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Feb, 01 2005

Some Lessons from the UK

MY recent visit to India in connection with the Franchise Awards and Seminar programme, which is highlighted elsewhere in this issue, demonstrated to me that there is vast potential for the development of a thriving franchise community there.

MY recent visit to India in connection with the Franchise Awards and Seminar programme, which is highlighted elsewhere in this issue, demonstrated to me that there is vast potential for the development of a thriving franchise community there. Several delegates at the Franchise India 2004 Opportunity Seminar, to whom I spoke, expressed interest in franchising their existing businesses, and even more willing were the visitors to the exhibition, obviously keen to become franchisees. Discussions with other professionals during my visit confirmed that there are many thousands of people across India with both the money and desire to start their own businesses, many of whom would readily snap up a franchise opportunity.

But to all this excitement and enthusiasm I must add a caveat for anyone who wants to see franchising develop as a credible and ethical format on the sub-continent. There are many things you can learn from the way franchising has developed elsewhere in the world, and, if you are wise, you will take notice, both, of what has gone right, and copy it; and of what has gone wrong, and avoid those mistakes for your franchising community.

Lack of knowledge traps

Whenever franchising starts in a country there are the same “many thousands of people with both the money and desire to start their own businesses”, referred to above. Their enthusiasm, innocence and ignorance makes them prey to unscrupulous franchisors who cannot see beyond the juicy upfront fees, and who have no intention of providing the continuing support and training that is an essential part of the franchising relationship. Not all franchisors set out to do things badly, but even those with the best intentions often lack the education and knowledge to forecast the consequences of their actions, and they too end up in failure because they cannot manage their networks properly. When too many people lose money in such deals it is not long before politicians start to take an interest and restrictive legislation follows, often drafted by people who also have little or no idea about how franchising should be properly conducted.

In my view, franchising in India is currently at great risk to such lack of experience (at best) or downright opportunism and crookedness (at worst). So, what can be done to avoid these pitfalls?

Since the UK is one of the most established, but least regulated, franchise markets in the world, perhaps there are some lessons to be learnt from how we do things here. The following series of points, in no particular order of priority, demonstrate some experience from the last 30 years that has served us well, and which the franchise community in India would do well to consider.

Banks as a lending institution

Let’s start with the banks. The UK was the first, and is still the leading market where banks recognised the enormous potential of franchising very early on, and decided to train specialists to operate in the sector. Banks like lending to franchisees of well-structured franchisors because it is very safe lending. A tiny proportion of franchisees go bust, compared to those individuals starting their own independent businesses, so the risks are far smaller for all concerned.

But, note the comment “well-structured” because the banks go to great lengths to ensure franchisors are properly set-up before they will consider lending to their franchisees. Different banks do this in different ways, but, basically, it involves visiting the franchisors, gathering data, and keeping central records about that franchisor and his network. Those records are then made available to that bank’s branches which are asked to provide loans to potential franchisees. If the bank is unhappy with the franchisor’s performance it can easily put a stop to any further lending to its franchisees, thus implementing an informal sanction without the need for legislation.

In order to be well-received by the franchisors, and, thus, become more likely to have potential franchisees referred to their bank, all these institutions now provide various forms of sponsorship and support to the franchising community. For example, NatWest sponsors the Annual Survey of Franchising, and also support The Franchise Alliance, The Third Wednesday Club and The Franchisor Supplier Showcase; HSBC has, for many years, sponsored both the Franchisor and Franchisee of the Year Awards, and also support the activities of The Franchise Training Centre; Royal Bank of Scotland sponsors the bi-annual International Symposium; and all the banks combine to fund the British Franchise Association website, with most of them also exhibiting at the various franchise exhibitions.

As a result of such commitment over the years, banks now lend to 85 per cent of those franchisees who need to borrow to start their business. With an average loan of around £40,000, (approximately rupees 32 lakh) and some 3,000 new franchisees a year, one can see for oneself the attraction to them. There is, therefore, great potential for whichever banks choose to get involved early in franchising in India, provided they themselves take the time and trouble to learn about the way the business model works. I will be pleased to assist.

Well-drafted agreements require lawyers

Next, the lawyers. Now, none of us is a great fan of paying high fees to the legal profession, and within Horwath we often say that “if you are franchising your business, the last thing you need is a lawyer”, but the fact is, franchising does need lawyers because the franchise agreement is the foundation of the entire relationship. Once a franchisor has used an experienced consultant to work out the structure of his franchise, he must go to a lawyer who understands franchising so that all the arrangements can be properly reflected in a well-drafted agreement that protects all parties. Ideally, it is never referred to once signed, but it must be right at the very start.

Franchise India 2004 was the only franchising event I have attended anywhere in the world that was not crawling with lawyers. Many people may view that as a good thing, but my message is that such a situation presented big warning signs to me. People were telling me “Don’t worry about it. We have no franchising legislation here, and franchising is just a matter of contract law, so any commercial lawyer can handle it”. Trust me, that is the route to disaster, and will end up in government interference and legislation, that nobody wants, when poorly drafted agreements cause franchised networks to fall apart.

Lawyers in the UK, where there is also no franchise-specific legislation, have spent 30 years refining the wordings of franchise agreements, based on their collective experience, to produce documents that anticipate and resolve problems before they happen. Franchising is a specialised area, and needs specialists working on it. Even now, there are probably only about five lawyers in the UK, who I would recommend to franchisors, as being capable to draft their franchise agreements, although there are many more who are competent to deal with things from the franchisees side.

So, once again, there is great potential for whichever law firms choose to get involved early in franchising in India, provided they themselves take the time and trouble to learn about the way the business model works. Their best starting point would be to obtain a copy of ‘The Guide To Franchising’, now in its seventh edition, written by Martin Mendelsohn, who has been the leading franchise lawyer in the UK, and renowned around the world, for nearly 40 years. Details can be obtained via www.martinmendelsohn.com

BFA’s accreditation process

The British Franchise Association has also been a vital factor in raising and maintaining standards, and, therefore, avoiding legislation for over 25 years. Unlike most other national franchise associations, a franchisor cannot just send off a subscription cheque to the BFA and become a member. Not only must they pass an increasingly robust accreditation procedure, they must graduate through three levels of membership as they gain experience, and are then subject to regular re-accreditation. The result of this approach has been that members of the association are very highly regarded by potential franchisees. A publicity campaign, “Don’t sign without the BFA sign” brings great benefit to its members, as do enquiries from its website.

There are several other benefits of membership, too numerous to mention here, but political lobbying at both the National and European level has been particularly effective at avoiding or deflecting unwelcome regulations.

The BFA started when a small group of franchisors got together to learn from each other and to develop, and disseminate, good practice. I would thoroughly recommend that any similar organisation in India learns from the UK experience, and will be happy to advise if required.

Franchising knowledge

The final area I would like to cover is education and training in and about franchising. There is an enormous need for education about franchising in India. This applies across the board to potential franchisees, potential and practicing franchisors, commercial and government institutions, professional bodies and the media. Even the UK caught onto this relatively late and The Franchise Training Centre, to which I must declare an interest having been its creator, has only been in existence for about eight years. However, it offers a complete range of education and training modules, developed by professionals with a combined experience of over one hundred years of practical franchise management, which we can easily arrange to be delivered to audiences in India. Managers in franchisor organisations can progress through a programme, obtaining a Certificate in Franchise Management, followed by a Diploma in Franchise Management, and even an MA Work-Based Learning (Franchising) accredited by Middlesex University.

So, my message to the franchising community in India is summarised as follows.

There is phenomenal potential for franchising in your country, but there is also potential for disaster. Franchising is about inexperienced people learning from those with great experience on how to operate a business system. My colleagues and I stand ready to use similar techniques to benefit the various members of the franchising community and show you how to operate franchising.

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