Article contained within: Advice, Franchising: what's it all about?
Franchising: what's it all about?
In essence, franchising is a means of growing an established business through the licensing of its business format and brand to an individual business person. The entrepreneur then owns a separate franchise business, which they can develop along certain guidelines.
How so?
The owner of the new franchise unit – the franchisee – pays the brand and company owner – the franchisor – a fee for the use of its brand and to sell its products or services. This means the franchisee immediately owns an established, reputable business.
The franchisor, for its part sees an expansion of its brand, while the franchisee has a robust business that he or she can grow.
The franchisor takes some sort of management fee, usually a percentage of revenues, however it is the franchisee’s business.
So why should a franchisee take the risk in putting up the capital, while the franchisor sits back and creams off revenue?
That’s precisely the point – a franchise is actually less risky. 90% of franchises survive their first year, while the same proportion say they make a profit. Of all the start-ups, on the other hand, two-thirds fail by year four.
But what makes a franchise so much safer?
You have the use of a ready-made, well-established brand; instantly you inherit the trust the public has in the products you sell or services that you are licensed to render.
How does the franchisee know how to operate the business in the way the franchisor wants?
This is why good franchisors will train them in business skills and sales techniques – so they can represent their brand as well as the franchisor has done.
Having the know-how of an established and authoritative industry player behind franchisees gives them a major advantage over the start-up operator.
To safeguard the brand a franchisee also has to sign a legal agreement before he can legally own his franchise.
Called a franchise agreement, it stipulates certain practices and standards of behaviour the franchisee must adhere to so that customers get broadly the same level of service a similar experience at any of the company's franchise units. This legal document, which also sets out the franchisor's obligations, in terms of the support provided and so on, usually covers a minimum period of around five years.
So the franchisee sacrifices creative freedom and part of the profit, but knows that at least he or she is going to make a profit…
Yes – savings are made elsewhere that can more than make up for the money taken by the franchisor. The franchisor will often pay for all the advertising and marketing, for example.
And if it is a huge brand such as Subway or Prontaprint then you know you'll have a massive marketing machine behind you.
Franchising sounds ideal for people new to business – but don’t franchises tend invariably to be fast-food restaurants?
Not at all. There are 718 franchisors operating in the UK, in a wide range of industries. Sandwich shops, plumbers, car-hire businesses and laundries – these are just a few examples.
How did franchising come about?
In 1840s Germany, brewers granted the exclusive privilege to certain taverns to sell their ale.
But it was the Singer Sewing Machine Company that was the first franchise in the modern sense, granting distribution franchises in the 1850s.
Is there an industry body which can give information and guidance to someone interested in franchising?
Yes - the British Franchise Association and the International Franchise Association.
