Redundancy as a route to franchising

Article by Richard Holden

Lloyds Bank

Richard Holden, Head of Franchising, Lloyds Banking Group

Redundancy can be difficult experience to deal with. Some people will accept it, while others might feel shock, anger, fear or even denial. But the most important thing for anyone going through a redundancy is not to rush into making decisions about the future. It’s all too easy to make hasty decisions, perhaps out of fear of unemployment or change, however redundancy can actually provide an ideal opportunity to refocus and steer your career or other aspects of your life in a different direction.

Many people who are made redundant might consider setting up their own business, and while there are many options out there, it is absolutely vital that any decision is not taken lightly. It should be understood that there is no business which provides substantial profits and overnight success. Running a business in the initial months can be sixteen hours day, seven days a week, meaning a substantial personal commitment and change to the existing lifestyle is likely to be required. It is not uncommon to feel on many occasions in the first year or two that it was a mistake setting up the business and it is vital that support of family and friends is available from the outset. Having said this, rewards in the longer term can be high in terms of satisfaction, lifestyle, independence and financial stability.

Franchising can be a great way to reduce the risks of setting up a business, because franchised businesses are already tried and tested success stories. A franchisor may have spent many years developing their business systems and will provide initial training, as well as ongoing support to the franchisee. According to the latest British Franchise Association NatWest Survey nearly nine out of ten franchisees claimed that their business was profitable. Although franchising does not by any means eliminate the risk of failure, it can be a favourable option for people wanting to start their own business.

What do you need to consider? Many franchisors will tell you that finding suitable franchisees is one of their biggest barriers to expansion. Finding people with the right skills and sufficient funds to invest in a business remain real concerns for franchisors.

From the franchisor’s point of view people who have been made redundant often have a number of qualities as well as the available funds to commit to a fresh start. Good franchisors will carry out a rigorous assessment, which may include psychometric or practical testing, to ensure as far as possible that they find people who will be able to develop their business. When you’re looking for a potential franchisor, it’s important you find someone who is able to answer all your questions. If they only seem interested in taking on your investment, be prepared to walk away.

Once you’ve decided to take the franchise route, you’ll need to think about funding the business. Anyone thinking of taking on a franchise should only invest what they can afford, and what they are prepared to lose. Banks will generally fund between 50 and 70 per cent of the initial set up costs, although they’ll probably need you to provide security for your borrowing and will want to see evidence that the business is a sound investment. Other sources of finance might be savings and of course any redundancy payments you’ve received from your previous employer.

Using a redundancy package or other savings to fund a franchise means that you’ll have more control over the business and that you’ll avoid interest repayments or loan charges. It can also demonstrate your commitment to and belief in your business, which can help sway lenders in the future, should you choose to borrow further down the line. However, using up these cash reserves to start up does mean you will not have anything to fall back on so it is worthwhile keeping enough reserves back as a contingency, to cover between six and twelve months expenditure.

For those facing redundancy, it can be hard to see it in a positive light, especially if it has come out of the blue. Nevertheless, there are many options open to people in this situation and for those interested in small business, franchising can be a real opportunity and a path well worth considering. The British Franchise Association runs regular virtual seminars for prospective franchisees and further information can be found on their www.thebfa.org website, including details of their free online educational programme Prospect Franchisee Certificate which is a must for every would be franchisee.

Lloyds Bank has produced a helpful guide to support your research as to whether franchising is the right option for you and a free copy can downloaded from the www.lloydsbank.com/franchising website. Our team of franchise specialists are available to discuss all aspects of planning your business and any financing requirements you may have.

Richard Holden, Head of Franchising, Lloyds Banking Group
Email: Franchising@lloydsbanking.com