Franchise Definition: What is a Franchise?

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Franchise definition what is a franchise

Originally uploaded on 02/08/2017. Updated on 06/04/2019.

You’ve dreamed of running your own business, choosing your own working hours and managing your own workload. A franchise offers all of this, but you’re not quite sure what it involves. Let’s take a look at the definition of franchising, according to the International Franchise Association:

“Franchising is a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the licence to a third party for the conducting of a business under their marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the licence to do business under the trademark and trade name by the franchisor), but also provide them with an operating system, brand and support.”

Simply put, a franchise is a type of business that is owned and run by franchisees, but is branded and managed by a larger company (the franchisor). Franchises are all around us and form a large part of the modern high street. From Subway and McDonalds to The Body Shop and Mothercare, we interact with franchises every day.

Franchising can be split into two different categories: ‘business format franchising’ and ‘product and trade name franchising’. In the UK, the former is much more common. Under this scheme, the franchisee pays an initial fee and ongoing royalties in exchange for use of the business model and the support of the franchisor in everything from store design to staff training.

On the other hand, the ‘product and trade name franchising’ scheme is implemented when a franchisor simply offers the franchisee the right to sell their products. This model is often found in the petroleum and automotive industries and soft drinks distribution.

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Franchising is Growing

Because franchising offers many of the advantages of running your own business with the added benefits of an established business model, brand awareness and franchisor support, franchising continues to grow in popularity.

In the UK, franchises add £15 billion to the economy – a figure which has risen by 46 percent in the last ten years. There are currently more than 44,000 franchise units in the UK, 97 percent of which are profitable and over half of which see a turnover of more than £250,000 (BFA-NatWest survey).

The BFA-NatWest franchise survey 2018 suggests that the franchise industry is more profitable than ever before. As increasing numbers of people are employed by franchises, the franchising industry represents a diverse space where individuals who would not necessarily have the opportunity or confidence to start up an independent business can manage their own franchise successfully. The survey states that female entrepreneurship is higher than the national average for small and medium-sized businesses, while an increase in business owners under the age of 30 further demonstrates the inclusivity of the franchising model.

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What’s in it for the franchisor?

Franchising represents an attractive alternative to starting up a business from scratch. But why would an existing business owner become a franchisor?

Franchising can be a powerful tool to expand a company. The franchisor receives regular royalty payments as the franchisee does the hard work for them, investing their own capital in selling the franchisor’s product or service in another territory. Most importantly, franchising allows business owners to benefit from investors’ capital without relinquishing equity or control in the company.

To understand the motivation behind franchising, it’s useful to know about the origin of the business model:

The first modern franchise system was developed by Isaac Singer, the creator of the famous sewing machine that was developed in the 1800s. Singer’s business partner suggested an instalment plan as a more affordable way for customers purchase the sewing machine, boosting the amount of sales the company made. When the demand for Singer’s sewing machines rose, Singer searched for a more efficient distribution method, prompting the emergence of the first business licensing agreement.

Franchise vs Business Opportunity

So, how does a franchise differ from a business opportunity? Well, they are both ways to set up a business without having to start from scratch, but they have some fundamental differences. A business opportunity is the sale or lease of any product, equipment or service that enables the purchaser to start a business – it’s a business in a box.

Some of the most common business opportunities include distributorships, turnkey operations, dealers, multi-level marketing, trademark/product licensing and working from home opportunities. Once purchased, the business owner can customise the business and operate it in their way, using their name – the owner has no commitments to the seller. Also, the initial set-up costs are generally lower than those of franchises.

However, prospective business owners should be careful when it comes to selecting a business opportunity – if it looks too good to be true, it probably is. Unlike with the franchise model, the seller of the business is under no obligation to provide support or guidance to the buyer. What’s more, this template does not give the buyer access to a proven business model or identifiable trademark, so their ability to make a profit is reduced compared to a franchise with an existing customer base.

Business opportunities are a great choice for entrepreneurs that need a product or service to sell and are happy to do so with minimal support. If, on the other hand, you are a prospective business owner with limited experience and/or would like the security of a proven business model, existing brand awareness and customer base and comprehensive training and support, franchising is the better option for you.

Figures show that franchising is on the up, with more and more people recognising the benefits of the model. As a result, there is huge potential for savvy entrepreneurs who would like to start up and manage their own business with a low risk factor. With an initial investment and ongoing royalty fees, you could start up a successful business that generates profit in no time.

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