Franchise definition
With franchising, sectors and trades increasing in popularity in the UK, many people are looking into franchise meaning and principles. While you may think you have a basic understanding of what it entails, there’s a lot you need to know before embarking on your own enterprise.
In this article, you’ll discover the true meaning of franchise relations, how it works, and the types that are available. Also, we’ll share some pros and cons of starting your own franchise business.
Table of Content
What is a Franchise?
How does a franchise work?
Types of franchises
Franchise Pros and Cons
Are you ready to start a Franchise?
What Is A Franchise?
You may have seen a few companies stating that they can help you start a business for yourself and not others. The success of the brand is dependent on both you and the franchisor, which is why you’ll always receive adequate support. That’s why they usually show you how to be your own boss in a specific trade.
But what does the term ‘franchise’ actually mean? Let’s take a look.
Franchise Meaning and Principles
The formal definition of ‘franchise’ is where one party (the franchisor) grants rights and permission for another party (franchisee) to market, sell or trade licenced products under its brand name for a select period within a specific area.
Yes, that’s quite a mouthful. Basically, the franchisor already has a well-recognised brand and is willing to let franchisees run similar businesses to make both of you a profit. There are incredibly strict rules for how a business needs to behave, and you’ll always find a franchise fee and investment cost included.
We’ll delve into the agreement and costs a bit later.
For now, here is the official definition of a franchise from The International Franchise Association, the world’s largest franchise association :
“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.”
Where does the word Franchise come from?
The word actually stems from the verbal phrase ‘to franchise’. It comes from Old French, where franchiss actually means to make something free. If you’re looking at the noun ‘franchise’, again we rely on the Old French language with fraunchise. The meaning of this term relates to the government or an entity granting specific rights to another party.
So basically, the etymology of the word gives a franchise meaning of the franchisee being free to run their own company while being connected in a business relationship to the franchisor.
From Origins to Modern Day: Franchising Evolution
Before we move on from what a franchise is, it may interest you to know how the franchise concept originated and evolved to modern times. It all began in the 1860s during the US Civil War. Isaac Singer wanted to mass-produce his popular sewing machines. However, he didn’t have the means to repair and maintain thousands of machines across the entire country.
That’s when franchising was born, when Singer decided to outsource the repair and maintenance of these sewing machines to other businesses. It’s also when the first version of the franchise agreement came into being.
Today, more than a thousand franchise brands exist. You may recognise some of the more popular ones, such as KFC and McDonald's. However, there are plenty more across several sectors. Recent years have seen a sudden increase in franchising, especially in the UK. Yet, not much has changed in terms of the franchise meaning.
How Does A Franchise Work?
Now that you have a better idea of what a franchise means and where it came from, it’s time to discuss how it works. Yes, we could simply state that the franchisor gives a licence to operate to the franchisee at a cost, but it’s not really that easy. Here’s what you need to know before starting your own enterprise.
Different Sectors and Trades
The most important concept of franchising is understanding that it operates in different sectors and trades. For example, you can start a new company that specialises in cleaning, B2B activities or courier services. If you have a specific trade that you excel in, there are plenty of businesses offering franchises for them. You only need to know where to look.
The best part is that some of the franchisors don’t worry about how much experience you have. They usually offer training and support from the start to the end of your business’s life cycle. If you manage to get the hang of it, you can even expand to other regions or start a second company in a different franchise.
The Franchise Agreement
When you want to enter into a business relationship with a franchisor, you’ll need to sign what’s called a franchise agreement. The name says it all: it’s a contract with the terms and conditions of running your company under the brand name. It includes expectations from you, especially if you’re running services in a specific area.
Contracts vary among franchises, so it’s always best to read each one carefully to see which agreements suit you and your future best.
Franchising Costs and Returns
Starting a franchise business isn’t free. There are different costs involved, some of which generally include:
- The franchise fee: the cost of owning and operating under the licence
- Operational and start-up costs: paying for the initial assets, training and support
- On-going royalties: the franchisor may ask for a percentage of sales
The franchise agreement will spell out exactly what you need to pay for. When considering these costs, it’s invaluable to look at how much the expected returns are within a specific time period. In this way, you can see just how profitable your business may become in the near future.
Types of Franchises
We’ve mentioned that there are different sectors and trades you can do business in. What’s more, there are also various types of franchises that will affect the agreement you enter. Here’s a look at these types, along with the forms of agreements you might receive.
Product Distributor
The basic concept with this type of franchise is that you’ll sell a franchisor’s branded products. There isn’t much training involved, and it’s like a seller/supplier relationship. No, it’s not like a retailer that sells any products it purchases for a specific niche. You’re directly involved in only that brand and logo, with the franchisor supplying you with the products.
Manufacturing
The manufacturing principle is almost the same as product distribution. The main difference is that your company will manufacture the franchisee’s products at a factory or building before selling them. You’ll also use the brand’s logos on the products.
Business Format
In this type of franchise, you transfer the franchisor’s business model into your company with the same services and products. The franchisor has more say in how to run your business towards improved success and sales. You’ll also receive plenty of assets, support and training.
Investment Franchise
An investment franchise is slightly rarer than the types mentioned above, but they do exist. Instead of starting a new business from scratch, you’ll invest in a company that’s already operating. It needs a fund injection to continue, which is where you’ll come in. The agreement will explain how much of a role you’ll play and what percentage of the sales you’ll receive.
Jobs or Employment
Finally, you can start a franchise that focuses on providing employment or manpower for specific tasks. There aren’t many assets, and it usually involves smaller businesses than the ones mentioned above. It may be as simple as repairs and maintenance services for specific industries.
Four types of Franchise Agreements
We can’t discuss the different types of franchises without mentioning the four main versions of franchise agreements. Sure, you may find variations of these, but these form the foundation:
- Single unit: You receive a licence to only operate a single unit or branch
- Multi-unit: You can operate more than one branch or facility
- Area development: The franchisor lets you open as many branches as needed to service a specific region
- Master franchise: You have permission to sub-franchise to other franchisees to help expand the brand across the country
Franchise Pros and Cons
Since you have the ultimate knowledge of franchise meaning and principles, you may still be wondering if it’s a good idea to open your own business under someone else’s name. Here’s a quick breakdown of the pros and cons to help you make a decision.
Pros
- Ready-made business models
- May include marketing and sales strategies
- Support and training provided
- Market-tested products
- Brands are already well-known in some areas
Cons
- Some franchises require high investment funds
- There may be ongoing monthly or annual fees
- Poor performance may result in negative returns
- Bad brand publicity will affect your company
Are you ready to start a Franchise?
Even though many franchises say you don’t need experience to work in a specific industry, you’ll still need to know or learn how to effectively run a business. If you have the required funds, you can quickly become operational thanks to the popular brand you’re working with. It also helps if you receive the right training that leads the way to future success.
