Article contained within: Advice, Franchising: what's it all about?
Franchising: what's it all about?
Put very simply, franchising is a way of expanding an existing business through the licensing of its business model and brand to an individual entrepreneur. The entrepreneur then owns a separate franchise business, which they can develop along certain guidelines.
How so?
Someone – the franchisee – pays the business operator – the franchisor – a fee for the privilege of using its brand, and for selling its products or services. This provides the franchisee with a tried and tested business.
The franchisor sees an expansion of its operation, while the franchisee has a robust business that they can grow as they see fit.
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 siphons off revenue?
That’s precisely the point – a franchise actually poses less risk. Nine out of 10 franchises survive their first year, and the same proportion say they make a profit; 90% of start-ups fail within the first three years.
But what makes a franchise so much safer?
You have the use of a ready-made, well-established brand; instantly you are bequeathed public trust 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 protect the quality and consistency of the products or services associated with the brand, a franchisee also has to sign a legal agreement at the outset.
Called a franchise agreement, this stipulates certain practices and standards of behavior they have to adhere to, and sets parameters defining how far they can stray from brand standards, such as décor, food ingredients or opening times – generally not very much. This legal document 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 offset the money taken by the franchisor. The franchisor will usually pay for all the advertising and marketing.
And if it is a huge, international brand such as Subway or Gold’s Gym then you know you are guaranteed a seriously heavyweight marketing budget 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.
In the US - almost 10 million people are employed in the franchising industry. According to the IFA, more than 75 industries operate within the franchising format, and their membership and network encompass some 1,000 franchisors, 350 suppliers, and over 7,000 franchisee members throughout the United States.
So what was the first-ever franchise?
Ale brewers in Germany granted the exclusive privilege – which is what ‘franchise’ translates as in archaic French – to certain taverns to sell their ale in the 1840s.
But it was the Singer Sewing Machine Company, which started granting distribution franchises in 1850, that was the precursor for the modern franchise.
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.
At a Glance
- There are over 718 franchises operating in the UK and 1,300 franchisees. 327,000 people are employed in franchising.
- The two biggest sectors in franchising are business and commercial services and property services. The biggest increase, at 19%, was in personal services.
- Nine out of 10 franchisees see their franchise survive its first year and emerge from it making profit.
- Meanwhile, the same proportion of franchisors expect their business to grow in 2006.
- Average annual turnover of a franchise is £291k.
- Turnover in the sector was £9.1bn in 2005.
- Franchisees pay an average of around 7.7% of their sales to the franchisor.
- 100% of franchisors provide training for their franchisees.
- 86% of franchisors and franchisees say they are satisfied with each other.
- Most franchise sales leads are generated over the internet. PR, referrals, print advertising and direct mail account for most of the rest.
- A new franchise opens somewhere in the US every 17 minutes.
