New franchise numbers remained high through 2020

Economic uncertainty and the pandemic didn’t reduce interest in new franchises during 2020, according to data from HSBC UK.

From January to September HSBC UK’s Franchise team took on 834 new customers, just short of the 894 new accounts in the same period of 2019 and comfortably exceeding the 727 new customers in 2018.

Food delivery, the storage sector, business technology, care in the home and tutoring were among the most popular new franchises started during 2020.

Fast-food franchises in particular adapted quickly during the first lockdown by pivoting to offer drive-thru, delivery and Covid-secure collection. The major brands saw huge demand and all have experienced like for like sale increases on the previous 12 months.

Andrew Brattesani, Head of Franchise for HSBC UK, believes the stability of new customer numbers can be put down to a combination of furlough giving people more time to consider their career aspirations, economic uncertainty putting jobs at risk and people wanting to take control of their own careers.

He said: Despite the huge economic challenges that businesses faced through the course of 2020 we haven’t seen interest in new franchises dwindle.

Through the uncertainty there have been opportunities and we’ve seen examples of people having more time to assess their options and look to franchising as a way to start their own business, be their own boss and find growth.

Even with the unprecedented disruption, franchising is booming. Having the benefit of a proven business model behind them has given people the confidence to take these new opportunities and run with them and we don’t expect that to change.

HSBC UK customer Gbolahan Laoshe from London took the opportunity to change his career and start a franchise during the pandemic.

He had been working for a financial services company in London, but after a couple of months in lockdown found his contracted hours reduced, giving him more time to consider his future career aspirations.

Gbolahan explains: I’d previously looked into starting a franchise but hadn’t taken the idea forward until things changed with my day job early in lockdown.

The pandemic expedited my thinking and I got back in touch with Driver Hire, who I had spoken to previously, to see if there was still an opportunity there for a franchise in Bedford and Huntingdon.

Gbolahan went to private school in the UK before moving to Nigeria for university to study law, he then took over the family haulage business which he ran for seven years.

He returned to the UK where he settled with his family and worked in IT, but always had the desire to start his own business.

He said: Going out on my own felt scary and that’s why I looked at the option of franchising and got in touch with the British Franchise Association (bfa) and spoke to a number of franchisees to understand their experiences.

In October Gbolahan joined the Driver Hire ranks. The company is the UK’s largest specialist logistics recruiter with more than 100 offices and offers a full range of recruitment services.

He added: Some people might think it’s mad to start a business during a pandemic but as a famous author once said every adversity has the seed of an equivalent or greater benefit.

In uncertainties there are opportunities and while it’s daunting every day I love the challenge. I wake up each day with a desire to make things happen.

HSBC UK has an award winning franchise team who have been providing financial support, advice and expertise to both franchisors and franchisees for decades.

The bank works closely with the bfa and its members to encourage successful and ethical franchising

Multi-unit & multi-brand franchisees – A bright future for UK franchising?

By Dr Mark Abell and Shelley Nadler Bird & Bird

Multi-unit / multi-brand franchisees have long been a feature of the US franchise market, a great many of this have become hugely wealthy and some have even floated. Without them the US franchise market could not have expanded as it has done. These exciting new large-scale franchisees have started to emerge in the UK Although the master franchisee/owner operator franchisee model of franchising has a role in franchising in the UK, many are beginning to realise that it has a number of severe limitations and that franchisors looking to launch their brands in the UK should be looking to engage with successful multi-unit franchisees.

Through the emergence of successful multi-unit / multi-brand franchisees in brands such as Costa, Domino’s and KFC a key resource has evolved. Due to market saturation and hence a lack of opportunity for further significant expansion within their current brands, these multi-unit operators can be usefully exploited by other franchised brands looking to turbo-charge their growth within the UK.

Who are these multi-unit / multi-brand franchisees?
Typically, these multi-unit/multi-brand operators are individuals who, through years of operating well developed franchise concepts, have developed a strong set of operational skills together with an effective operational and managerial infra-structure. Many of them have professional backgrounds as accountants, lawyers or MBA graduates. They have applied their professional training and rigour to the effective implementation of their chosen concepts (often fast food and coffee shops), whilst at the same time taking a bigger picture and strategic view as regards the structuring, financing and growth horizons of their business.

Often they acquire their first franchise at a young age and this is usually in the food and beverage sector. These operators are good negotiators and have a history of finding securing good locations at competitive rents. They also understand how to motivate and retain good quality staff which ensures that standards are maintained for stores whether they are operating one or fifty. Many multi-unit / multi-brand operators have invested heavily in real estate and worked strategically to build a portfolio of brands that can occupy adjoining sites in a hub type structure. These operators know how to keep costs down by sharing resources. Importantly, these operators all have access to substantial capital that is available to invest in appropriate projects.

Once established as a multiple franchisee with one brand the multi-unit franchisee typically switches to a non-competing brand to spread the risk. Lessons have been learnt following the BSE crisis in the 1990’s when sales of burgers plummeted that it is good to own more than one type of food concept. The same could be said of the KFC chicken shortages earlier this year. So, the multi-unit / multi-brand franchisees learnt to diversify, perhaps owning a chicken, pizza and coffee brand. With worries regarding staff shortages following Brexit, multi-unit/multi-brand operators are looking for new opportunities in sectors where there is greater reliance on technology and less need for staff. Many are looking at fitness and wellness concepts and service concepts that are less labour intensive.

Interestingly, these multi-unit/multi-brand operators typically do not want to become master franchisees as they feel that requires a different skill set and does not play to their key strengths, which is operational implementation rather than the recruitment, training and management of franchisees. Another appealing factor is that these multi-unit/multi-brand operators are often regionally based within the UK and they understand the geography and markets in those regions. Appointing a number of regional multi-unit franchisees rather than one master franchisee could quickly give a foreign brand coverage across the UK.

The advantages and disadvantages of dealing with multi-unit/multi-brand franchisees
From a franchisor’s point of view the great attraction of such multi-unit/multi-brand operators is that they have a huge amount of operational expertise and an established infrastructure and the financial resources to expand quickly. If a foreign brand is seeking to enter the UK in a competitive sector (such as gyms) by using experienced multi-unit/multi-brand operators the brand owner may be able to quickly get coverage in the UK ahead of other gym brands. In allowing multi-unit franchisees to open multiple stores, franchisors know they are dealing with someone who has experience of the system and a proven track record and will need so much less support then a new franchisee. Often successful multi-unit franchisees are able to take over poor performing franchisees. A system that uses multi-unit operators will have less franchisees to deal with but this can be a blessing and a curse.

Partnering with such franchisees is not without a potential downside for franchisors. Fundamentally the nature of these multi-unit/multi brand franchisees means that the classical relationship dynamics between the franchisor and its franchisees are bound to be impacted due to the size and bargaining power of the franchisee. These franchisees do have the resources to challenge the franchisor. Another disadvantage is that by over extending themselves they are not able to implement a new brand concept. There is also a risk of know-how leakage and potential cross contamination between different concepts.

However, matched against the obvious commercial upside these risks are clearly manageable so long as franchisors do not simply ignore them. Franchisors will probably need to adapt their ways of working for multi-unit / multi-brand franchisees but if care is taken we believe it will be worthwhile.

How can franchisors best engage with multi-unit/multi-brand franchisees?
To be successful in the UK market most foreign brands need to invest a good deal or time and money adapting the concept to the UK market or finding a developer or master franchisee with sufficient faith in the brand to make that investment for them. For well-known legacy brands that may be possible but for many smaller brands that is often a struggle. By partnering with a successful multi-unit/multi-brand operator, such franchisors can effectively pilot and adapt their brand to the UK market on a relatively low risk manner. Of course, it is critical that this new style relationship is properly structured and documented. A classic joint venture is unlikely to work but a subordinated equity type relationship is a proven way of structuring an effective catalyst for such a relationship.

A subordinated equity arrangement is a variation on the traditional joint venture model adapted for the franchise industry. In a subordinated equity arrangement, a franchisor takes a minority shareholding in a franchisee company but the primary relationship between the parties remains that of franchisor and franchisee rather than as joint venture parties. The franchisor exercises the usual controls over the franchisee under the franchise agreement rather than by holding board and shareholders meetings under a joint venture agreement. A special purpose vehicle is set up with the multi-unit franchisee as the majority shareholder and the franchisor holding a minority stake. Multi-unit franchisees favour this arrangement as the franchisor “has skin in the game” and it will encourage the franchisor to establish a “boots on the ground” presence locally to help set up the new concept. The franchisor benefits by having the greater rewards that equity participation brings and also, in some cases, the option to buy out the franchisee company once the concept is established at a pre-agreed valuation.

If a foreign brand already has a master franchisee in the UK accessing good unit franchisees is always a challenge. Potentially good operators can find it difficult to obtain the required capital to invest in a franchised business and many of those with the available capital do not fit the brand profile or are unlikely to be good operators. Also, managing a large number of individual franchisees spread the length and breadth of the country is a stretch for many developing franchise concepts. Engaging with multi- unit/multi-brand franchisees could be a solution to this challenge for master franchisees.

New start up UK based franchisors can also take advantage of multi-unit/multi-brand franchisees. Proving a concept and establishing the first 10 or so franchise outlets is a hard and slow process for new franchisors. One potential solution to this is partnering with a multi-unit/multi-brand franchisee and leveraging off of its operational expertise and infrastructure. Clearly this type of relationship is very different from the classical franchisor/ franchisee relationship but, properly structured – perhaps through a subordinated equity structure (as mentioned above),this could enable brands that will otherwise struggle to get over the sustainability threshold as regards the number of outlets, to leap frog over those market entry barriers and establish themselves as a successful and credible brand much more quickly and with fewer difficulties than would usually be the case.

The way forward
So, in conclusion, the UK franchising market has evolved, in an almost Darwinian fashion, to offer franchisors the opportunity to take advantage of a new “gene pool” of relevant expertise and capital that handled appropriately can greatly add to their chances of success. Foreign franchisors and UK start-ups should consider developing their brand in the UK using multi-unit / multi-brand franchisees rather than appointing a master franchisee.

The key is to ensure that the relationship with them is captured in an appropriate legal mechanism. Joint Ventures rarely succeed, particularly between franchisors and their franchisees. Instead, subordinated equity structures and other specially developed relationships can be used to ensure a full alignment of interests and mutually attractive exit strategies.

Multi-brand franchisee is owner of Domino’s, Costa Coffee and Anytime Fitness franchises

Mike Racz is a multi-unit, multi-brand franchisee, based in the North East with a passion for building businesses and developing people. He’s helping people build brighter futures and bringing life back to areas that have sometimes been neglected by investment. Mike currently owns Domino’s, Costa Coffee and Anytime Fitness franchises across the North East.

Name: Mike Racz
Location: North East England
Franchise: Domino’s / Costa / Anytime Fitness

What is your business background?
I don’t have one. Everything I know, I learned from experience; I started from the bottom, selling stickers in school when I was 6, started my first business at 13 under my dad’s name, and later moved into Domino’s and worked my way up from being an in-store assistant to manager to area manager and finally opening my first store and becoming a franchisee, learning as much as I could on the way.

Why did you choose Domino’s, Costa Coffee and Anytime Fitness franchises to invest in?
I loved Domino’s since I started working there in 2004. I didn’t pick it because it was a safe option, I just love the brand. I spent quite a while looking for Costa and Anytime Fitness, I needed to find the right businesses to achieve my vision and accelerate growth. I didn’t always get it right, I had another two franchises that failed but I think it only counts as failure if you don’t learn anything from it. I took those lessons and I made my other companies stronger.

What’s the best thing about being a multi-unit/multi-brand franchisee?
People. Finding talent is a very rewarding aspect of being a franchisee. I get to challenge people, give them opportunities and watch them grow. Most of my Head Office team started at the bottom. If someone has passion and ambition, I want to push that and get the best from them. No two days are the same within the Racz Group, everyone has the chance to develop, learn new skills and be who they want to be. A Barista at Costa could become a PT at Anytime Fitness if they wanted, there is always opportunity to try something new. Attitude is everything, you can’t build a successful company without enthusiastic team members and there is nothing better than finding someone who is a perfect fit.

How would you describe your role as a multi-unit/multi-brand, franchisee? What is your management style/method?
Strategic. Almost exclusively. I don’t involve myself in hiring and training etc., I have an excellent team whom I trust completely to take care of those things. I hold Marketing and Finance close to my heart, I focus on growing my profit level and my revenue, I like to know what the top and bottom lines are. Everything in-between is in safe hands with my Head Office team, Area Managers and Managers.

What training and support did you receive initially and ongoing from your franchisors?
I was an Area Manager when I opened my first franchise of Domino’s and I’d learned a lot on the job. I knew I wanted more, I wanted to progress, so I made sure to do my homework and educate myself on how to make a business thrive. Obviously, I’d been trained at an operational level but becoming a multi-unit, multi-brand Franchisee has largely been a self-taught venture. It’s been a hard journey but it’s definitely worth it.

What are some of the challenges you have faced being a multi-unit/multi-brand franchisee, and how did you overcome them?
When you expand quickly, you have to learn to let go of things. It’s very easy to think I know better than everyone else and that I’m the best at everything, but it’s just because I care so much and it’s not true half the time anyway. Learning to delegate and completely hand over control of some things was a tough one. Now I have a solid team, each of whom are experts in their respective fields. I can trust them to take even the vaguest idea and make it happen, and I know they’ll do a great job.

When you own a business, you need to take a holistic view. Make sure you have purpose and vision, define it and work on it. I had to not let myself get bogged down, finding a way to make my vision a reality would have been impossible without the team I’ve built.

What are your long-term plans for your business and what are your goals for the future?
I want to provide opportunities, I want to change the lives of my team members and our customers. I want to give people the chance to be who they want to be and achieve their goals. Ultimately, I want Racz Group to be the largest company based in the North East of England by turnover and number of team members. If you want me to put a number on it, I’d say £300 million in sales is step 1.

What is the most invaluable piece of advice you could give someone looking to become a multi-unit/multi-brand franchisee?
Do not have an exit strategy. Every business guru will tell you to have one but it isn’t for me. You can’t build a visionary company by having the mindset that you’re only there to make money. You need purpose, passion, vision and values. You should focus on the company culture, build something meaningful. Enjoy what you do! You need to know where you want to go and what you want to achieve. It’s clich, but they’re right when they say you should never stop chasing your dreams.