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Franchising in estate agency

publication date: Oct 17, 2006
author/source: Jessie Hewitson
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It is a tough market place out there – and it’s getting increasingly difficult for smaller, independent agencies to compete with the clout of bigger brands. One way some agents are tackling this problem is by joining a franchise.

The advantages of franchising are easy to understand. For budding entrepreneurs, it is a relatively cheap way of starting your own business, and offers the safety net of a support network to help you through the initial stages of setting up. As a franchisee, your business is less likely to fail than if you started on your own (according to research conducted in the beginning of 2004 by NatWest and the British Franchise Association), possibly because as an established brand, clients are attracted straight away, meaning you can hit the ground running. Or, possibly, because you have already been vetted by the franchisor as someone who is likely to succeed in business.

Not only do you gain the extra clout of joining an established brand but your running costs are reduced, with smaller management costs, marketing budgets, and often you will find reduced rates of advertising, printing, training and IT support have been negotiated on your behalf. For smaller, independent agencies who have struggled with increased regulation, red tape and customer expectation, joining a franchise can help deal with this, and also help with the logistical problems that the introduction of new legislation such as HIPs and HMOs.

The history of franchising estate agencies in this country is a relatively short one. The first franchise operation of any significance in the U.K. started only in 1981, by Winkworth. Since then, franchising has not exactly exploded, but has increased steadily and now accounts for 4% of all estate agencies.

Simon Agace, chairman of Winkworth franchising and the man responsible for introducing the concept to the U.K. after he saw its success in America, also points out that the re-sell value of an established brand may be higher than self-owned companies. “If you have a business consisting of four or five offices, it’s not easy to sell. It may not be a big enough business to attract a good price. With a franchise you have a marketable product. A U.K. franchise has become a valuable asset, between £300,000 to £1,000,000 for a Winkworth one depending on the area.”

The U.K. system operated by Winkworth, and now adopted by all British franchise companies, differs from the American system in that agents are given their own patch to operate within, but are encouraged to enter into cooperation agreements with neighbouring franchises. Agace decided to introduce the kinder “territorial” system in this country, rather than follow the “competitive” system already in place in America, “This means that a franchisee has an exclusive territory, so you run a certain area. In America they set up as many franchisees as they can in an area, and see who survives and who does not. Volume is good from the franchiser’s point of view; not so good for the franchisee.”

Winkworth will not be drawn on precise charges, but a spokesperson says on the matter: “prospective buyers need enough money to secure the correct commercial premises, which will vary depending on the position of the office (i.e. footfall), location and staffing costs. The cost of a franchise would depend on whether one chooses to do sales or lettings from the same premises; it is possible for a franchise to be exclusively one or the other, or, as many of our office are, both.’

According to Roy Glover, of GCG Consulting (Glover has set up franchises for quite a few big names, including Reeds Rains, Fisks, Harrison Murray and Pearsons), costs are typically a one-off franchise fee of £15,000 for the first office, and costs for subsequent offices are reduced substantially. On top of this there is a running “royalty” fee of 8% of any takings.

The franchise model is broadly similar in lettings and sales, only costs for lettings are slightly higher: Most charge a joining fee of around the £20,000 mark. There are some advantages to running a lettings franchise, rather than sales, as lettings doesn’t tend to follow the peaks and troughs that sales does, with some viewing it as a more predictable and stable avenue to making money.

Glover, evangelical of the benefits of a franchise, believes that, done well, it offers a win-win situation. “The world of estate agency is getting immensely complex. The training has to be increasingly comprehensive, compliance is more onerous and the marketing has to be more sophisticated these days. With a franchise you get the best of both worlds: the best business advice, cheaper back up and support in technology and marketing. A decent brand acts as a magnet.”

He points out that in the case of Reeds Rains they have a combination of franchised offices and offices that are wholly owned and not franchised. “This means they are bound to invest heavily into the research and development of the business which is fed back into the franchisee.”

These franchisors have invested a vast amount of time and effort in perfecting their franchise offer – but the perfect franchisees are not always easy to find.

“We are looking for motivated people with the commitment to make their own business work,” says Graham Harrison, CEO, Ashton Burkinshaw. “When they buy into our brand, our business style and our reputation, we can give the help, support and establishment that they need. It is a great way to step into the scary world of property - but success does not come on a plate. You have to want it, work for it and be prepared to motivate those who work with you to achieve your goals.”

There has to be commitment on both sides in all aspects: “The franchisor has a significant risk to his reputation and finances if the franchisee does not work out. The franchisee may not have such a risk to his reputation but the financial loss would be significant. All franchises cost the franchisee far more than the basic £15-20k mentioned by many franchisors in the adverts and initial information. We believe in being honest about the timescales before the cash starts to flow, the cost of office premises, staffing and advertising and our policy is working well. Commitment counts!”

There is some debate as to whether the British market will see the levels of uptake of franchising that the U.S. market has witnessed – where 80% of realtors are franchisers. Peter Bolton King, chief executive of the NAEA, says that while he can see continued growth in franchise operations, especially in a tougher market, he believes that the trend will not grow to American proportions for one reason: commission levels. “There is of course one very big difference between here and America and that is the fees they charge. Over there the fees are between 6% and 8%, so even if you are sharing them between the buying and selling agent, it is still significantly more than the 1% or 2% we get.” Over here, with less commission, you are obviously making less money per transaction, leaving less to share with a franchise operator.

The equation is a rather simple one: do you believe that the amount of money you make by buying into an established brand is more than the amount you are paying to your franchiser? During a strong market the question may be more difficult to answer, but during a deflated market, many believe the answer is a clear ‘yes’. Most of the people we spoke to believe that franchising will go up as the market goes down. In a weaker market, after all, containment of costs is all-important. The franchise model doesn’t require the same management costs, and with the risk being borne by the franchisee, costs will be managed much better.

It is the smaller, independent agents who franchisers predict will turn them, businesses who cannot see a way of moving forward without considerable investment that they don’t have, and who find they are being squeezed out of the market by more established names in the industry. Agace, who believes that the franchise market has at last gathered momentum and is on the brink of booming adds, “It is these people, who will not be able to move forward without substantial investment, who will see their profits disappear in a slowing market and who will benefit most from franchising.”