A Beginnerís Guide to Franchising

11/05/2018 08:00 | Start a business

Beginner's guide to franchising

If youíre new to franchising, there can be a lot to learn before youíre ready to take your first steps and begin thinking of buying a franchise. However, once youíve got your head around the basics and understand why itís a popular business model, thereís not much stopping you from pursuing the dream of managing your own business.

Here, we take a look at what franchising is, how it works, and what advantages the franchise system has over other types of business. If you want your first glimpse into the world of franchising or just need to brush up on your franchising basics, continue reading our beginners guide to franchising to find out everything you need to know.

What is franchising?

Franchising is a versatile concept that can manifest itself in various ways. However, at its heart, franchising is a business relationship - or agreement - between two parties. These two parties are the franchisor and the franchisee. Generally, the franchisor is an individual or group of people who own a company. The franchisee is an individual or group of people who want to open a business using the name and products/services of the franchisorís company.

Franchise agreement

To do this, the two parties sign a franchise agreement. This document defines the franchisor/franchisee relationship by establishing what each party has to offer and what they expect from each other. Though franchise agreements can vary wildly from franchise to franchise, they typically set out the terms of the relationship by tackling several issues. These include, but are not limited to;

  • The ability to use and trade under the franchisorís name and branding.
  • The level of support offered by the franchisor to the franchisee. Support can include training programmes, marketing materials, and business advice, amongst other things.
  • What products and services the franchisee is to use and how they are to be sourced. Usually, franchisees source the vast majority of their stock or materials through the franchisor.
  • How the franchisee will conduct business. While some franchise agreements stipulate that the franchisee has to follow a particular business model and particular business practices, others allow them to trade in any way they deem fit.
  • Where the franchisee is located and in which geographical area they are allowed to trade.
  • The financial arrangements. To benefit from trading under the franchisorís company name, franchisees must pay an up-front franchise fee. On top of this, franchisees will pay annual fees Ė sometimes calculated as a percentage of profit and sometimes set at a fixed rate Ė and often contribute to marketing costs. All of these fees are set out in the franchise agreement.

Franchising and the economy

Having understood the basic concept of franchising, it's essential to place it into context by looking at its role in the modern economy. Some of the largest businesses in the world have adopted a franchise model, and many have found it a useful model for facilitating large-scale expansion. These include McDonaldís, KFC, Hertz, Kumon Maths, Spar, Costa Coffee, and Subway.

In the UK, many franchises become part of the influential British Franchise Association (BFA). The BFA estimates that franchising contributes £15.1 billion every year to the UK economy and employs approximately 621,000 people. In the same report, they revealed that 97% of franchise units (each franchised business) reported a profit and that more than 50% of units had an annual turnover more than £250,000.

This information highlights how successful franchising has proven for many businesses and what an important role it plays in the UK economy. However, it doesnít explain why franchising is such an effective business model. For that, we need to take a look at how franchising benefits franchisees.

Advantages of franchising

There are several advantages to franchising, many of which explain why it has become such a popular business model. These include;

  • Operating under the name of an established business - A recognisable business name means that franchisees don't have to dedicate vast amounts of time to marketing and growing the brand.
  • Support from experienced business managers - Most franchisors offer their franchisees a great deal of support and assistance, as itís in their best interest for them to succeed.
  • A prepared business model - Franchisors will have spent a considerable amount of time developing their business model and ensuring itís profitable. This allows the franchisee to step into a ready-made business system thatís been shown to work.

Though these advantages are enough to convince many that franchising is the way forward, there can be a number of disadvantages, too.

Disadvantages of franchising

There are two principal disadvantages to the franchising model. However, some would argue that these arenít actually drawbacks, theyíre merely the cost of doing business.

  • Lack of creative control - While the franchisee is in control of their own unit and boasts a number of critical managerial responsibilities, they do still ultimately answer to the franchisor. Typically, franchisees will have to run their unit according to the franchisorís instructions, limiting the amount of creative control they can exert.
  • Franchise fees Ė Franchise fees can often be prohibitively expensive, while the annual fees and marketing contributions can place a strain on an underperforming business. However, theyíre an intrinsic part of the franchise system and most franchisors are completely honest about the amount franchisees can expect to pay.

Conclusion

Like any business model, franchising has its advantages and disadvantages. For the franchisor, itís a way of expanding their business quickly, without having to manage every new unit independently. For the franchisee, itís a means of running your own business with the reduced risk of operating under an established brand name and in a carefully crafted business model. Though becoming a franchisee isnít for everyone, itís certainly worked for a large number of business-orientated individuals around the world. If youíre thinking of buying a franchise, or would like to find out more, browse our list of top franchises and take the first steps towards running your own business.

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