Some of the world’s most successful companies are franchises and have become household names across the globe. Just look at McDonalds, Burger King, and KFC. They have thousands of branches in numerous countries, and their business model allows for exponential growth.
According to British Franchising Association figures the franchise sector contributes over £19 billion to the UK economy and employs in excess of 700,000 people. Franchising has continued to grow despite cyclical economic downturns, proving to be an incredibly resilient business structure.
Before investing in or starting up any sort of franchise, it is very important to understand how the franchise business model operates. This article outlines some of the basics and need-to-know facts about franchises and the franchise system.
What is a simple franchise definition?
In the most simple form of the word, a franchise is a right or a license that is sold by the franchisor to the franchisee. The franchisor is the person who owns the company name, and the franchisee is an individual looking to buy the right to set up a branch of the company and trade under the company name.
What are the origins of franchises?
One of the very first instances of franchises can be traced back to Isaac Singer, who started mass-producing Singer sewing machines in the 1860s. He began with creating repair and servicing licenses for local merchants and then created licenses for salesmen too. And thus, a franchising revolution was born. It took a while for franchising to catch on to the mainstream, but as soon as massive companies such as Coca Cola and Pepsi started using the franchising structure, there was no going back!
Where catering and cars once ruled the franchising arena, these days, there are thousands of franchises that span across a multitude of different industries, including everything from pet grooming to technology to recruitment agencies. There are many benefits to both the franchisee and franchisor that has caused franchise popularity to boom.
There are currently over 1,000 franchise brands in the UK today!
What is a franchise in business?
A business franchise can be looked at as a company that has multiple branches across multiple locations. Many guidelines determine how the business is managed, but business franchises are most definitely the most popular types of franchises. A franchise is a business partnership, and it is often a great alternative for people who want to own a business but don’t have the innovative ideas of their own.
There are two other types of franchises, namely:
- Product – A product franchise agreement allows the franchisee to sell a specific product using the franchisor’s logo, trademark and brand name. This product could be sold online or within a physical store.
- Manufacturing – A manufacturing franchise agreement allows the franchisee to manufacture and sell the franchisor’s products while using their logo, brand name etc.
There are cases in which franchise agreements cover all types of franchises, but for the most part, it is business franchises that are the most popular and are used in franchises such as McDonalds.
What is a franchise, and how does it work?
The way in which a business franchise is structured usually differs slightly from company to company but it is essentially a joint venture between a franchisor and franchisee. However, the franchisor will not be involved in the day-to-day running of the franchisee’s business.
There will be the initial upfront fee of purchasing the license, and the franchisor may often receive payment for providing equipment, training and business advisory services to get up and running. From then on, the franchisee will pay regular ongoing franchise fees and royalties to the franchisor as outlined in the agreement.
The franchise agreement will list the partnership details, including any ongoing fees and the period of time that the contract is valid for (usually 5 to 20 years with the option to renew should everything go according to plan). The franchisee will be required to adhere to very strict guidelines laid down by the franchisor that will determine everything from opening hours to branding and employee uniforms. This is so that a cohesive, coherent and consistent approach is maintained across all branches.
If the franchisee does not stick to these guidelines or franchise rules, they may be in danger of breaching the contract and ultimately being forced to give up the franchise. The contract is most times completely confidential as trade secrets, business processes and other confidential information about the franchisor’s business may be included in the contract. As a franchisee, you will not be able to share this information with anyone.
What are some benefits to owning a franchise
There are many benefits to making a franchise investment and owning a business franchise. While the franchisor will often be responsible for providing training and ongoing support, there are many other advantages of these types of franchisor licenses that make them a golden opportunity for prospective franchisees. Some advantages include:
- Receive guidance and business support from the franchisor and other successful business people
- Have an already well-known, established business and instant brand recognition
- You don’t need to come up with a business idea, or business plan or marketing strategy of your own
- Access already market-tested products and services
- Start your business with an already-established customer base
- Acquiring financing for a franchise is generally easier than when trying to get funding to start your own business
- Enjoy business relationships that the franchisor has already established
- There are already intricate support and security systems in place should you need them
- The opportunity to be your own boss and have realistic estimated financial performance expectations
What are some disadvantages to running a franchise
Running a franchise is very different to owning your own business, and some of the disadvantages that franchise owners may experience include:
- You have very little to no control over business operations as the entire structure, business format and operating methods will have already been laid out.
- The request to make necessary changes can be a time-consuming procedure.
- You are tied to the suppliers that the franchisor has stipulated.
- Your customers will most likely be location-based. If another branch opened in a nearby suburb, you might very well lose a large portion of your customers.
- You run the risk of other franchisees ruining the reputation of your business by their mistakes.
- There are heavy start-up costs, including the franchise fee, and the franchisor usually takes an ongoing percentage of sales revenue and other royalties and franchisor fees.
- It can be exceptionally difficult, if not impossible, to get out of a franchise agreement should you find it unsatisfactory.
Is owning a franchise right for you?
As you can tell by the previously listed advantages and disadvantages, there are many pros and cons to owning a franchise, and it certainly isn’t a one-stop solution for budding business owners.
Creative, innovative entrepreneurs usually shy away from franchises as they aren’t able to implement their own ideas and incentives and have very little control over how the business is run. Franchisees are often left feeling like glorified managers, following strict guidelines, instead of the independent business owners they once imagined themselves to be.
If you do your research correctly and find a franchise agreement that is fair and benefits both parties, it could be a very good opportunity for you. Be sure to always do your research and know exactly what you’re signing up for, but with the right choice, you could benefit from a successful franchisor’s brand.
What are the world’s most successful franchises?
The top 10 franchises in the world currently include:
- McDonald’s
- KFC
- Burger King
- 7- Eleven
- Domino’s
- Ace Hardware Corporation
- Century 21
- Papa John’s
- Taco Bell
- Pizza Hut
While most of these franchises are very well-known household names, many of them started with very humble beginnings and probably much less capital than you would expect. While the majority are fast food-orientated franchises, this is not to say that there are not other excellent non-food-related franchise opportunities out there.
How do I buy a franchise
Buying a franchise is not as easy as one may think. Franchisors want to be very confident in the person that they share some of their company secrets with. After all, a failed branch could reflect badly on the company as a whole.
In order to apply to own a franchise in the UK, you can search through listings on sites such as Franchise Direct. Franchise opportunities are also very often spread through word of mouth, so knowing people within the business and franchise communities is often very helpful.
The screening process for purchasing a franchise includes a detailed application, an interview, and submitting your financial information. In order to increase your chances of getting the opportunity to own a franchise, you’ll want to do your research when it comes to the company and show a true interest and passion for what they do. The more information you have, the better. Also, ensure that the company is a franchise that you really want to invest in. You’ll be playing by their rules for years to come, and you don’t want to sign yourself into an agreement that isn’t in line with your goals and your lifestyle. There are actually many franchise opportunities out there, and you are more likely to be successful if you apply for a franchise that suits you and your previous experience, interest and knowledge.
While it is not a requirement to have experience as a franchisee, most franchisors will want to choose franchisees that have studied business or know business concepts. Personality may also play a significant role in the success of your interview. As a franchisee, you will be working with a fairly large team, and franchisors often look for a personality type that the team will get on with.
Once you have been accepted, you’ll need to sign the franchise agreement that will outline everything you need to know in great detail. Contracts usually differ greatly from franchise to franchise. Some may allow you to work alongside a partner, while others may not.
This binding agreement should not be taken lightly, and you should get advice from a lawyer or legal representative should you not understand anything fully.
Once you have made an effort to understand the contract and sign it fully, you’ll need to learn as much as you can about the company and what is expected of you. The franchisor should assist you with training, inventory, suppliers etc.
Pros & cons of being a franchisor
For most of this article, we have looked at franchises through the lens of the franchisee, but what about being a franchisor? Being a franchisor is a completely different role altogether. Instead of following the rules, you get to make them. And you get to see others carry out your business plan, possibly across the world! Some of the pros associated with being a franchisor include:
- The opportunity to greatly expand your client base
- You’ll be able to scale your business to a bigger scale than you’d ever be able to without franchising
- Eventually reach an international target market through franchisees
- Create jobs for thousands of people
- Create a passive income for yourself where you can eventually sit back, relax, and let your franchisees make money for you
But being a franchisor can also be exceptionally stressful. Some of the cons include:
- Intensive screening processes to find the right franchisees
- Putting your trust in franchisees to uphold the reputation of your business and keep trade secrets to themselves
- It often takes many years for your business to be successful enough to become a franchise and a franchise that franchisees would like to invest in at that
- As you scale up, you will be dealing with more and more people, so it’s essential to have a good human resources team in place.
Is buying a franchise better than starting my own business?
Starting a business in the UK is actually very straightforward, and you can easily start a business on a small scale and allow it to grow. If you want to express your own business ideas and innovations, then starting your own business is probably better for you.
Buying a franchise means that you don’t necessarily need excessive business knowledge as everything will be laid out in front of you, and you’ll already have a customer base that trusts the established brand. The franchisee usually pays the franchisor fees associated with buying a franchise and these are often worth the investment as you should start making money fairly quickly, depending on your branch’s location.
It’s impossible to say whether starting a new business is better than buying a franchise, as each offers unique opportunities and challenges. Franchises provide businesses the chance to use a proven formula and track record that may increase their chances of success but limit their opportunity for innovation.
Since the last recession, the franchise industry has grown around 20%, proving that this industry is not going anywhere. If you’re looking for a great business opportunity that lays out everything you need to know, franchising could be for you!
