What is a franchise?

Looking to start a franchise? Learn how buying and running a franchise can be the perfect way to become your own boss.

A franchise is a business in which an established business owner – known as the ‘franchisor’ – sells the rights to use their company name, trademarks and business model to independent operators, called ‘franchisees’. This is usually in return for a one-off franchise fee, plus an ongoing percentage of sales revenue and other fees.

Licensing other businesses to sell products and services allows companies to expand quickly without the risk of a major capital outlay. For individuals, a franchise offers a great way to start running your own business without having to start from scratch. Not only do you have the reassurance of a proven business plan and products or services, you’ve the backing of a team of experienced people who can help you achieve your business goals. For this reason, franchises have a higher success rate than start-ups businesses.

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Franchise opportunities exist across a wide range of businesses. Examples of franchises include fast food restaurants, coffee shops, car dealerships, house cleaning services and estate agencies.

Franchise types explained

There are three main types of franchise arrangements:

Business format franchise –  This is the most popular type of franchise. An established business (franchisor) allows another business (the franchisee) to trade using their branding and business model in exchange for a fee and ongoing royalties. The franchisee must run the franchise according to the parent company’s guidelines and rules but in return gets ongoing support such as help with store location, design and layout; product and market research; staff recruiting and training; and preferred supplies contacts.

Product franchise –  Common in the fast food and car industries, this type of franchise is essentially a supplier/dealer relationship. It involves the franchisee exclusively selling the products of the franchisor. Ongoing franchisor support may include provides national marketing and advertising campaigns, logos and trademarks.

Manufacturing franchise –  A manufacturing franchise is licensed to produce and sell goods and services using the franchisor’s name and trademark.

Why run a franchise business?

There are lots of advantages in starting a franchise but the prime one is that the risk of your business failing is much lower than if you started a company from scratch. With a franchise, you can enjoy the independence of small business ownership while working with a tried and proven business idea. You’ll have the backing and support of a parent company with an established reputation, proven management and work practices, and you’ll benefit from any advertising or marketing it carries out. You don’t always need related business experience to run a franchise – training is often provided by franchisors. And finally, securing funding for a franchise is often easier than starting your own business.

What are the drawbacks to franchises?

Franchises can be expensive. Not only must you pay a purchase fee up front, there are on-going fees and royalties involved, which can restrict the amount of profit you’re able to make in the long term. Also franchise agreements can be very restrictive – dictating how the business must be run including where and how you operate, the products you sell and the suppliers you use. As such, there’s little room for creative control, so this type of business may not suit entrepreneurial types.

In most cases, you’ll be part of a network of franchises, so run the risk that anything another franchise does to damage the brand may have a knock-on effect on your business too. Franchise agreements run for a set period of time and franchisors do not have to renew an agreement at the end of the term – and there may be restrictions when it comes to selling your business.

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