Franchising is moving with the times. Originating with Albert Singer in 1851 (who used franchising as a method of distributing and servicing his eponymous sewing machines), the use of franchising grew slowly over the following century before gathering pace in the 1990s and booming in the 2000s. Nowadays it has become commonplace and we are starting to see a wide variety of would be Franchisors taking to Crowdfunding platforms such as ‘Crowdcube’ and ‘Kickstarter’ to try and secure funding for their franchise development plans.

Franchising is a business growth method whereby a business owner (the “Franchisor’) grants a type of license (known as a franchise) to another (the “Franchisee’), permitting the franchisee to run their own business following the processes, procedures and training set out by the Franchisor. The Franchisor allows the franchisee to trade under the name (and trade marks) of the Franchisor and gives them a complete package containing all that the Franchisee needs to run their business. In return, the Franchisee pays the Franchisor an upfront fee and an ongoing percentage of their turnover. The franchising industry is one which is well-established in many countries around the world with the global industry looking to hit £3 trillion by 2020 and the UK franchise industry alone being worth £13.4 billion to the UK.

It is evident that franchising is an enticing method of growing your business, however the cost of franchising your business can often be prohibitive as most of the costs have to be paid before a Franchisor recruits its first franchisee (and is able to start recovering its investment from franchise fees). By way of example, the fees charged by franchise consultants, lawyers and other professionals in setting up the network and the cost of marketing and advertising franchise opportunities for sale all require to be paid in advance of any franchisees coming in to the business. Given this, would be franchisors need to make sure they have this “development capital” in place to fund the set-up costs.

While banks (particularly those with designated franchising teams) have always been keen to stress their support for the franchising industry and are ready and willing to lend to many franchisees of established brands such as “Dominos Pizza” or “McDonalds”, we have noticed a reluctance since the recession to lend development capital to relatively new businesses seeking to franchise. This has forced such businesses to look into more innovative ways of securing funding including Crowdfunding and Mini-bonds.

Crowdfunding

Crowdfunding, whilst not a new concept, has seen significant growth in recent years thanks, in a large part, to increased internet accessibility and a significant increase in the number of Crowdfunding platforms. Crowdfunding utilises large groups of people (the “Crowd’) to collect a significant number of small contributions which (when added together) makes a usable sum. The main types of Crowdfunding are:

Equity – where members of the Crowd invest in return for a shareholding in the business;

Donation – where members of the Crowd simply donate money to the business (usually for a charitable cause);

Lending – where members of the Crowd are repaid their investment over a certain period of time; and

Reward – where members of the Crowd receive an item or service in return for their money (e.g. a limited edition product or a discount for future services)

Equity Crowdfunding is the method most frequently used by start-up and early stage businesses and, as such, it fits well with businesses looking to franchise. The advantage of the Equity model are:

• Funding can be raised quickly with limited upfront fees;

• Presenting the franchise project via the Crowdfunding website is useful marketing which can raise awareness of the brand and help recruit a franchisor’s first franchisee; and

• Sharing the plans for franchising and monitoring any reaction or feedback is a great way of testing the potential market for franchisees.

Indeed as a live case study, one of our clients, specialising in craft beers and ciders, successfully raised £107,130 on Crowdcube in May 2015 and hopes to use the funds to aid their expansion through franchising.

Mini-bonds

Mini-bonds are an increasingly popular form of alternative finance which may also appeal to potential franchisors. Essentially a “Mini-bond” is an unsecured, non-convertible and non-transferable bond issued from a company in return for investment. The bond acts as a type of loan whereby the investor receives regular fixed interest (usually between 6% and 8% a year) for a specified term (usually around three to five years) and the return of the initial investment amount at the end of the term. This method of funding is normally used by businesses at a relatively advanced stage.

The growth of the mini-bond industry as a means of alternative finance is predicted to reach £8 billion in 2017. The application of mini-bonds to the franchising market can be seen through a number of successful franchise specific deals. For example, one of our clients (an established chinese takeaway franchise) has recently launched a mini-bond campaign with a target of raising £1 million (at the date of writing this article they have managed to raise £554,250 of this target). Also, although not strictly a franchising operation, Chilango (a mexican restaurant chain) recently secured £2.2 million of funding via the operation of a mini-bond which will be used to fund the opening of a further three Chilango restaurants.

In addition to the benefits of Crowdfunding there are many advantages to securing investment through mini-bonds. For example, there are no restrictions on the amount that can be raised and no equity needs to be sacrificed by the business (albeit the business will have to ensure that it meets all the interest repayments to its investors!).

In short, we predict that Crowdfunding and Mini-bonds will increasingly be used as an alternative means of raising the development capital required to set-up a franchise operation and, going forward, the establishment of new franchise brands will no longer be subject to the discretion of a bank.