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What Is A Franchise - Definition By The Dragons Den

by Jo Shaer, on December 11, 2012

Far too many people have come into the Dragons Den over the last few weeks with half-baked franchise ideas that have completely missed some particularly crucial points.

According to Investor Words, a franchise is a form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.

How does franchising work

It was Duncan Bannatyne who crystallised for me how a successful franchise operation works.

Someone buys a franchise from someone else who is already doing the thing that they want to buy the franchise in. But you're not going to sell a franchise to someone for something that you haven't even managed to show can be done successfully. This was aimed at the businessman who wanted to set up a franchise selling second hand commercial kitchen equipment.

Hilary Devey's definition of a successful franchise required:

  • a USP;
  • apossession of an intellectual property for something; and
  • testimonials that what you've got makes money and is a temptation for someone looking for investment.

She went on to tell another potential franchisor in the same series: "without those things, you cannot look potential fanchisees in the eye and say I know it will work"

Deborah Meaden summed it up: "if you believe in this, then do it. Be your own first franchisee. The only thing that would persuade me to hand over my money as an investor was if you could say to me 'I've done it.' Track record - whole different ballgame."

Who would buy a franchise?

Deborah also urged franchisors to identify their potential franchisees and work out where to find them. To an icafe owner who said that two guys had already expressed an interest in paying £110,000 for a franchise that would only earn £35k profit in the first year, she advised that he find out more about this person. How much is he earning? Do you think he's earning more than £30k/year. Will he really give up £30k guaranteed and also hand over £100k of his hard earned savings for the chance of securing profits only just in excess of what he could already get in his regular job? Is the return you are offering worth their investment?

"You need to think about who is going to be one of your franchisees and understand them so that you can sell it to them."

However, in the case of the icafe owner, Duncan did not totally agree with Hilary's way of defining the core elements of a franchise or share the negative views of his co-Dragons about the icafe possibilities.

He said: "I have a very successful franchise company that doesn't agree with all the things that she said."

He advised Umer, the icafe owner You said you couldn't sell a franchise because you couldn't sell a half cooked dinner - but you've got two cooked dinners. Why don't you try to sell one of your two existing businesses as a franchise?"

When Umer explained that his cashflow would drop from 100% to 6%, he replied:

"No it won't. Because you open your new shop on the day that you sell the old one as a franchise. Get the new shop ready to open and the day you sell, you open it. You will prove to yourself then whether or not someone is willing to pay that money for the franchise. You have a business that is making a profit of £49k after you have taken £27.5k wages, that is worth an offer"

Knowing that he had been successful in a previous series with a fancy dress franchise opportunity, he offered Umer the £30k he had asked for, in return for 49% of his company and Umer accepted.

A few months later, the latest reports say that the due diligence on the deal has been completed apart from a few minor issues and he has put in an offer on the first of nine planned stores in Glasgow, forecasting an increased turnover from around £500,000 to £5.5 million. Once this has been achieved, Umer says that he will start franchising based on the model he has built.

Topics:Small BusinessWomen and Small Businessfranchise definition

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