Buying a franchise is a way to start a new business without having to start from scratch. If you decide to buy a franchise, your business will be based on another business' tried and tested business model, idea and products or services and you will trade under that business' name. You often benefit from their marketing, training and systems.
What is a franchise business?
A franchise business is an existing business (the franchisor) that allows other entrepreneurs or businesses (franchisees) to buy the rights to sell its products or services and to trade under its name. Popular examples include Pizza Hut, Subway and KFC.
Starting up as a franchise business allows you to buy into a ready-made brand, usually one with an established trade mark and successful format. The franchisor has done all the hard work, which means the failure rate for new franchises is generally lower than for other start-up businesses.
Business format franchising is the most common form. Basically, the franchisor grants a license to sell well-known (usually trademarked) products and services to the franchisee.
How do franchises work?
The franchisor (the business that came up with and owns the original business idea) sells the franchisee (the person or business buying into the business) a licence to trade under the business name and format. The franchisee pays the franchisor an initial fee to buy the licence and often ongoing fees (perhaps a fixed percentage of sales, royalties or to buy the franchisor's goods which they then sell on).
The franchisor often helps the franchisee set up the business by providing training and support. They often provide access to the business systems, too. However, the franchisor will want to protect the business, and the franchisee will often have to comply with rules and restrictions on what they can and can't do. Consider how franchisee businesses like Subway all offer the same menu, and the shops are all fitted out in the same style. There will often be restrictions on the area in which you can trade to protect other franchisees and to allow the franchisor to sell a licence to multiple franchisees.
A licence can last from a couple of years to 25 years and there will often be break clauses at set intervals. Both the franchisor and franchisee should take specialist advice before committing to a licence.
Buying a franchise: advantages
Buying a franchise means you don't need to come up with a business idea or start completely from scratch. Instead, you benefit from the reputation, experience and expertise of an established business.
Franchisors want their franchisees to succeed, which is why they provide support through training, product development, marketing, advertising and management services.
Franchisees usually enjoy exclusive rights within their territory. Some banks can also be more willing to lend to those looking to buy into a reputable franchise than to those starting a new business from scratch.
Buying a franchise: disadvantages
Buying into a successful business franchise can be expensive. Franchisees pay an initial fee up-front, and an ongoing fee after that (sometimes a percentage of turnover).
Supplies, which usually need to be bought from the franchisor, can come with hidden costs and mark-ups. Higher-profile business franchises charge considerably more.
As a franchisee you'll own and operate the business and retain control over its day-to-day running. However, the franchisor usually controls such things as marketing and sale of products and services - including range and price. You will not be able to introduce new lines or discount slow-moving products, for example.
There's also a risk in some cases that the franchisor might go out of business, change ownership or impose significant changes (eg a new brand identity), which can be expensive and disruptive.
Potentially, the actions of other franchisees could impact negatively on your reputation, while your options could be limited by the franchisor should you wish to sell up.
Should you buy a franchise?
If you're highly ambitious and prefer to have full control of all aspects of your business, a franchise might not be the best option for you. However, as a franchisee you will still need to bring energy, commitment, passion and pride, and the role can still be highly challenging and rewarding.
Although the workload might be just as challenging as starting a business from scratch, many franchises don't offer the prospect of earning a vast fortune - just a good return on investment.
And although franchises can fail just as any other small business, if you're not comfortable with risk, buying a franchise could provide more acceptable odds of success.
If you're interested in buying a franchise, carefully consider all opportunities before parting with any money - and seek professional guidance before you sign up. Also, speak to other members of the network. There are many business franchise opportunities available, but you need to be sure franchising is the best option for you.
Visit the British Franchise Association website for advice.
