What is a Franchise?

A franchise is a business model in which a franchisor licences business assets to franchisees. A franchise agreement generally allows the franchise business the right to use the franchisor’s brand. It may also cover access to products/suppliers, operational processes and general business support.

Different types of franchise

Within the franchise business model there are several different subtypes.

These include:

Business format franchise

The business format franchise model is what most people think about when they picture a franchise. Here, the franchisor is a ubiquitous and trusted brand that lends its image to smaller companies that want to become franchisees. This means that the franchisee must not only use the franchisor’s branding but must strictly adhere to its business model and operational practices. Franchisees will also receive ongoing support in terms of sourcing products, store layout, marketing, recruitment and training practices. In return for using the brand and receiving ongoing support, franchisees will usually pay royalties to the franchisor as well as upfront fees.

Some of the most common examples of the business format franchise in the UK include petrol stations, corner shops and convenience stores like Spar, Londis, One-Stop and CostCutter.

Product franchise

Product franchises are also very common in the UK. They are often very similar to business format franchises except that the key selling point is the franchisor’s unique product range. Essentially, the franchisor acts as a supplier and the franchisee acts as that supplier’s distributor, acting as the face of the brand for customers. Again, the franchisor will provide branding, training and support with the expectation that the franchisee will pay royalties and follow the brand’s operational model.

This is commonly seen in car dealerships where a franchisee sells the franchisor’s vehicles. It is also common in fast food chains such as Subway, KFC and Burger King.

Manufacturing franchise

In a manufacturing franchise, the franchisor gives a franchisee manufacturer permission to manufacture and distribute their product under their brand and trademark.

There are many areas in which this is common from fashion to soft drinks to vehicle manufacture.

Examples of franchises

Many of the world’s most famous businesses are run on the franchise business model. In fact, the franchise model is very well suited to geographical expansion, including international expansion.

For example, in the UK franchise sector, many of the biggest names are brands that have moved in from overseas. They include the likes of McDonald’s, Dominos, Pizza Hut, KFC and Starbucks all of which started in the U.S.

The convenience sector is dominated by franchises. In addition to fast-food outlets, many local supermarkets are franchises. These included Spar, Londis, Budgens, Costcutter and Nisa. There are also franchise opportunities at the more premium end of retail such as jeweller Swarovski.

In fact, it’s probably fair to say that there are franchise opportunities available in literally every business sector. What’s more, if there is a business sector without any current franchise opportunities then there’s probably scope to create them.

The benefits of franchises for franchisors

For franchisors creating a franchise agreement is a way for them to scale up their company with minimal investment risk. Instead of having to absorb scale-up costs, the franchisor essentially creates a blueprint for franchisees to replicate their business in new locations.

The franchisor still retains overall control of the business, in particular the brand assets. They may also take some level of responsibility for business operations. This will, however, typically be at a high level. For example, a franchisor might control the overall supplier network but leave the franchisees to choose and order their own supplies.

The drawbacks of franchises for franchisors

Creating a franchise does still require an upfront investment. In particular, most prospective franchisors are likely to need professional help to navigate franchise law. Franchisors must have a robust franchise agreement to protect them from intellectual-property theft. From a franchisor’s perspective, this is the only real potential risk of operating a franchise.

The benefit of franchises for franchisees

For franchisees, the franchise model can provide an opportunity to run your own business (and be your own boss) with minimal risk. Signing up for a franchise allows entrepreneurs to bypass the tricky start-up stage. It can therefore provide a shorter and smoother path to profitability.

Going down the franchise route may be particularly helpful for people with limited experience in running a business themselves. For example, people in employment may well have skills they can transfer. They will, however, still need to adapt to the realities of entrepreneurship. Becoming a franchisee can help to flatten this learning curve somewhat.

From a franchisee’s perspective, a lot of the benefits of franchise businesses often stem from the ability to use the brand. This is particularly relevant in the convenience sector, hence the predominance of franchise businesses in this area.

Convenience businesses tend to serve customers who prioritise speed. These customers tend to value familiarity as it makes choices easier (and hence quicker).

The drawbacks of franchises for franchisees

For franchisees, there are two main potential drawbacks of entering into a franchise agreement. Firstly, the upfront investment required can be much higher than for equivalent start-ups. Ongoing costs may also be higher as franchisors may require franchisees to buy goods and services directly from them or their approved suppliers.

Secondly, franchisees have limited scope for making their own decisions. This can actually be a benefit for new entrepreneurs. As entrepreneurs gain experience, however, it can become a drawback. It may also prevent franchisees from optimising their business for local conditions.

How to start a franchise

Now that we have looked at the potential benefits and caveats of becoming a franchisee, let’s take a look at how to get started.

Step 1 - Research

Research what franchise opportunities are available to you. There are a number of things you should factor in when choosing a franchise, including:

• your budget

• your skills, experience and passions

• the level of autonomy and support you feel you need

Step 2 - Develop a business plan

While franchisees are given very specific guidelines by the franchisors, brands still expect to see a clear business plan to demonstrate that the franchisee will be a reliable ambassador for the brand. Take a look at our guide to writing a business plan.

Step 3 - Secure funding

You may need to secure the business capital necessary to become a franchisee. Presenting your business plan to a lender and explaining how you will satisfy the franchisor’s criteria will help you to build a case for funding.

Step 4 - Get legal advice

Franchisors will provide franchisees with a franchise agreement by which both parties are bound. It is important to go over this with a legal professional to ensure that you understand your duties and obligations

Step 5 - Build your skills

In anticipation of becoming a franchisee, it may be advisable to refresh and develop your skills to prepare you for franchise operations. For instance, you may need to take classes on customer service, digital marketing or bookkeeping.

Step 6 - Register as self-employed

If you have not already, you will need to register as self-employed with HMRC as soon as you start operating. The latest deadline to do this is on the 5th of October in the year after you start trading.

Step 7 - Open a business bank account

Your new business will need its own bank account. Many banks and franchisors will not allow franchisees to use their own accounts for business transactions.

Franchise FAQs

Are franchises a good idea for my first business?

Because they provide access to a trusted brand name and robust business support, franchises can be a good idea for first-time business owners. However, those who want total autonomy may find working within the franchise model constrictive.

Are franchises high-risk?

Franchises are generally lower-risk than startups with higher success rates. However, they do have their own risks. Royalties paid to franchises can impact on cash flow and while franchise branding is generally advantageous, anything that damages the reputation of the brand could harm your business.

What kinds of businesses are commonly franchised?

Wherever your skills, experiences and passions lie there is a good chance that you can find a franchise in the appropriate industry. Franchises are common in the following:

• business support services

• clothing and fashion retail

• convenience retail

• fast food

• hair salons

• maintenance and cleaning services

• tool hire