What is Franchising?
Introduction
When most people hear the word ‘franchising’ they probably think of fast food restaurants such as Burger King or McDonald’s but what you might not know is that franchising offers a wide variety of business opportunities for you to become a part of.
Growing rapidly worldwide as a proven way to develop successful new business ventures, business format franchising offers a ready-made solution to the uncertainties faced by those wanting to start up a new business. Franchising is now an enormous part of the business landscape and continuing to grow at a phenomenal speed.
There are hundreds of brands that offer franchises on the global market these days and franchising has proved to be one of the most successful ways of starting a business, compared to starting out on your own from scratch. The franchise principle is simple – all companies want to grow, so the idea is to permit a license to others to help sell their established product or service. But what is a franchise, and how can you get involved? In today’s guide, we’re going to put franchising under the microscope to reveal all.
What is a franchise?
What is franchising? A franchise is a commercial operation that licenses its name, brand, and products to franchisees. It gives people – the franchisees – the opportunity to buy into a brand name and sell it in a particular market.
You don’t have to look too hard to see franchises in action. Just head down to your local high street and you will see many brand names built on the foundations of the licensing system. The likes of Subway and McDonald’s are two of the most famous examples in the UK of course but there are exciting new franchises popping up all the time such as Tutor Doctor, Apollo Blinds and DNS Accountants.
WHAT IS A FRANCHISOR AND A FRANCHISEE?
The franchise principle is simple – all companies want to grow, so the idea is to permit a license to others to help sell their established product or service. The owner of a business, otherwise know as THE FRANCHISOR – grants a licence to a local operator – known as THE FRANCHISEE – to use the franchisor’s name, product, service and association goodwill for a specific period of time. THE FRANCHISOR, in turn supplies a complete, proven concept together with their own unique ‘know-how’ thereby removing, for the franchisee, some of the uncertainties in starting a new business. See The Franchise Glossary for more terminology relating to the franchise process.
THE FRANCHISOR/FRANCHISEE RELATIONSHIP
As with all areas of business, franchises are all about relationships. The franchisee buys the rights to use the franchise name and gets all the benefits that come with it. We’ll take a closer look at those benefits later, but, in essence, it is the process of starting a business in another company’s name. As a franchisee, you pay an up-front franchise fee that gives you the right to trade under the name. These are usually time-limited, and agreements last for anything between five and ten years. The fees can be different, depending on the agreement. You might only have to pay a flat fee, or there may be more charges to meet if you become more successful. You will also have access to their business systems, marketing power, business software, and much more. You may also get exclusivity in your area, with a guarantee that no other franchise will open within a set radius.
WHAT ARE THE ADVANTAGES OF A FRANCHISE
There are two ways of looking at the pros – and cons – of a franchise business. Firstly, from the franchisee side, there are plenty of benefits that can sound enticing to anyone wishing to start up a business. Straight away, you can see that you are running at limited risk. There are none of the problems that a startup might have about exposure, for example. You will be buying into a brand name that has been around for many years; that is already a powerful pull for customers.
Not all franchisors are big names, of course. But, with many of them operating across the country – and the globe – there is a lot of potential at your disposal. There are plenty of economic advantages, too. Because your brand name buys its supplies on a vast scale, you will be able to buy them at a much lower price than an independent business. Franchises might also come with free training and development for staff so that you can hit the ground running. Again, this is a significant saving for any business.
Training schemes also mean that franchising is a great way for anyone who lacks experience. As long as you show enough nous, you will get all the training you need. Franchisees may also find it easier to raise money from the banks. Financial institutions focus a lot on risk, and if you are part of a big brand name, they will see that as far less risky when it comes to loan decisions. It’s one area where you have a significant advantage over independent businesses, which banks tend to see as much more of a risk.
Finance and capital investment are key elements to consider when buying into a franchise business so be sure to do your due diligence. Start by taking a look at our guides to Franchise Finance to understand more about what’s involved. There are enormous benefits for the franchisor, too, of course. For a start, they get to expand their business and brand across all kinds of territories. And, it is a much cheaper way of growing their business than the traditional bricks and mortar expansion. Sure, they contribute towards some of the costs. But, with the franchise fee in place – and potential to make more money if the business is a success – it’s a great way of lowering financial risk.
THE COSTS OF FRANCHISING
Of course, the costs of buying into a franchise can vary. But, as the old saying goes, you will have to spend money to make money. You can expect to invest as little as £10,000 for some smaller franchise opportunities. That figure could be even less for less-established names, or home-based franchise businesses. You could also end up paying six-figure sums – amounts up to £5 million are not as uncommon as you might think. Again, hotels are a good example of this in action. However, as a rough guide, the majority of franchise licenses can be bought for around £50,000-£250,000.
There are also professional fees to consider, that fall outside of your franchise costs. You might need to pay for legal fees, or you may have to buy your own property to work from. You’ll have the usual ongoing expenses to think about, too. Wages, city-wide promotions, supplies and maintenance might come out of your working budget. You’ll have royalties to pay, too – anything from 4-7% of your revenue might go back to the host. So, it’s important that you can prove your financial viability before applying to become a franchisee.
If you want to get a serious conversation started with a franchisor, you should be able to support your business, for a minimum of a year, off your own back. All new businesses – even franchises – can take a year or so to get into the black. You will have to prove you can support yourself over this time. Whether this is through your personal net worth, or your ability to borrow relies heavily on the franchisor. All in all, it can be an expensive business getting into franchising. It certainly isn’t a ‘cheap’ alternative to starting an independent brand.
However, given the potential and reduction of risk, many franchisees believe it is worth every penny. There are not many business opportunities that will give you as good estimates of your chance of success than you get with a franchise. Before committing yourself to a franchise there is more than just the financial aspect to consider so be sure to have fully done your research before taking that leap.
WHO IS IN CONTROL?
Each franchise outlet is owned and operated by the franchisee and is the franchisee’s very own business. However, the franchisor retains control over the way in which the products and services are marketed and sold. To make a franchise successful there needs to be a solid partnership, combing the franchisee’s talents with the franchisor’s experience and knowledge. Any franchise agreement will contain a details of the obligations the franchisor expects of the franchisee and a detailed breakdown of the commitments the franchisor is making to the franchisee. Ultimately it is the franchisors business so the direction of the business and the obligations and expectations are set by them.
CAN I FRANCHISE MY BUSINESS?
If your question is can I franchise my business? We can help you. We have helpful, friendly franchise consultants across the UK who will be happy to discuss franchising with you whatever stage you are at. From helping you gain a basic understanding of franchising to whether your business is right for franchising you can speak to one of our advisors on an initial free, no obligation basis.If you are reading this you have asked yourself the question “What is franchising?” On this page you’ll find plenty of useful information and advice on the subject. But perhaps you should be asking “How does franchising relate to me?” You may know in theory what franchising is, but can it help you achieve your business and personal goals?
