What is business franchising?
Franchising can offer a much lower-risk way of starting up a business than doing everything yourself and from scratch. It's not all plain sailing, of course, but it's well worth a look if you don't yet have a clear vision and new concept for a business.
Franchising: the basics
- Franchising is where a company grants a license to others to sell their product or service under their brand name.
- You usually pay for the license and have to go through a series of interviews to make sure you're suitable.
- This agreement places the franchisee (the person who receives the license) under certain restrictions, which vary according to different franchise networks.
- You might have to make sure every last aspect of your business adheres to a franchisor's (the company who own the brand) rules, from what tie you wear to how you sign letters to what colour carpet you can have.
- Or it may be much freer - you simply buy the right to use the brand name and logo and other than that make the business completely your own.
- The extent of authority the franchisee has will differ depending on the type of licensing agreement granted.
- The franchisor provides guidance as you set up and run the franchise.
- McDonald's, Coffee Republic and Kall Kwik are examples of famous franchises.
- There are more than 800 franchise operations in the UK.
Types of franchise
- There are different types of franchise and franchise license, stipulating different terms and conditions of how much control the franchisee has.
- Business format franchising is the most popular type. The franchisor grants a license to others to sell their product or service under their trade name while all the time retaining control of marketing and standards of the business. As part of the agreement:
- The franchisor provides the training and information for the franchisee.
- This enables them to set the business up without any previous experience.
- The franchisor provides continual support that is agreed to the terms of the license.
- As part of the training and support the franchisor may set you up or provide you with discounted bulk-buy supplies.
- The franchisee owns the premises and controls the operation of the outlet, retaining the majority of the profits, but a predetermined percentage is paid annually to the franchisor.
- Operating under an established trade name offers a readymade customer base and security.
- Licensee franchising is where the franchisor grants a license to produce and market its products, without any limits on how the franchisee runs the business.
- In distributor and dealership franchising the franchisee sells the franchisor's products, but not under the franchiser's name.
- Sales & distribution franchising means the franchise owner is on the road, selling or distributing the products in a given territory.
- All franchise agreements will have their own unique variations on the type of agreements above. Seek legal advice while in discussion with the franchisor to monitor what is and isn't allowed under the type of franchise agreements being offered.
Franchisor: A company that licenses their trade name to another person or party.
Franchisee: The persons or business who have paid to trade under the trade name of the franchisor.
What types of business can be franchised?
Loads of different ones! Fast food outlets and restaurants tend to be most common, but almost any industry can be franchised, including estate agents, retail businesses, hotels and garages. Such is the diversity that the International Franchise Association now lists more than 75 different categories to describe its members.
How can I tell if franchising is right for me?
Our guide will help you out with that one.
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