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What is a Business Franchise?

25/05/2023

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Not every small business is about unique, show-stopping ideas. Though the concept of the entrepreneur is underpinned by a ‘Eureka!’ moment, that’s simply not always the case in reality. If you want to give business ownership a go but don’t have an idea that’s ready to market, or if you just want to operate within a safety net where support and reputation are already built-in, a franchise could be a great choice.

What is a Business Franchise?

Simply put, a franchise agreement is when a larger company ‘leases’ its name, products, trademarks and services to a third party who then offers these to the public in return for a cut of the profit. While this may seem like the brand is employing a person as a location manager, the responsibility of customer service, financial management and product management is all down to the franchisee.

It is a contractual agreement at the end of the day. Franchising is already a common way to expand businesses in North America, and is growing in popularity in the UK. The length of franchise licences varies, but there are usually always options to renew.

Franchisee vs Franchisor

A franchising business, also known as a ‘franchisor’, is the original owner of the brand, services and products in which a ‘franchisee’ can invest. This franchisee can be an individual or a business entity in its own right. By investing in the franchisor, the franchisee can trade under their name and offer the same products and services. With the support, experience and proven business experience of the brand behind them, franchisees can start up their own branch of the franchisor’s business in no time at all.

Franchising allows you to enjoy owning a retail site, having your own team and running a branch of a business, but it also restricts you to the broader processes of the brand you’ve bought into. There are many other pros and cons to consider before taking the plunge as a franchisee.

Franchise Basics and Regulations

Before you embark on your franchise journey, you may wonder what legal and regulatory hurdles you’ll need to navigate in order to become a franchisee.

Believe it or not, there are currently no legislative rules or guidelines around franchise operations. This is because the British Franchise Association (BFA) has a comprehensive set of ethical standards that ensures fair conditions for franchisees, their employees and their customers. While franchisees are not legally obliged to register with the BFA, it is highly recommended as the body provides recognition, representation, support, training, exposure and promotion for franchisees as well as effectively self-regulating British franchise operations.

While franchise contracts vary from one franchisor to another, the franchisee essentially leases the franchise from the franchisor. Franchise agreements in the UK usually last for 5 years.

Franchise vs. Startup

It’s easy to see why nascent and aspiring entrepreneurs may be drawn to the franchise model. As well as benefiting from association with a proven brand, franchisees also receive a level of operational, branding and marketing support that many startup owners would envy. At the same time, there is very little room for creativity or individual expression when running a franchise. Franchisees have to represent the franchisor’s brand rather than building their own, which may be frustrating for those who wish to express themselves through their business.

While a startup allows entrepreneurs to manage operations, marketing and branding on their own terms, they also do so at greater risk. In economically tumultuous times, consumers may be more inclined to give their money to brands they know and trust rather than taking a chance on a new business, even if it could better meet their needs.

In order to determine whether your entrepreneurial urge would be better served by a franchise or startup, it’s important to weigh the pros and cons of franchising.

Pros and Cons of Franchising

There are plenty of positives and negatives to consider when starting out as a franchisee. However, if starting a small business from scratch isn’t your forte, your strengths may lie in a franchise business instead. Here’s what you need to think about before moving forward and looking into franchise opportunities:

Pros:

  • You’re buying into a proven brand. This is especially true if you choose to work with some of the world’s biggest franchisors like McDonald’s and Subway. You get the backing and support from a brand whose track record has been profitable, and whose future prospects look bright. For many, this is reason enough to choose the path of a franchisee
  • Proven concepts. In the same way as above, you don’t need to worry about coming up with a winning concept — it’s all done for you. Any sizeable future innovations will also come from the franchisor, which alleviates the pressure to think creatively on your feet. So long as you have the motivation and the energy to succeed, it’s worth looking into franchise opportunities
  • Quick growth. With a brand like Subway for example, you can bet you’ll have new and return customers visiting your store throughout the entire day. With a good brand and a good location, growing a franchise can take far less time than an independent company.
  • Support. The level of support on offer varies from business to business, but there’s usually plenty of assistance (financial and otherwise) to get your franchise off the ground — it’s in the franchisor’s interest at the end of the day. Some businesses will have you complete a crash course, covering everything from book-keeping to running social media, whilst others may offer 24-hour support or your very own personal franchise coach. In any case, compared to starting an independent business on your own, a franchise most definitely gives you a guiding hand and plenty of experience-based knowledge to take advantage of
  • Financial help. As well as the helpful funds your franchisor may offer you, banks tend to favour franchisees over startups who don’t have the backing of a big brand. This means even if you need to take out a loan to get things running, the chances of having your request granted are much higher
  • Location, location, location. Finding and securing a location is one of the biggest initial costs when starting a business. Many an entrepreneur has found themselves settling for less than their dream location because of costs and other logistics. With a franchisor behind you, you have the experience and funds to secure a prime-location branch on the high street or local shopping centre. Franchisors will think very carefully about where to place their next venture.

Cons:

  • Their way or the highway. Brands have their own way of doing things — with lots of compulsory documentation, training and guidance to get you on the same page. If you do anything beyond the business model of your franchisor, you could face a penalty or have your franchisee licence cancelled. With this in mind, it’s unlikely that creative individuals will be happy working so rigidly to someone else’s concept. If you want room to stretch your entrepreneurial wings, think carefully before jumping in
  • It can be hard work. This is where franchising really doesn’t differ from running your own business. Though your franchisor will help out, train you up and secure you a great location, you’ll need to work the long hours, manage your team and develop strategies to make it a roaring success. Unlike an independent business, you may also feel like you constantly need to be working towards goals and figures to appease your franchising partner. While targets are necessary even when running your own business, having a franchisor involved can add to the pressure
  • You’re a link in a chain. And there’s no telling who could break that chain. Even with solid backing behind you, nobody can rule out the possibility that a franchisor will stumble upon hard times. No matter how hard you’ve worked, if the brand fails, so does your franchise. As with every business opportunity, there’s risk involved
  • Setup fees. Franchisors will ask you for an initial investment to cover the cost of setting up. This ranges from the lower thousands to the hundreds of thousands. After this is sorted, you’re then required to pay royalty fees in full and on time to your franchisor. This setup isn’t going to work in the long term if you feel uncomfortable passing your start-up money and earnings to a business that isn’t your own.

Famous Franchises

Some of the UK’s most recognised and loved brands operate through a franchise network, acting as a springboard for UK entrepreneurs by making them franchisees. To name a few of these franchise-led companies:

Square Point of Sale

Square’s bespoke POS system is ideal for multi-location franchise systems. Our electronic point of sale helps people run businesses with multiple locations easily. Manage sales, payments, records, inventory and more, simply and effectively, with no training required.
With Square Dashboard you can create unique business profiles for each location with specific business hours and individual bank accounts or tags to differentiate transfers. You can manage devices by location, too.

As your franchise expands, you can add tools that can help you take your next steps. Manage team members and add devices and locations, with only a couple of taps.

Franchise FAQs

What are the risks of franchises?

Although franchises are generally less risky than startups, they do contain their own inherent risks. For instance, even modestly-sized franchises have hefty upfront fees that may be similar to startup costs. If these were procured through business borrowing, franchisees will need to factor the principal and interest repayments into their cash flow projections. Moreover, franchisees must pay ongoing royalty fees to their franchisors which may place a further squeeze on cash flow.

Though franchises account for some of the best-known and most trusted brands in the UK, there are nonetheless less ubiquitous and reputable franchisors out there. And franchisees may find themselves hampered by bad managerial practices or duped by inaccurate or misleading information.

What is a business franchise fee?

A business franchise fee, also known as a licensing fee, is the upfront cost that a new franchisee pays to a franchisor in order to become a part of their franchise group. This is separate to the ongoing royalties that franchisees pay to their franchisors throughout their business operations.

What are the different types of business franchises?

Franchises are broadly divided into three categories.

The first is business format franchises. This is where a franchisee adopts the franchise’s branding and its business practices. Corner shops and petrol stations are common examples of this.

The second is product franchises such as McDonalds, KFC, Greggs and Subway, where a franchisee gains access to a franchisor’s unique product range.

The third is manufacturing franchises where a franchisee gains permission to manufacture and distribute a franchisor’s product. This happens with many consumer products in the UK from vehicles to soft drinks.

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