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Great Scot: why franchising is taking off north of the border

Written by Alex Littner on Tuesday, 12 July 2016. Posted in Analysis

Franchising is beginning to amass more of a following in fair Caledonia. But what will it take for Scotland to truly embrace the model?

Great Scot: why franchising is taking off north of the border

Scotland has a strong tradition of entrepreneurship. Scots invented the television, telephone and radar technology, while the country also boasts a whole host of big business names from steel magnate Andrew Carnegie to, more recently, Michelle Mone and Tom Hunter. But one type of business ownership has not always proved popular north of the border, with the number of franchises remaining low compared to much of the UK. Fortunately this is finally beginning to change. So what is now driving Scottish people towards franchises? Where is the growth and how is it funded? And how might Scotland’s franchising scene look in the future?

From small beginnings

Currently, Scotland has one of the lowest rates of franchise ownership in Britain, with just 5% of the UK’s units based in the country, according to the latest figures from the bfa. Only Wales and Northern Ireland fall lower in the rankings. However, the franchising landscape is shifting in Scotland – and quickly. 

Franchising contributed £800m to the Scottish economy last year, a 14% increase over five years. And the bfa predicts this figure will hit the £1bn mark by 2020, reflecting a growing appetite for franchise systems among the Scottish population. There are more than 2,200 franchises in the country at present, employing about 32,000 people and representing more than 500 brands. And experts suggest the relative immaturity of the franchising industry in Scotland represents a tremendous growth opportunity – one that many enterprising Scots are beginning to realise. 

This is one of the reasons the bfa held Scottish Franchise Week from May 16 to 20, the 12th such event celebrating the country’s existing franchising successes, as well as encouraging others to invest. But the question remains: why is franchising only now flourishing so far north? And what is the state of the Scottish business ecosystem?

Geography is certainly a factor. Evidence shows that franchises tend to cluster in urban areas. While Scotland has significant conurbations in the south, it also has one of the lowest population densities in Europe, with many inhabitants scattered between villages, isolated towns and islands. On the upside, the country’s birth rate is now growing and it has increasing levels of inward migration – all good news for the economy. However, the economic effects of fiscal devolution – Scotland recently gained control over its own income tax as part of its deal with Westminster after 2014’s Scottish independence referendum – have yet to be seen. 

A mood of optimism gripped the country after the success of the Scottish National Party in the 2015 general election but falling oil and gas prices have dented business confidence, with small firms in Scotland recently found to be at their lowest ebb for three years. Add to this a further possible vote on independence following the referendum where Britain opted to leave the European Union and it’s understandable why Scottish businesses are a bit uncertain about the future.

The security of franchising

So the economic backdrop in Scotland is a mixed picture. But these variables may explain why those who want to be their own boss are considering more secure forms of enterprise ownership than launching a startup. When many Scottish small businesses closed their doors in recent years, franchising largely weathered the storm. At the worst points of the downturn, Scottish franchise numbers stumbled a little but not dramatically – and they’ve since made an impressive recovery. 

It’s no surprise, since everyone knows franchises have a lower failure rate than independent, standalone businesses. It may be linked to the backing given by the parent franchisor, the fact that owners are operating a tried and tested business formula and because a recognised brand attracts consumers who prefer giving their money and custom to a known entity. Whatever the reasons, the franchising formula appears to be working for many Scots and it’s attracting more who want their own operation with minimal risk.

Growth and how it’s funded

Scotland has followed general UK trends in franchising, with fast-food operations, as well as hotel and catering businesses on the rise. Personal services are also proving popular. In particular, one Glasgow-based franchising expert labelled last year ‘The Year of the Dog’ due to a rush of interest in dog-walking, grooming and kennelling franchises. He put this growth down to the low barriers to entry: minimal investment costs, few overheads and the ability of franchisees to work from home without premises. With about one in four Scots owning a dog, it’s not surprising such businesses are proving successful. 

But when it comes to funding, most Scottish entrepreneurs remain conservative in their behaviour. Information doesn’t exist detailing franchising finance north of the border but the Scottish Parliament has said that fewer than one in three Scottish SMEs has heard of alternative funders, such as asset finance, crowdfunding or short-term providers operating online. Most still depend on friends, family, personal funds or bank loans and overdrafts for business capital. Alternative-finance providers clearly have work to do to raise awareness among Scotland’s business community of the range of funding options available.

Points of difference

It’s also worth noting Scotland has its own legal system and, while business matters are similar to the rest of the UK, there are areas where things differ. For example, franchise agreements made on one side of the border may not be enforceable on the other. Say an English franchise with an agreement drafted under English law recruits a Scottish-based franchisee. It’s necessary for both parties to check that there are no acts of parliament – either from Westminster or Holyrood – that do not apply in the other country. These variations only look set to increase now Scotland has powers to collect its own taxes, so the help of an experienced franchise lawyer with knowledge of the Scottish law is vital before any agreements are signed. Very often they will only need to draft a document known as a Scottish Addendum to attach to the franchise agreement but it is a necessary step in the process.

Equally, if a franchise operates in a sector requiring membership of a governing body – for example, a care-home franchise or education-related operation – Scotland and England often have different regulators, so franchise agreements must be amended accordingly. And, finally, Scottish law is very different when it comes to property issues, so any lease agreement must be put in front of a Scottish property expert before anything is finalised between franchisor and franchisee. 

The growth in Scottish franchising is genuinely exciting and, with the country’s already rich and diverse economy, proud business heritage and enterprising population, it has tremendous potential. Franchising has a great track record of creating wealth and employment elsewhere in the UK and with the right funding, business support and a healthy dose of ambition, Scotland can follow suit. 

About the Author

Alex Littner

Alex Littner

Littner certainly has pedigree when it comes to finance. Currently managing director at Boost Capital, a business funding company, he previously spent eight years at American Express working on its Small Business Card Portfolio across EMEA, Asia-Pacific, Latin America and the Caribbean. Away from work, Littner is a family and football man: he has a two-year-old daughter and an Arsenal season ticket.

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