
The following specific terms of Membership apply to
both Associate and Full Members. Each term sets out a
general condition that the applicant must fulfil. Each
general condition is followed by examples of how
applicants will ordinarily be expected to demonstrate
that the condition has been met.
1. Demonstrate that the Business itself is Viable
- The production of 24 months recent audited
accounts, including trading accounts, which show
that the business is capable of being run at a profit
that will support a franchised network.
2. Demonstrate that the Operating Units in the
Business can be Successfully Replicated - The
production of 12 months recent audited accounts
for a managed arms-length pilot franchise, or a fully
fledged pilot franchise, which show a trading
performance at least in line with the business plan
set for it and which is supported by a developed
operating system.
3. Demonstrate that the Contractual Terms to be
offered to Prospective Franchisees comply
with the Association's Code of Ethical Conduct
and such other terms as it may publish from
time-to-time - Lodge with the Association for its^
accreditation, and to be available for inspection by
appointed franchisees, a copy of the then current
agreement and any changes thereto.
4. Demonstrate that the Offer Documents to be
used with Prospective Franchisees Present a
Full and Realistic Picture of the Franchise
Proposition - Lodge with the Association for its
accreditation, and to be available for inspection by
appointed franchisees, a copy of the then current
Lloyds Bank plcllFRC Franchising Your Business: Getting Started
offer documents and any changes thereto.
Applicants who comply with the foregoing general
conditions of membership and the specific terms 1to 4
set out above will be eligible for admission as an
'Associate Member of the British Franchise
Association'.
Applicants who comply with the following, additional
specific condition will be eligible for admission as a
'Full Member of the British Franchise Association'.
Associate and Full Members may refer to themselves
as such in their offer documents, advertising and other
published material. Only Full Members are entitled to
use the Association's logo.
5. Demonstrate that the Franchise Network has
Developed over Time with a Proven Trading
and Franchising Record - Provide a record of
franchise openings, withdrawals and disputes
(which required external intervention to resolve)
individual units and of the network as a whole
sustained over a period of 24 months.
Franchise operations which form part of a larger group
or company will be required to submit evidence
concerning the franchised network, on a confidential
basis if necessary, which is confirmed by a Director of
the company as representing a true and fair picture of
the franchised network. Additionally such franchised
operations will be required to provide a statement from
the holding company or group confirming its intention
to maintain the franchised operation for at least the
forthcoming, year.
Overseas Franchisors franchising directly into the UK,
and the Master Licensee of Overseas Franchisors are
eligible to apply for Associate or Full Membership in
respect of their UK operation. Additionally Overseas
Franchisors seeking only to operate through a Master
Franchisee are eligible to apply for 'Overseas
Membership'. To gain admission their overseas
operation must comply with the general conditions of
Membership and the specific conditions applicable to a
Full Member (excepting any terms of the Association's
Code of Ethical Conduct which would not be
recognised by an Association of similar standing in the
Country concerned).
July 1990
 Lloyds Bank plcIlFRC FranchisingYour Business: Getting Started

Franchisees Recruited
Total Franchisees

Receipts
Franchise Fees (Initial)........................................................;...... flOk f40k f 80k
Management Service Fees (from Franchisees) f 7k f15k f99k
Owners' Share Capital............................................................... flOOk -
Bank Loan (5 Year Term).......................................................... f 150k

Total Receipts (A)

Payments
Capital Expenditure....................................................................
Development Expenditure........................................................
Franchisee Recruitment Costs............................................ f24k £39 k
Loan Repayments (24 Month Capital Repayment ~ollday).............. f 50k
Loan Interest................................................................................... f15k flOk
Direct Costs.................................................................................... f20k f52k
Staff Costs........................................................................................ f49k £71 k
Overheads........................................................................................ f22k f30k
ACT (~dvanceCorporat~onax) .............................................................
VAT........................................................................................................
Professional Fees.........................................................................
Dividends..........................................................................................
Overdraft Interest..........................................................................

Total Payments (B)

Net Cash Flow (A) - (B) ...........................................................

Opening Balance..........................................................................

1 Bank Balance Credit (overdraft) f 62k fOk (f89k) (fl88k)

Total Receipts (C)...................................................................... f 250k f50k E161k

Total Payments (D).................................................................... f 188k f80k f156k f305k
Net Cash Flow (C) - (D)............................................................ f62k (E80k) (fl06k) (f144k)
Opening Balance......................................................................... f62k (fl8k) (fl24k)

/ Bank Balance Credit (overdraft) f62k (fl8k) (El24k) (f268k)

 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

SAMPLE CASH FLOW FORECAST

(Figure 6 data)
The following cash-flow example is not intended to
represent any given franchise system, but is to
illustrate the timing and extent of the finance that might
be needed when launching a new system. A 'worst-case'
scenario has also been included to convey an indication
of the additional finance that would be needed to allow
the system to continue until it reached 'break-even'.
At the outset, it has been assumed that the owners
invested £100,000 in the system and also obtained a 5
year loan of £150,000. If everything goes as expected,
then a peak borrowing requirement of a further
£199,000 will be needed. Alternatively, if the 'worst-
case' outcome materialised, then the peak requirement
will rise to £345,000.

Other assumptions
0 Franchisee initial fee £8,500 plus VAT

0 Franchisee ongoing fees (management service

fees) 7%of turnover

0 Franchisee sales turnover:

Year 1 £look
Year 2 £120k
Year3 £140k
Year4 E155k
Year 5 £165k
Year 6 £175k
Year 7 £185k

0 All franchisees open at the start of each year,

rather than the usual phased openings

0 Variation for worst case, Income -10%;Costs +

10%from Year 2 onwards. No franchisee opened
(fllk) f95k f210k f123k in Year 1
(f l88k) (f l99k) ( f 1O4k) El 06k
0 Two year capital repayment holiday on 5-year
bank loan

No failures of franchisees

0 All figures rounded to nearest £1,000 for clarity

Lloyds Bank plc1lFRC Franchising Your Business: Getting Started
INTRODUCTION
The question of who will make a good franchisee is one
which exercises the minds of all franchisors. The
statements below, plucked from various franchise
articles, quite clearly spell out the overriding
importance of franchisee selection:
"Franchising is a partnership. A franchise's major
asset, once established, is its franchisees."
"A model franchise company will recruit as
franchisees people who are not only qualified
financially, but also by ability, energy and
enthusiasm to make the most of the opportunity
available to them."
0 "Setting up a franchise is less difficult than
managing it later on - you have to live with your
earlier mistakes and a lot of those are people you
pick when the urge for rapid growth takes over
from all other considerations."
PICKING WINNERS
Picking winners is not a simple task and the difficulties
inherent in the situation tend to be compounded by a
number of additional factors:
Most developing franchises have much in common
with the typical small firm in that they have only a
few key staff members undertaking a multitude of
tasks. These may be very able and committed
people but, usually, none of them is expert in the
field of personnel selection and management,
which is the relevant specialism here.
Some franchisors may feel that they can rely on
'instinctive' or 'gut' feelings to signal good or bad
franchisee prospects. Just as few people would
admit to being a bad driver, so they feel it reflects
badly upon them to admit to difficulties in selection
personnel.
Very often people fall into the trap for looking for
people exactly like themselves when what they may
be best advised to do is look for people who
complement rather than duplicate their own
abilities and weaknesses.
In as much as franchising is a team effort, one of
the key front line teams is the franchisee
husband/wife team. If this team is not operating
effectively, then a source of potential strength can
descend into a weakness.
COSTS & CONVERSIONS
For businesses having 4 or more years experience of
franchising, research has indicated that nearly 60%
report an average recruitment cost in excess of £5,000
per franchisee (1994 prices).
This cost is a reflection of appreciable numbers of
applicant rejections and most of the more professional i
franchise companies convert no more than 4%of initial
enquiries for franchise prospectuses into sales. Even
this is judged by some to be, if anything, on the high
side with 2% being a better target figure. But why i
should this figure be so low ?
One reason is that self-employmentis a pipe-dream for
quite a large army of people who like to indulge in 'half-
way-house' experiences. They may subscribe to small
business magazines, attend seminars, join business
clubs and, in this way, get an arm's-length thrill of a
'share of the action'.
Some of these people may, eventually, take the plunge,
should they lose their job, or come into money, etc.
But, in the meantime, they are not serious prospects.
Another reason is that self-employmentis a widely held
desire in our society, albeit one that is often associated
with very little knowledge of precisely what is involved.
Grand notions abound of independence - 'doing your
own thing', 'no one looking over your shoulder', 'being
able to play a round of golf midweek when the course
is empty'. Thus, the bait is strong enough to at least
initially interest a great many people.
Finance is often thought to be no great problem by
potential franchisees since, as they see it, the clearing
banks exist to address precisely this problem.
However, many prospects will never have raised bank
loans before and the idea of having to offer security or
collateral (their house perhaps) can often come as a
shock to them.
PSYCHOLOGISTS
Some psychologists have made an industry out of
attempting to devise tests which will predict those
likely to make a success of running their own small
business and those who are unlikely to do so. Whilst
success in the field of psychological profiling here has
been very limited, it is perhaps worth mentioning a
couple of the more hopeful approaches.
Probably the best known is that associated with
Professor McClelland and his attempts to measure
'achievement-need', or 'the desire to do well for the
sake of an inner feeling of personal accomplishment'.
In the 1960s this was used in many countries for
selection and training purposes but, after some initial
claims of success, has come in for increasing criticism.
Another psychological test is the so-called 'locus of
control', which is based upon the proposition here that
potentially entrepreneurs will have a high 'locus of
control' or, in other words, believe that they can control

their own behaviour and that their behaviour
determines what happens to them. Put simply, this
amounts to a belief that they control their environment
rather than the reverse. Again, there have been some
successes claimed here but locus of control testing is
still not widespread in the field of entrepreneurial
selection. Also, knowing that many people who become
self-employed have been 'pushed' by environmental
circumstances, e.g., redundancy, a locus of control test
would not appear very appropriate.
There appears to be a common misconception amongst
franchisors that franchisees are very different animals
from conventional independent small business people.
However, research shows that around one-third of
franchisees have previously been conventional small
business people and around half of all potential
franchisees attending franchise exhibitions have
current or previous experiehce of conventional self-
employment.
LOOKING THROUGH THE EYES OF
POTENTIAL FRANCHISEES
It is important to keep in focus the goals of potential
franchisees. Their prime aim in life is not, and will
never be, to make your firm 'the biggest in its market'.
Potential franchisees will have their own goals and
these will vary with their past experience.
For instance, we now know that people without any
previous experience of self-employment have goals
practically identical to most other people in their
situation. Thus, their main goal is the search for
independence and autonomy, achieved through
structuring their own time and efforts rather than
being directly supervised and controlled by others.
For potential franchisees with previous experience of self-
employment, the lure of franchising as a proven business
system takes prominence. Thus, goals such as 'security',
'access to a known tradename' and 'business backup'
assume great importance.
SOME GUIDELINES FOR THE FRANCHISOR
Some franchise companies may wish to explore the
possible advantages of psychological profiling in depth.
If so, they would be well advised to seek specialist help.
Short of this, what do the lessons of research and
management theory generally hold to assist the
franchisor in improving franchisee selection methods ?
In a nutshell, they offer 3 main messages for the
franchisor:
First we know that people who have either first
hand experience of self-employment themselves or,
alternatively, come from a family which has such
experience, are statistically more likely to take up
franchises than people randomly drawn from the
population. Thus, ensure that you are delving this
question at an early stage.
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started
Make use of standard personnel selection
techniques to ensure that your interview and
selection techniques are as scientific as possible
and protect you against subjective or whimsical
judgements. For instance, you should develop a
proper franchisee role description outlining the
purpose, functions, responsibilities, conditions and
prospects linked to the role.
Then, you should have a proper franchisee
specification which should outline the kind of
person best suited to the role. This document
should be based upon the answers to 2 questions:
- which attributes are essential in a franchisee and
- which are desirable.
In addition to the above, you should develop your
own diagnostic questionnaire schedule, suited to
your own franchise operation (see below).
Whilst it remains true that there is no single foolproof
formula, or litmus paper test, that will guarantee a
franchisor 100%success in selecting good franchisees,
the more scientific the approach used, the better your
choices should be, thus bringing long-term benefits for
franchisors and the franchise network. The remainder
of this paper will concentrate upon assisting franchisors
to develop their own diagnostic questionnaire schedule.
THE DIAGNOSTIC FRANCHISEE
QUESTIONNAIRE
The following diagnostic questionnaire was developed
by Professor John Stanworth of the University of
Westminster's International Franchise Research
Centre. It can be used in exactly the form outline below
or, alternatively, can be modified to fit any franchise
company's precise needs.
When Should It Be Used ?
The timing of the franchisor's use of the Diagnostic
Questionnaire can be organised to suit the needs of
individual companies but the possibilities are
numerous:
It can be sent out with the company's initial
information pack as part of a first response to
enquiries. This can have the advantage of making
prospects think through their own position whilst
spelling out some of the issues involved in being a
franchisee. This initial educational function can be
useful in 'cooling down' some of the 'dreamers'.
Franchisors might even suggest that potential
franchisees not only complete the exercise for
themselves but also get other people who know
them to complete it for them as an aid to checking
out the image others have of them. Both versions
should then be returned to the franchisor for
discussion at the interview stage.
Its use can be delayed until, say, the first interview
stage when the franchisor has the choice of
allowing the prospective franchisee to complete it
in private unprompted, or with the franchisor
Lloyds Bank plc1lFRC Franchising Your Business: Getting Started
administering it as part of a face-to-faceinterview.
It can be used when discussions are well advanced
and then used to the advantages of both parties as
an additional check of their understanding of one
another.
Which of the above alternatives is preferable depends
on the franchisor's other selection/recruitment
techniques but, on balance, the first probably has
most to offer since it makes the prospective franchisee
think through hidher situation as well as providing
the franchisor with valuable information later on.
Questions
Twenty questions are listed below and these are
designed to get the potential franchisee to analyse
his/her ability to:
Cope with the isolation of self-employment
Exercise self-discipline
Work long hours under pressure
Learn from failures
Compete with self-imposed standards
Take unpopular decisions
Resist impetuous or emotional behaviour
Take a balanced view of events
Tolerate uncertainty
Accept advice
Demonstrate financial viability
Demonstrate support of spouse
Demonstrate enterprise background
Demonstrate profit motivation
Demonstrate sales orientation
Demonstrate receptiveness towards
franchisor's training
Demonstrate growth orientation
Demonstrate a favourable attitude towards
task delegation (QW
Take the long-term view
Demonstrate belief that individuals can '
make things happen'
Interpreting Replies
The marking scheme, contained in the body of the
questionnaire and presented in square brackets [ I,
should, in practice, be separated out if the franchisor
does not wish the prospective franchisee to be able to
conduct his/her own marking. A good score for the
exercise in its present form would be 25+ of a possible
maximum score of 40 marks. It is worth remembering
that no exercise like this can ever be totally efficient in
predicting success. It is essential that it is used in
association with other personnel management
techniques. With that proviso, it should pay good
dividends.
The twenty questions, along with marks in brackets [ ]
are presented overleaf. These are 'forced choice'
questions where the respondents is asked to opt for
one of a choice of 3 possibilities: (a), (b) and (c) on each
of 20 questions. This 'forced choice' format is designed
to stop people sitting on the fence. It is quick and easy
to administer, whilst giving the franchisor leads on
issues that can be followed up in greater detail later.
If you the franchisor wish to use this exercise
essentially to inform a prospective franchisee of
whether or not they are likely to be suitable material,
you may provide them with the marking scheme to
facilitate self-asessment and, in the process, allow them
to see which statements are regarded favourably by
your in terms of relevance to your franchise.
On the other hand, if the main reason for running the
exercise is to get information from the prospective
franchisee in as accurate a form as possible, you the
franchisor should mark the completed questionnaire. If
the prospect does not know which statements carry
most marks, he/she is less likely to be tempted to
deliberately select the statements attracting most
marks. It is worth, in any case, stressing the point that
giving dishonest answers in order merely to
accumulate points is a fruitless exercise from all points
of view.
(Q19)
(Q20)
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Twenty Questions
Q1 Are you regarded by those who know you as:
(a) Generally a fairly self-contained person ?............................................................................................ [21
(b) Generally a rather gregarious person ?................................................................................................ Lo]
(c) Somewhere in between (a) and (b) ? ................................................................................................... [I]

Q2 Are you regarded by those who know you as:

(a) Frequently frustrated by tasks you find boring ?............................................................................ 101
(b) Able to endure a reasonable amount of boredom and frustration ?......................................[I]
(c) Generally good at concentrating on whatever tasks face you ?............................................[21

Q3 Would you say that:

(a) You possess an excess of mental and physical stamina and enjoy excellent health ? [2]
(b) You find that you tire easily if you work long hours and your health is not always
of the best ?......................................................................................................................................................... [OI
(c) You estimate that your health and stamina are about average for a person of
your age ?.............................................................................................................................................................[I]

Q 4 Would you say that:

(a) You find mistakes and setbacks very demoralising ?................................................................... [O]
(b) You feel that mistakes can be a very useful way of learning as long as they are
not repeated ?....................................................................................................................................................
[21
(c) You try to learn from your mistakes but often find it easier said than done ? [I]

Q5 Which of the following most accurately describes you ?

(a) You set yourself targets and almost obsessively chase after them ?....................................[21
(b) You get fed up if you find yourself 'on the go' all the time ?....................................................[ I ]
(c) You like to take life at a modest pace and respond to pressures
as and when they arrive ?............................................................................................................................ [Ol

Q6 Would you say that:

(a) You find it almost impossible to make tough decisions, particularly if they
involve people ?................................................................................................................................................
[OI
(b) You can make tough decisions when necessary but it takes
a lot out of you emotionally ?.................................................................................................................... 111
(c) You see tough decisions as a fact of l i e - you don't necessarily
enjoy them but, on occasions, see no alternative ?....................................................................... [21

Q7 Would you say that:

(a) You do not suffer fools gladly and make little effort to hide your feelings ?................... [O]
(b) You have notable patience and self-control ?....................................................................................
[21
(c) You are situated in between positions (a) and (b) ?..................................................................... [I]

Q8Would you say that:

(a) Your mood is very influenced by events ?.........................................................................................
[OI
(b) Your mood is very little influenced by events ?..............................................................................
[I]
(c) You tend to adopt a policy of 'taking the rough with the smooth' ?.................................... [a]
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Q9 Are you regarded by people who know you as:

(a) A person who needs to know exactly where they stand ?............................................................. [Ol
(b) A person who can live with uncertainty ?..............................................................................................[2]
(c) A person who can endure a reasonable amount of uncertainty ?............................................. [I]

Q 1 0 If you go into business would you:

(a) Resent people who appear to be telling you how to run your own business ?.................. [O]
(b) Regard the views of others as a potential source of useful information and
guidance ?...............................................................................................................................................................
[2]
(c) Be willing to listen to others when you had the time but likely to 'take it all with
a pinch of salt' ?................................................................................................................................................... [I]
Q11 Would you say that your total personal assets and savings together:
(a) Exceed the full buy-in cost of the franchise ? ................................................................................... [2]
(b) Exceed two-thirds of the full buy-in cost ?............................................................................................ [I]
(c) Amount to less than two-thirds of the full buy-in cost ?................................................................ [O]

Q 1 2 Do you feel that your spouse:

(a) Feels that how you earn a living is very much your own affair ?............................................. [O]
(b) Would prefer to see you doing something you enjoy ?.................................................................. [I]
(c) Is very keen on your taking a franchise and willing to back you very strongly ?.......... [21

Q 1 3 Which of the following is true of you ?

(a) There is no prior history of self-employment in your family involving either yourself
or close relatives ?..............................................................................................................................................
[O]
(b) Though you have not personally been self-employed previously, there is
some history of self-employment in your family via close family and/or relatives ?..... [I]
(c) You have personally been self-employed previously ?.................................................................... [2]

Q 1 4 Is your main reason for wanting to be a franchisee:

(a) To achieve a good standard of living ?.................................................................................................... [2]
(b) Because most of the alternative options for making a living appear closed ?.................... 101
(c) For the independence and autonomy involved in having your own business ?.................. [I]

Q 1 5 Do you feel that, in taking a franchise:

(a) You would have a tried and tested product/service which should sell itself ?.................. [Ol
(b) No matter how good the product/service, customers still respond to sales effort ?... [l]
(c) Selling would still be a key activity ?....................................................................................................... [2]
Q 1 6 Is your prior work experience:
(a) Unrelated to the franchise in question ?................................................................................................ [2]
(b) Very closely related to the franchise in question ?........................................................................... [O]
(c) Marginally related to the franchise in question ?.............................................................................. [I]
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

Q17 In running your own business, would you:

(a) Prefer to stay small ?........................................................................................................................................ [OI
(b) Wish to grow as big as circumstances allowed ?..............................................................................[21
(c) Just grow to a size where you could begin to take more time out of the business ?..... [ I ]

Q18 Do you feel that:

(a) To get a job done properly, you must do it yourself ?................................................................. [OI
(b) Delegation allows you to spend more time doing what you are best at ?........................ [21
(c) Delegation is a necessary evil ?..............................................................................................................
[I]

Q19 Do you feel that it usually pays to:

(a) Take a long-term view of things ?..........................................................................................................[21
(b) Make hay whilst the sun shines ?.......................................................................................................... [ol
(c) Adopt the medium-term view ?................................................................................................................
[I]

Q20 Do you feel that

(a) Your future lies largely in your own hands ?................................................................................... 121
(b) You can at least partly influence your own future ?.....................................................................[ I ]
(c) The individual is merely a puppet on the end of a string and
can do little to influence events ?........................................................................................................... [OI
Lloyds Bank plcIlFRC Franchising Your Business: Getting Started
THE POINTS BEHIND THE QUESTIONS
To add more 'meat to the bone', what follows here is a
more detailed background on the issue being
investigated in the questions above:
Franchisees need to be able to survive feelings
of isolation. In contrast to being an employee,
they have no immediate boss, or peers, who can
give help, advice or moral support.
Franchisees need to be able to exercise self-
discipline. In running their own business they
will be responsible for a wide range of tasks.
Some of these will almost certainly prove
satisfying whilst others will prove highly
frustrating. The franchisee will be responsible
for allocating his/her own time and can, at their
peril, neglect tasks such as paperwork, financial
control, invoicing and chasing payment.
Although these tasks are sometimes viewed by
franchisees as stopping them from getting on
with the 'real job' of producing and selling, no
business can survive without them.
Franchisees will usually need to work harder
than they have ever worked before. This
requires both mental and physical stamina. In
the early days of building up a franchise, there
will be little time for leisure activities, holidays or
illness. Some advisers go as far as
recommending that anyone considering setting
up in business should consult their doctor first.
Franchisees need to be able to learn from failure.
Disappointments are inevitable in business and
can lead to demoralisation. A good
businessman/woman, however, must possess
the resilience to survive setbacks and learn from
them.
Franchisees need to be able to compete with self-
imposed standards. When working on your own,
targets and standards need to be set which act as
goals reinforcing motivation. If these goals are
set too low they will have little motivating value.
If they are set unrealistically high, they will not
be achieved and a sense of failure and
demoralisation will result. Thus, modestly
ambitious, though not unrealistic, goals need to
be set and used as markers of achievement.
Franchisees need to be able to take unpopular
decisions. It is impossible to remain popular at all
times and any attempt to do so it likely to have
costly consequences for your business.
Franchisees must be able to resist impetuous or
emotional behaviour. It is tempting, especially
when you are your 'own boss', to exercise the
associated independence by reacting to
frustration in what might later be seen as a
whimsical manner that is not in the longer-term
interests of the business. This may be
emotionally satisfying in the short term but
should be resisted at all costs.
Franchisees should be able to take a balanced
view of events. In business it is easy to yield to
the temptation of feelings of euphoria or
depression in response to good ,or bad news.
This can prove extremely stressful and wearing.
A successful businessman/women needs to be
able at all times to take a a balanced view of
events and to set an attitude of 'taking the rough
with the smooth'.
Franchisees, running their own outlets, need to
have a facility for surviving uncertainty. The
setting up of a new business entity is a creative
venture and requires a facility for coping with
ambiguity. People with a low stress tolerance
may find difficulty in running their franchise.
Franchisee must have a facility for taking advice.
Having gone into business with 'independence'
one of their main goals, franchisees need to
avoid maximising that independence by resisting
advice whether it be from the franchisor or some
other expert source.
Franchisees must demonstrate financial ability.
Though the clearing banks tend to lend to would-
be franchisees more readily than to would-be
conventional small business start-ups, it needs to
be remembered that all loans have to be repaid,
with interest. A large financial repayment
overhead in the early days of trading can impose
additional pressures.
Franchisees should, ideally, be able to
demonstrate support from their spouse. Most
franchise outlets work long hours involving
domestic disruption. Anything less than positive
spouse support here can have very negative
consequences.
Franchisees should, ideally, be able to
demonstrate an enterprise background. Despite
the desire for self-employment being quite
common, only a minority make the jump from
aspiration to reality. Those who have previous
direct experience of self-employment or,
alternatively, have a close relative self-employed
(usually a father) appear to find the transition
easier. Some evidence exists to suggest that they
may also be more successful in terms of
business growth.
Recent analysis suggests that newer franchisors
are keen on franchisees having prior experience
of self-employment, but franchisors with a longer
track-record are less inclined to do so.
Franchisees should demonstrate profit
motivation. Amongst small business people
generally, profit motivation is of a relatively lower
order than other goals such as independence
and autonomy. Profit motivation tends to
promote greater growth.
Franchisees should demonstrate sales
orientation. Despite national advertising and
promotion of brand awareness by the franchisor,
sales skills on the part of the franchisee can still
 Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

make a substantial difference to levels of local OUTLINE FRANCHISE AGREEMENT

market penetration. Local advertising and good
interpersonal skills and service at the customer Main Headings and Notes
interface can be crucial.
This has been derived from an agreement intended for
Q 1 6 Franchisees should demonstrate receptiveness use by a company acting as franchisor and wishing to
towards the franchisor's training. Franchisors enter into a formal agreement with an individual or a
tend towards the view that 'starting with a clean partnership as a franchisee.
sheet' is the best basis for initial training rather
than competing with previous training that a The original agreement was developed by Wragge &
potential franchisee may already have previously Co., solicitors based in Birmingham. The notes are
received in the field of operation. based on a commentary in 'Franchising: A Legal &
Commercial Guide', prepared by a partner in the firm,
Q 1 7 Franchisees should demonstrate growth Gordon Harris. It should be noted that the exact
orientation. The income of the franchisor is wording in any agreement will be strongly influenced
directly related to the growth of franchisees. by the circumstances of the given franchise system.
Thus, franchisees easily satisfied with low levels
of growth may require considerable motivating. This is only a specimen and prospective franchisors
Q 1 8 Franchisees should demonstrate an ability to should seek independent legal advice from a lawyer
delegate rather than attempt to undertake all experienced in franchising.
jobs themselves. Failure to delegate will limit
business growth and lead to the franchisee Clause Headings:
spending time on tasks that could be performed
1 Definitions
by less key staff. 2 Grant of the franchise
Q 1 9 Franchisees must be capable of taking the long- 3 Duration of this Agreement
term view. In an economy suffering endemic 4 Renewal of this Agreement
'short-termism', long term planning and goal 5 Payment
setting is likely to pay dividends by giving an 6 What the Company must do
edge over the competition. 7 Intellectual Property, Trade Marks
8 Records and Accounts
Q 2 0 Franchisees should have an ability to 'make 9 Equipment and Products
things happen'. People with an 'internal locus of 10 Control of standards and training
control' tend to believe they personally can 11 What the Franchisee must do
influence their environment. This belief can 12 Marketing, advertising and promotion
become a self-fulfilling prophecy. 13 Insurance and Vehicle formalities
14 Improvements
15 Force majeure
CHANGE TO SUIT YOUR COMPANY 16 What happens if the Franchisee wants to sell the
Business
Obviously, any company using this technique can add 17 What happens if the Franchisee is ill, becomes
additional questions, drop others and even reallocate physically or mentally incapacitated or dies
the points on certain questions in line with their own 18 Termination of the Agreement
specific requirements. 19 What happens after termination
20 Restrictions after termination
By way of example here, Q1 refers to the ability of an 21 Partnership and agency
individual to cope with feelings of isolation. Depending 22 Waiver
upon the precise nature of your franchise, and also the 23 Incorporation
stage of its development, this factor may be upgraded 24 Entire Agreement
or reduced in its importance. Also, many franchisors 25 Independent Advice
express a preference for potential franchisees coming 26 Notices
from outside the line of business in question. Others, 27 Severance
however, may see advantages in recruiting people from 28 Law and Jurisdiction
similar lines of business (Q16). Further, some 29 Set-off
companies look for franchisees who are very ambitious 30 Restrictive Trade Practices Act
and wish to grow (Q17). Others, selling what may be Schedules
called 'job franchises' better suited to a one-person.
operation, may feel that such ambition could be stifled
or counter productive.

Changing the points scheme to accommodate such in-

house preferences is a relatively simple matter.
Lloyds Bank plc/lFRC Franchising Your Business: Getting Started
Definitions
Contains descriptions and meanings of important
expressions, such as the 'advertising fund',
'franchise fee', 'intellectual property', 'know-how',
'marketing materials', 'management services fee',
'premises', 'operations manual', 'territory' and
'training'
Also, 'Substantial Term' means a term or condition
of the agreement which is listed in an appended
schedule and which is considered to be of
particular significance.
Grant of the franchise
This additionally notes that an exclusive territory is
not being granted to the franchisee (should the
franchisor later 'reasonably consider' that a single
franchisee cannot service the given territory, then
the franchisor has the right to reduce the size of
that territory). The franchisee may not sub-
franchise or use the premises for other purposes
without prior consent.
Duration of this Agreement
An initial term might be 5 years, with one or more
options to renew for a similar period. The
provisions for termination are shown later in the
agreement.
Renewal of this Agreement
Requires careful drafting not only to permit the
removal of recalcitrant franchisees, but also to
provide an incentive to renew for those who comply
substantially with the agreement. The B F ' s code
of ethics provides that no fee should be paid on
renewal.
Payment
This covers the ongoing management services fee
and also any payments towards advertising funds.
Also specified will be the steps that the franchisor
will be allowed to take in the event of late payment
by the franchisee.
What the Company [franchisor] must do
The franchisor's obligations are described so that
the franchisee can assess what support he or she
will get. An active interest in the franchisee, by the
franchisor, should be to the benefit of both parties.
It commits the franchisor to provide the initial and
subsequent training, and also to supply an
operations manual. Marketing support is to be
supplied as the franchisor thinks appropriate, but
franchisee requests for such support will be met
only at the franchisee's expense. National and/or
local meetings for franchisees are to be provided at
the franchisor's expense (but excluding the
franchisee's out-of-pocket expenses).
Intellectual Property, Trade Marks
An important section, setting out the franchisor's
intellectual property rights and the licensing of the
same to the franchisee. The franchisee is not to
infringe these rights -for example, by trading using
a 'confusingly similar name' - and he/she must
acknowledge the confidentiality of the operations
manual and any associated 'know-how'.
Records and Accounts
The main purposes of this section are to determine
the operating efficiency of the outlet and to
deter/detect fraud. This will require the franchisee
to maintain 'full and accurate' records, and also to
provide the franchisor with regular management
accounts and a copy of any VAT returns submitted
by the franchisee to H.M. Customs & Excise.
Equipment and Products
Requires the franchisee to purchase goods and
services from nominated suppliers, but the use of
alternative suppliers of at least a comparable
standard and cost may be permitted, at the
franchisor's discretion. The franchisee is required
to purchase or lease additional equipment as the
franchisor considers reasonably necessary.
Inspections of the franchisee's operation by the
franchisor are permitted at any time, without
notice. Minimum prices to customers are to be
recommended, but not set, by the franchisor,
except in the case of 'national account customers'.
10 Control of standards and training
As one of crucial importance, this section is
considered to be a 'substantial term of the
agreement', whereby a failure to comply can lead to
the franchisee being removed.
The franchisee must comply with all of the
procedures set out in the operations manual.
Premises must be kept clean and tidy, and such as
refurbishment and alterations reasonably
stipulated by the franchisor are to be made at the
franchisee's expense. Employees of the franchisee
failing to maintain the requisite standards must be
removed. Failure by the franchisee to reach the
minimum standards necessary to successfully
complete the initial training programme results in
the franchisor having the right to terminate the
franchise agreement, however, the franchisee will
usually receive a predetermined part-refund of
fees. Changes to the nature of the business,
introduced by the franchisor and requiring
additional franchisee training, will be provided at
the franchisor's expense (but will not cover 'out-of-
pocket' expenses, such as salaries, travelling or
accommodation).
All 'material' customer complaints are to be notified
to the franchisor. Inventory (equipment) and stock
checks are to be conducted at a specified
frequency.
What the Franchisee must do
The franchisee's main obligations are noted here,
including a requirement to comply with the
operations manual. He/she must "devote whatever
time and attention to the Business as is necessary
to carry out and procure the greatest volume of
business consistent with the provision of a good
service to Customers", and do "everything that

he/she possibly can to promote and expand the
Business". The franchisee must not compete with
the franchisor, nor borrow money using the
franchised outlet's business as security without
prior consent. Comprehensive customer records
are to be maintained, for supply to the franchisor
upon request. Cover for the franchisee is to be
arranged in case of absence and prior permission is
to be obtained if any self-employed person it to be
engaged.
12 Marketing, advertising and promotion
The advertising fund is to be used as the franchisor
thinks fit, but an audited report will be available to
franchisees upon request. Prior permission will be
needed for the use of 'non-standard' marketing
material by the franchisee.
13 Insurance and Vehicle formalities
A copy of each of the franchisee's insurance
certificates and policies is to be supplied to the
franchisor, or the franchisor themselves may set up
a group policy and the franchisee may be expected
to participate in that.
1 4 Improvements
All suggestions for improvements to the franchised
service must be supplied to the franchisor. The
rights to any improvements will be licensed on a
perpetual worldwide royalty fee basis.
15 Force majeure
In the event that either party is prevented from
complying with the terms of the agreement and/or
operating the franchised outlet for reasons beyond
their control - such as the usual 'war, act of God,
national emergency' types of occurrences - it is
important that they are able to withdraw from the
agreement and mitigate their losses.
16 What happens if the Franchisee wants to sell
the Business
Prospective purchasers need to be just as strictly
vetted as the original franchisee, and so the
franchisor's prior consent is required. So, when
framing the conditions here, a balance has to be
reached, whereby there is still an incentive for the
franchisee to build up the value of the business so
that it can be sold on, whilst also ensuring that a
reliable and effective replacement is introduced.
Permission to sell is not to be 'unreasonably
withheld' by the franchisor, provided that the
necessary conditions are met. No information in
the operations manual or any other 'know-how' can
be conveyed to a prospective purchaser until a
confidentiality agreement has been signed. The
franchisee is liable to pay the franchisor's legal and
other expenses associated with the transfer, and
also 5%of the purchase price to the franchisor in
respect of administrative expenses. If the
franchisor is asked to find a suitable candidate,
then a reward of 15% of the purchase price
(including the 5%for administrative expenses) will
be paid to the franchisor. Also, the franchisor will
Lloyds Bank plcllFRC Franchising Your Business: Getting Started
be given the option to purchase the franchise outlet
on the same price and terms as the proposed
purchaser.
17 What happens if the Franchisee is ill,
becomes physically or mentally incapacitated
or dies
For the franchisor, there is a need to ensure that
the franchise outlet continues to function if the
franchisee is incapacitated. Nonetheless, the
franchisee needs to ensure that his business
interests are not unduly compromised.
In the case of illness rendering himJher unable to
operate the franchised outlet, the franchisee must
notify the franchisor and appoint an approved
stand-in. In the absence of a stand-in being
appointed, the franchisor is entitled to appoint
someone else to ensure that the franchised outlet
continues to operate as normal.
Permanent incapacity would mean an inability to
operate the outlet satisfactorily for a period of 6
months or longer. Should this arise, the franchisor
will be able to terminate the agreement or
purchase the franchised outlet at an agreed market
value less 20%.
18 Termination of the Agreement
Careful consideration is needed to ensure that
there is a clear distinction between those
circumstances which warrant an immediate
termination, and others which will allow time for
the franchisee to remedy any breaches of the
agreement.
Circumstances warranting immediate termination
include: breach of a 'substantial term' by the
franchisee, failing to open the outlet as agreed, the
termination of any licence needed for the outlet to
function, the franchisee ceasing or threatening in
writing to cease operating the outlet, the franchisee
being convicted of a criminal offence which
materially affects the outlet, the franchisee being
served with a genuine bankruptcy petition, or the
franchisee providing false or misleading
information to the franchisor.
19 What happens after termination
Should the need arise, it is important that upon
termination the franchisor is in a position to
operate the outlet itself immediately, so as to avoid
the system falling into disrepute or being perceived
as ailing.
All monies owed to the franchisor by the franchisee
must be paid immediately. The franchisee is to
provide the franchisor with a list of customers and
existing contacts. The operations manual and any
copies are to be returned to the franchisor.
2 0 Restrictions after termination
During the l i e of the agreement, the franchisor will
probably have divulged substantial information
about itself, its finances and vital details required
for the efficient operation of a retail business. This
presents an opportunity for the former franchisee
Lloyds Bank plc1lFRC Franchising Your Business: Getting Started

to become a significant competitor to the 27 Severance

franchisor, and so 'restraint of trade' conditions are
applied. In the event that any clause in the agreement is
deemed invalid, a clause here permits the
The franchisee agrees not to be engaged in remainder of the agreement to remain in force.
another business, in any capacity, which competes
with the franchisor's business in the designated 28 Law and Jurisdiction
territory for a -fixed period, e.g. within 6 months of This specifies the jurisdiction of the agreement and
termination. The franchisee must not solicit the forum for the resolution of disputes, i.e. the
business from any customer of the franchise outlet English courts.
within 24 months of termination. Also, the
franchisee must not disclose any information about 2 9 Set-off
the franchisor or copy any part of the operations This is to prevent the franchisee from withholding
manual to any third party at any time after the monies due to the franchisor by claiming that
termination. he/she is due to receive monies owed by the
21 Partnership and agency franchisor.
A barrier between the franchisor and franchisee is
needed, so as to prevent a franchisee's financial 30 Restrictive Trade Practices Act
liabilities falling upon the franchisor. "This
Agreement does not constitute a partnership In any agreement where two parties trading in the
between the Company [franchisor] and the U.K. accept restrictions, the contract may need to
Franchisee. The Franchisee must act solely as an be registered under the Restrictive Trade Practices
independent trader and must not act or purport to Act 1976. This clause ensures that if the agreement
act as an agent for the Company." does fall within the registration provisions of the
Act, then the agreement does not come into effect
2 2 Waiver until the day after it has been registered with the
A clause is shown here to protect either party's Office of Fair Trading
right to pursue a remedy for a breach of the
agreement which was previously overlooked.
Schedules
23 Incorporation
1 Franchise Fee apportionment
Subsequent incorporation of the outlet by the
franchisee as a limited liability company is only 2 Start-up Package
possible with the prior permission of the
franchisor. 3 Substantial Terms
4 Territory
2 4 Entire Agreement
That for the avoidance of any doubt, this clause 5 Trade Marks
makes it clear that only the agreement itself 6 Training
together with any documents incorporated in it by
reference, apply to the franchisor/franchisee 7 Telephone Number Transfer Letter
relationship and that any representations or 8 Trade Mark Licence
statements made by the franchisor prior to the
signature of the agreement are not binding on the
franchisor save for those which have been made
fraudulently.
2 5 Independent Advice
"The Franchisee acknowledges that he has been
advised by the Company [franchisor] to take
independent professional advice on the terms of
this Agreement and his purchase of the Business,
prior to entering into this Agreement."
26 Notices
A detailed clause lays down a specific mechanism
for the issuing and serving of notices by either
par@.

GLOSSARY OF
FRANCHISE TERMS
ADVERTISING LEVY/FEE May also be called promotional
levy/fee, marketing levy/fee. An identified charge
on the franchises by the franchisor, over and
above the management fee, the purpose being to
promote the business on a national or regional
basis. The combined funds of all the franchisees
make a greater impact than any single outlet
could achieve. It is usual for such a fee to be
identified separately in the franchise agreement, a
separate fund set up, and a guarantee given that
the monies will be spent on the specified activity
with provision for an audit and independent
examination of the fund by the franchisees
ADVISORY COUNCIL Sometimes called franchises
association or review council. The name given to a
representative body of franchisees within a
specific franchise nominated by the franchisor or
elected by the franchisees. The purpose is to
explore new ideas and opportunities through
regular meetings with the franchisor. Usually such
bodies are formed at the instigation of the
franchisor but have also been formed by
dissatisfied franchisees with the objective of
bringing pressure to bear on the franchisor
ASSIGNMENT A clause, common in franchise contracts,
giving the franchisee the right to assign the
agreement usually to a person approved by the
franchisor
BANK FRANCHISE FINANCE PACKAGE Working primarily
with franchisors, bank franchise managers and
their staff examine franchise opportunities and
will often offer a funding scheme enabling the
prospective franchisees to purchase the franchise.
Up to 70 per cent of the total cost of the franchise
may be available. These schemes are effected
through the branch network and may be a
combination of facilities including term loans,
overdrafts and delayed terms for capital and/or
interest repayments
BLUEPRINT A term used in franchising to describe the
format (as in business format) or plan developed
by the franchisor to describe the complete system
for the successful operation of the business
B ~ S FRANCHISE
H ASSOCIATION (BFA) The
franchisor's trade association founded in 1977 by
eight of the early U.K. franchising companies with
the objective of raising the profile of ethical
franchising in the U.K.
BUSINESS-FORMAT FRANCHISE A franchise term where
the franchisor provides a complete formula,
blueprint, plan or format for operating the total
business, where the franchisor is actively involved
in establishing the franchisee's business both
initially and ongoing, and the franchises can build
equity in the business
Lloyds Bank plcIlFRC Franchising Your Business: Getting Started
COMPANY-OWNED UNITS/OUTLETS See also pilot
operations. Outlets owned, operated and managed
by the franchisor, they may be used for training as
well as a testbed for new ideas and programmes.
They can, more simply, be a continuing source of
income to the franchisor
LAWS competition
C O M P ~ O N laws applicable in the
U.K. include the Fair Trading Act 1973, the
Restrictive Trade Practices Act 1976, and, in the
EEC, the Treaty of Rome, Article 85, dealing with
competition, and Article 86, dealing with
monopoly situations. The purpose of competition
law is to increase competition between companies
or organisations through the removal of restraints
on trade or monopoly situations. The clauses in
franchise contracts most likely to cause problems
with competition laws are full-line forcing, tied-in-
sales and restricted or exclusive areas
CONTINUING FEE See franchise fee
CONTRACT -
FRANCHISE CONTRACT The agreement
between the franchisor and the franchises
describing the terms of the agreement, the rights
and obligations of both parties
DISENFRANCHISE The withdrawal of the rights of the
franchise, whether it be a franchise to vote or to
operate a business format business system
ETHICAL FRANCHISE A franchise that is operated
according to ethical business standards usually
referring to the ethics as promulgated by the
British Franchise Association
EUROPEAN FRANCHISE FEDERATION (EFF) The EFF
comprises the National Franchise Trade
Associations in different European countries
which includes the British Franchise Association.
A secretariat rotates around the membership, e.g.
the BFA held the EFF secretariat in 1996
EXCLUSIVE AREA A territory assigned to a franchises
with undertakings that the franchisor will not
trade in the area nor will other franchisees be
appointed or allowed to trade within the area.
There is a difficulty in giving total exclusivity
within the Restrictive Trade Practices Act 1976
FAST-FOOD FRANCHISE Food outlets usually offering a
limited menu, served quickly. Encompasses
counter service, table service and take-away
outlets. Wimpy and Kentucky Fried Chicken were
the first in the U.K., McDonald's is the largest,
currently opening a new store somewhere in the
world every 15 hours
FIRST-GENERATION FRANCHISE Usually used to identify
early franchises - car manufacturers, oil
companies and soft drink bottlers who used
franchising principally as a means of distribution
Lloyds Bank plcllFRC Franchising Your Business: Getting Started
FIXED FEE See franchise fee
FRACTIONAL FRANCHISE Where the franchise is only a
part of the franchisee's interest. Usually related to
premises, a franchise shop within department
stores is a good example
FRANCHISE FEE There are two types of franchise fee
common in franchising: the initial fee and the
ongoing fee. The initial fee, sometimes called the
front-end fee, is a one-off payment designed to
cover the costs of the franchisor in recruiting and
setting up the franchises. The ongoing service
fee, sometimes referred to as royalties or
management fees and most commonly based on a
percentage of sales turnover, is the usual way for
the franchisor to obtain his continuing income
from the franchises. Occasionally a franchisor will
choose to charge a fixed fee on a weekly or
monthly basis
FRANCHISES The individual, company or partnership
which buys a franchise or licence from the
franchisor. Variously referred to as licensee,
franchise owner or associate
FRANCHISES ASSOCIATION/ADVISORY COUNCIL
See advisory council
FRANCHISOR The company which operates the
franchise and sells franchises to franchisees. In
some cases the franchisor can be a franchisee of a
franchisor himself, in other words an
intermediary franchisee - see master licensee
FRONT-END FEE See franchise fee
INTERNATIONAL FRANCHISE ASSOCIATION(IFA) The
Franchise Trade Association for the U.S.A.
INVESTMENT FRANCHISE'Investment', 'job' and
'business' franchises are terms coined in an
attempt to classify franchising. An 'investment'
franchise is more expensive than the others but
has never been quantified
JOB FRANCHISE A term coined in an attempt to
categorise franchising along with investment and
business. A 'job' franchise is usually described as
low-level investment where the franchisee works
in the business
JOINT VENTURE A method whereby a franchisor,
usually from overseas, will seek to establish a
legal relationship with a partner in a foreign
market and share the costs of getting up a
franchise organisation. Commonly the franchisor
initiating the idea will contribute the know-how
and expect the host country partner to provide
the funds and management
KNOW-HOWThe intellectual property - the systems,
methods and expertise of the franchisor. Usually
referred to as know-how in the contract
LICENSEE See franchisee
LKENSING AGREEMENTSee franchise agreement
LOCATION FRANCHISEA franchise operating from fixed
premises where the premises tend to be an
important part of the business operation, i.e. retail
premises where customers visit
MANAGEMENT SERVICE FEE See franchise fee
MARK The name by which the franchisor's business is
known and which the franchisee will be permitted
to use
MARKETING LEVY See advertising levy
MASTER LICENSEE A franchisee who usually has
responsibility for more than one outlet and is
commonly totally responsible for the development
of the franchised business (through other
franchisees) in an area. As an example, the U.K.
arm of ServiceMaster was originally a master
licensee in Europe
MOBILE FRANCHISE Usually a vehicle-operated
franchise which goes out to serve customers, e.g.
windscreen replacement, car tuning and cleaning
services. The opposite to a location franchise
MONTHLY FEE See franchise fee
M U L ~ L EFRANCHISE Commonly refers to a franchisee
who operates more than one, of a specific
franchise, outlet
NETWORK Usually used to describe the whole
franchise organisation. Could be a U.K. network
or world-wide network
NON-EXCLUSIVE AREA Theoretically the opposite of
exclusive areas but usually qualified to assure the
franchises of some protection
OPERATIONS MANUALS NOWa generic term used to
describe all the manuals provided by a franchisor
to a franchises to operate the business. These will
include administrative as well as actual operational
manuals
PILOT UNIT The term used to describe the test model
or outlet set up by the franchisor. See also
company-owned units/outlets
PROMOTIONAL LEVY See advertising levy
PYRAMID SELLING Pyramid selling is a marketing
system, erroneously associated with franchising in
the past, which involves selling distributorships
through a tiered structure. The founders of such
schemes rely primarily on selling distributorships
rather than products. Several Acts of Parliament
govern pyramid selling in the U.K.
REVIEW COUNCIL See advisory council
 Lloyds Bank plcllFRC Franchising Your Business: Getting Started

ROYAL~ES See franchise fee. The use of this term

within a franchise may raise questions with the
Inland Revenue. Traditionally royalties are paid on
copyrighted works of art such as literature and
music and different tax arrangements may apply
SECOND-GENERATION FRANCHISES A term commonly
used to describe the franchises which started in
and since the franchise boom of the 1950s
SERVICE FEE See franchise fee

SERVICE MARK The mark registered by a service

organisation applied to services rather than
products. A few years ago it was not possible to
register service marks in the U.K. and the British
Franchise Association and its members lobbied
MPs and produced a turn-around in Government
thinking on this

SUB-FRANCHISES A term used to describe franchisees

set up by an existing franchisee, usually a master
franchisee
TERRITORIAL RIGHTS The rights granted by the
franchisor to the franchisee within the area
allocated. Franchisees will usually seek some
understanding that they will not be in competition
with other franchisees or the franchisor within
their territory
TURNKEY OPERATION Basically an expression for a
business format franchise where the franchisee
turns the key in the door with the business ready
to run
UP-FRONT FEE See franchise fee. initial fee

(0John Stanworth & Brian Smith, 1991)

Lloyds Bank plc/lFRC Franchising Your Business: Getting Started

NOTES