Franchise definition: what is a franchise?

02/08/2017 09:00 | Start a business

Franchise definition what is a franchise

You’ve dreamed of being your own boss, giving orders rather than taking them and being in charge of your own workload. Running a franchise allows you to do all this, but what is a franchise? Here’s the definition 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 license 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 license 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 ran 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.

There are two types of franchise methods called ‘business format franchising’ and ‘product and trade name franchising’. The most common type in the UK is business format franchising. A franchisee in this relationship will receive help from the franchisor with everything from store design to staff training, in return for an upfront fee and ongoing royalties.

The product and trade name franchising method is much less prominent in the UK and involves the franchisor providing the franchisee with a product to sell. This type of franchising is mainly associated with industries such as petroleum, soft drink distribution and automotive.

Franchising is growing

The popularity of franchising has grown significantly over the last 10 years, and is set to continue to create more jobs and contribute to the UK economy. These impressive statistics from the British Franchise Association survey 2015 show just how much the industry has developed since 1995:

1995

2015

Industry annual turnover

£5 billion

£15.1 billion

Number of franchisor brands operating in the UK

379

901

Number of franchisee outlets

18,300

44,200

Number of people employed by franchising

621,000

Percentage of units profitable (including new businesses)

97%

As a franchisee, the model provides a safety net and a sense of security when starting a business. This is evidenced by the fact that an amazing 97% of franchises are profitable, with 56% saying they are ‘quite’ or ‘very’ profitable. When the rights are bought to open a franchise, a franchisee receives more than just a franchise agreement. As well as being given access to trademarked logos and slogans, a franchisee also has the benefits from a proven business model, prices and products.

For the cost of an upfront franchise fee, which can differ hugely depending on the franchise, much of the stress and teething problems experienced by small businesses are done away with. In fact, according to the 2016 UK Franchising Survey, complied by Franchise Direct, 50.4% of those questioned stated that the primary reason for considering franchising was because they wanted to be their own boss, but didn’t want to come up with their own business idea.

So, the franchise deal is a no-brainer for the franchisee, but what’s in it for the franchisor? Why do franchisors sell their franchise opportunities? In a nutshell, developing franchise opportunities is a powerful method for expanding a company – the ultimate form of scaling an operation. The first modern franchise opportunity was developed by Isaac Singer who patented a practical, widely used sewing machine in the 1800s. A business partner of Singer’s had introduced the first ever instalment plan so that more people could pay for the $120 machine. Now that more people could afford to buy the machine, Singer needed a better distribution model.

And so, the first licensing agreement was born. Like Singer, franchisors can grow their business in new locations without much of the financial risks associated with expansion. Franchising allows businesses to grow using franchisee’s capital and provides an investment vehicle that allows a franchisor to bring on investors without giving up equity or control in their company.

Franchise or a business for sale?

After the question ‘what is a franchise?’, many then ask, ‘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 this is where the similarities end. A business opportunity is the sale or lease of any product, service or equipment that will enable the purchaser to start a business – it’s really a business in a box. Once purchased, the business owner has the freedom to operate in their way, using their name. There’s no binding commitment to the seller and, in the main, the initial set up costs are lower than franchises.

Caution should be taken when considering any business opportunity though. As the saying goes, if it looks too good to be true, it probably is. If a business opportunity has been chosen instead of starting a brand-new business because of the assumed support the seller will provide, then disappointment may follow. The seller has no obligation to offer assistance to the purchaser, and without any affiliation to a proven business system or successful trademark, the ability to make profit is often limited.

All franchises are business opportunities, but not all business opportunities are franchises. The right choice for an individual looking to run a business without a unique product or service to offer largely depends on the amount of support wanted. If a kick-start is all that’s needed with the flexibility to run a business in their own way, then a business opportunity may be the right choice.

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