With Article 50 having been triggered in March, franchises better prepare for how Brexit will affect their business
Franchising has seemed like a fool-proof recipe for success during the past few decades. By buying into a tried and tested model, a budding franchisee can generally expect to quickly turn a profit. “But Brexit has created a lot of uncertainty,” says Dan Archer, director at Rev PR, the franchise consultancy. And with Theresa May having pulled the trigger on the UK’s divorce from the EU in March, this insecurity looks set to affect franchising on all levels for the foreseeable future.
Given that the Leave campaign argued that severing the ties with the continent would enable British businesses to rid themselves of unnecessary red tape, it’s hardly surprising that the government has begun to draw up plans for how to untangle the country from EU regulations. However, this could have some unforeseen side-effects for franchises. “UK franchising today only exists because of a piece of European legislation,” says Archer.
The law in question is an exemption for vertical agreements that can be found in EU competition law. This piece of legislation allows franchisees to enjoy the benefits of being a part of a franchise – like lower prices and access to an established supply chain – that stand-alone SMEs don’t have. In other words, it allows franchisees to be more competitive than other small-business owners. So the risk for franchises is that these regulations may be subject to change once the government starts to look into how EU regulations will be translated into UK law. “It might mean that the advantage that franchisees derive from being part of a franchise structure will be reduced and that they can’t collaborate on things like pricing anymore,” says Archer.
Another regulatory worry is how Brexit will affect the free movement of people. “Franchisees and franchisors are worried that they may not be able to recruit the right candidates,” says Glen Murphy, client relationship manager at Dennis and Turnbull, the accountancy firm. While it still remains to be seen whether or not freedom of movement will be restricted, the uncertainty around the outcome of the negotiations has already meant that sourcing talent has become more difficult, according to a report by the CIPD, the professional body for HR and people development, and Adecco Group, the recruitment agency. This talent gap is particularly prevalent in sectors that depend on foreign talent such as retail, manufacturing, health and food services. And that’s before the rules have even been changed. “If there are changes to how people are able to move freely in Europe it will obviously have a big impact on the way that franchises operate,” says Murphy.
At the moment, it’s still unclear exactly how trade between the UK and the rest of Europe will look once the divorce negotiations are finalised. For now, UK franchises can easily sell their products and services to customers around the EU without having to pay any tariffs or additional taxes. But with the prime minister having ruled out that the UK will remain a member of the single market after Brexit, these arrangements are set to change and tariffs could potentially increase. “That would be the worst-case scenario,” says Magdalena Konig, associate at Shoosmiths, the law firm. “For some businesses that make their margin on low tariffs, the result of raising them could be that whatever they’re selling won’t be commercially viable anymore.”
With the future of business seemingly in flux, it’s understandable that franchisors could be tempted to find ways to weather the Brexit storm. “More people are actually looking at including hardship clauses,” says Konig. Introducing these clauses would allow franchisors to renegotiate franchise agreements if the Brexit fallout puts their business under significant stress. However, Konig is strongly opposed to franchisors considering this strategy. “It’s a real sledgehammer approach and it’s dangerous because it creates negative feeling among potential franchisees,” she says. “It could discourage them from buying a franchise.” Instead of opting for the nuclear option, Konig suggests that franchisors should look at other ways to counteract the potential negative effects of Brexit.
Another factor that could impair franchisee recruitment is if access to funding is restricted. If there's one thing that people looking to invest in businesses hate, it is unpredictability. In light of this, it would be easy to think that budding franchisees may find it more difficult to raise funds for their enterprises. Fortunately, that doesn’t seem to be the case. “From a bank’s perspective, lending to a franchise is a really good idea because it's more likely to get its money back,” says Konig. According to conversations she’s had with bank associates, most of them aren’t going to change their approach to lending to franchisees. The reason for this is that while similar uncertainties were created during the economic downturn a few years ago, franchises still managed to grow their businesses. “That showed that franchising is recession proof,” says Konig.
Speaking of economic downturns, one of the immediate results of the referendum was that the pound fell to its lowest level in 30 years. While this has been wreaking havoc on international businesses selling in the UK, it may actually create more franchising opportunities. “A lot of US franchisors are more inclined to launch in the UK now,” says Archer. “That’s because the low pound means that relatively it's cheaper now than it was 18 months ago.” And this seems to be borne out by the evidence. For instance, Orangetheory, the US fitness franchise, announced that it has signed a master franchisee agreement to start expanding its model in the UK from April this year. And it’s not just US franchises that are looking to grow across the pond: the Canadian coffee-shop franchise Tim Hortons will open its first UK franchise in Glasgow in May this year. That being said, it’s important to remember that while costs for a foreign franchise may have gone down, the weaker pound also means that their profit margins could be smaller. “So there are pros as well as cons,” says Archer.
For UK franchisors on the other hand, Brexit could have an impact on their growth plans. “It would certainly make European expansions more difficult as they could be forced to jump through more regulatory hoops,” says Konig. One example of that is Fantastic Services, the multi-service franchise, which halted its plans to expand into the continent after the referendum. On the flipside, while British franchises could be feeling more reluctant to enter into European countries, it seems as if they may be looking to expand into other regions instead. “From speaking with my own clients, Brexit has encouraged them to look for alternative territories,” says Konig.
While we may have to wait until after the general election to find out what the Brexit negotiations will look like, it definitely seems as if whatever deal is struck will have long-lasting effects on UK franchising. “It’s a very interesting time to be alive,” concludes Konig.