If you’re thinking about taking a leap into business ownership, you might be wondering whether to start your own business from scratch or buy an existing one. But if neither one of these approaches appeals to you, there’s a third option: buying the rights to a franchise. Let’s take a look at everything you need to know about how a franchise works.
What is franchising?
Franchising is basically where an established business (the franchiser) grants a licence to a third party (the franchisee) to operate a business of its own using either the franchiser’s trade name, model or systems. In return, the franchisee pays an upfront fee and further regular payments.
The franchise business model is quite popular in the UK. Among the most successful franchise brands in the country are:
- McDonald’s
- Domino’s
- Starbucks
- Pizza Hut
- KFC
- InXpress
- Costa Coffee
What are the main franchise models and how do they work?
1. Product or distribution franchise
Here, a product made by the franchiser is sold to a franchisee who in turn sells it to consumers under the trademark of the franchiser. This type of arrangement is usually common with automotive and petroleum companies.
The franchisee still pays an initial franchise fee, but instead of also paying ongoing royalties, the franchiser derives a stream of revenue from the markup on sales to the franchisee.
2. Manufacturing, production or processing franchise
Under this model, the franchiser sells the franchisee an essential ingredient or provides some specific know-how that enables the franchisee to make a final product.
Coca-Cola operates using this model. It supplies its franchisees with the essential ingredient of the popular drink, and the franchisees then use it to produce the final product.
3. Business format franchise
This is the most common franchise model. The franchiser gives the franchisee the rights to trade using its business model, trademark, designs, patents and other assets.
In addition, it provides training, mentorship and ongoing assistance to the franchisee. An example of a renowned brand using this model is McDonald’s.
What are the advantages of operating under a franchise?
There are a number of reasons to consider operating under a franchise:
- Opportunity to operate under a well-established name
- Smooth entry into a proven business model instead of having to start from scratch
- Availability of training, know-how, support, marketing and even financing
- Benefit from an already established customer base
- Opportunity to grow within the system
- Lower costs for buying inventory and equipment
- Exclusive rights to operate in a certain territory
What are the disadvantages?
While there are many benefits of operating under a franchise, the arrangement is not without disadvantages. Here are the most notable ones:
- Potentially high start-up costs as well as ongoing fees or payments
- Obligation to report and follow detailed directives
- Less flexibility due to franchiser control of business practices
- Vulnerability of the franchise network (the bad reputation of one franchisee can affect the entire network)
What sort of investment is required?
Naturally, the cost of entry will vary depending on the industry, as well as the brand you choose to work with. The fee paid upfront can vary from £500 to £300,000, depending on the brand chosen.
Furthermore, a franchise survey published in 2018 by NatWest Bank and the British Franchise Association (BFA) estimated that the mean total start-up costs of a franchise business in the UK is £100,000 (inclusive of franchise fees, working capital, stock and equipment).
Is working with a franchise profitable?
Though not a guarantee, most franchises tend to be profitable. In the 2018 survey by NatWest Bank and the BFA, 93% of franchisees claimed they were profitable.
With research showing that nearly half of all independent small businesses fail after two years, a franchise might actually be a much safer investment for those wishing to start a small business.
Would I make a successful franchisee?
While each franchise concept will have its own unique requirements, there is a core group of traits and skills that most successful entrepreneurs operating under this model tend to share, including:
- Willingness to learn and follow a system
- Leadership and business management skills
- People skills
- Optimism
- Financial aptitude
- Patience
- Adaptability
- Passion for the brand
While no one is perfect, having these characteristics can increase the probability of success regardless of the type of franchise you choose to work with.
Having said that, franchising may not be for everyone. Some people might simply be better suited to independent business ownership.
Before you follow the franchise route, it’s a good idea to first weigh up the pros and cons and consider your goals, values, abilities and personality type. This will hopefully help you to determine whether a franchise is the right path for you.
