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TOPICALADVICE


Jon Newsum-Smith is GIS project manager at VeriLocation/Overview Mapping, helping established franchisors evaluate the true potential of their network. Jon’s current focus is on developing a powerful web-based territory mapping system to benefit both new and existing franchisors.


When it comes to a franchisee’s renewal, is it really worth addressing their territory area?


Whilst there is no hard and fast rule to this, there could potentially be a number of benefits to both you and the franchisee. You must first decide, however, what outcome you are seeking. For instance, if you reduce the size of an operated territory, will this freed-up area be added to a vacant territory to make it more attractive? Or would it only make sense to give/sell it to a neighbouring franchisee? Ultimately, it is all about trying to maximise profitability of the available geography but, at the same time, avoiding unrest amongst your existing franchisee network.


A number of our franchisor clients have used their own customer data to visualise on a map how well their franchisees are utilising their territory area. Any areas that are highlighted as lacking in sales or activity could be discussed at the time of renewal. Whilst this renewing franchisee is unlikely to simply give up a section of their territory, it could prove to be a more profitable area under the control of another franchisee, or more beneficial to help promote a currently unsold territory. Franchisors may need to buy back this area at the time of the renewal but, in the long run, could gain significantly from doing so. For many franchisors, the franchisees’ renewal is the perfect time to consider discussing any amendments. It is important, however, to consider the actual franchise agreement you have in place. Historically, we have come across agreements that have clear clauses in them to ensure that franchisees’ territory boundaries are renegotiable at the time of renewal, or, in some cases, are completely unprotected allowing the franchisor to change them as they see fit. If you do have this kind of agreement and decide to enforce this clause, consider the impact upon both the franchisee that is being affected and the wider network. All in all, we would recommend any franchisor looking at this issue


to review these potential territory changes on a case-by-case basis. Franchisors need to be mindful of the complex factors that are unique to their business and that, if changes are going to made, the end positive result must far outweigh any negatives that could occur.


Chris Roberts is co-owner of Franchise Finance Limited, provider of finance, business consultancy and finance training to the UK franchising industry. Chris is QFP qualified and specialises in arranging funding for franchisors and franchisees.


I feel that recruitment of franchisees is slowing down because they think the banks won’t lend. Is it realistic to reassure them to the contrary?


It’s not unrealistic. A good starting point is to talk directly with the franchise departments of the banks, give them an update on your franchise and ensure they have a current copy of your franchise agreement, prospectus etc. They will then write (or update) their report on your franchise for use by their franchise managers and underwriters, the bankers who often make the ultimate lending decisions. Any potential problems can then be ironed out and they will understand how the business is currently supposed to work and how they are going to be repaid. It will also help if you can give them some average monthly turnover and profit figures from the network so that they can compare any projections they receive against this. You should advise prospective franchisees to approach the franchise departments of one or more of the banks and not go to their local high-street banker in the first instance, unless they have an existing business relationship with them. This is because they will then be directed to a specialist franchise bank manager who has been trained to work in this sector, understands what is involved, and will have access to the internal report on the franchise, mentioned above. If the franchisee has a well-thought- out proposition, a reasonable credit rating and a professional business plan, they will have a good chance of success, as long as they don’t ask to borrow too much money! It’s a good idea to reassure potential recruits that the banks will generally lend 50-70 per cent of the total requirement including start-up costs, working capital and VAT. This, however, would be for a well-established franchise; it is unlikely they would lend more than 50 per cent for a new franchise brand. In summary, the banks are lending, providing the proposition is viable and falls within the general guidelines as set out above. ■


If you would like to ask our experts a question please email fnews@vmgl.com Franchisor News | 11


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