When it comes to starting a business, many entrepreneurs go in with a very specific unique selling point of their own – but if you’re itching to go your own way and don’t necessarily want to start from scratch, buying into a franchise might just be the perfect fit.
According to the British Franchise Association, 90% of franchisees turn a profit and less than 4% of businesses fail in their first year. In comparison, somewhere between half and two-thirds of independent startups close within their first three years.
So, how does franchising work, and what are the pros and cons of franchises? Read on to find out.
What is a franchise?
A franchise is an arrangement in which an established company offers a third party the right to sell its branded products and services.
Most franchises charge an up-front licensing fee and then take a portion of revenue from all of your business thereafter. In return, you are given use of the franchisor’s brand name, trademark, operating systems, marketing materials and products. That includes access to branded packaging, exclusive products and suppliers – the whole chain is already set up for you to plug and play.
Often you’ll be assigned an exclusive territory so that branches aren’t competing with each other. In some cases, corporate will choose a spot that’s optimal according to their own research.
Franchises you might recognise include Spar, Costa Coffee, Subway, Riverford Organic and Dairy Crest. Beyond the food industry, there are franchises for everything from after-school maths to hairdressing.
Types of franchises
There are three main franchise business models in the UK: business format, single operator and manufacturing.
Business format franchise
This is the most common type of franchise, particularly associated with fast food. When you buy into a business like McDonalds or Starbucks, you are provided with the name and resources you need to set up your own outlet. In return, you pay royalties and buy product and uniforms directly from the parent company.
Single operator franchise
Also known as product franchise, this model is all about individual contractors and the services they offer. If you’re a professional cleaner, for example, you might choose to invest in a larger cleaning service. Working as part of the company, you’ll manage your end of business while a team of professionals handles advertising, bookings and customer service.
Factory owners, this is for you. Companies like Coca-Cola and Hyundai produce their own ingredients or parts and then sell them, along with the right to use their brand name and trademarks, to companies that finish the product and sell to suppliers. Coca-Cola alone has 250 franchisees worldwide.
The pros and cons of franchises
There’s a lot to mull over before buying a franchise. While this is by no means an exhaustive list, here are some of the pros and cons.
Benefits of joining a franchise
- Existing brand awareness. With the clout of an established brand, marketing is less of an issue. It’s easier to tempt the public with a recognisable name than a brand new venture.
- An established customer base.
- Access to tried-and-tested operating systems. You’ll be provided with point-of-sale systems, accounting systems and support systems, for example.
- Training. A lack of experience in business ownership or a particular sector won’t hold you back – you’ll be brought up to standard.
- Ongoing support. The company has a vested interest in your success, and that includes being available when you need help.
- It’s easier to secure financing. Lenders are very amenable to franchises because they already have a proven track record. In some cases, the company itself might offer in-house financing or leasing options.
- You will be a business owner. While you’re agreeing to follow the franchisor’s direction, the business still belongs to you.
- Financially, there is less risk. Franchises have already overcome the most common startup challenges.
- Economies of scale. The sheer quantity of product being shifted means that your costs may be lower than if you go it alone.
Disadvantages of joining a franchise
- The start-up costs are still significant. Depending upon the business, it could actually add up to more than it would cost to strike out by yourself.
- Committing to an existing supply chain. Even if you find the same product or service at a lower price, you have agreed to use the franchisor’s resources.
- There are ongoing fees. Most franchise agreements require that you pay monthly royalty fees to the franchisor. These are usually proportionate to your revenue, but in some cases are charged as a flat fee.
- Your business’s reputation rests on the franchisor. If the franchisor’s brand faces negative publicity, you’ll be hit too.
- Creativity is limited. When you license a franchise, you agree to follow strict rules on equipment, product, marketing, premises, signage, uniform and more. There’s little room for personal flair.
- Monitoring can be intrusive. Regular inspections and the criticism that comes with them can be exhausting and frustrating.
- Franchisors have no obligation to renew contracts. While it’s unusual, your contract could expire with no opportunity to continue working with the franchisor.
- You may find it difficult to sell your business. If you decide to change career or to retire, you will need to find a buyer that is approved by the franchisor.
- Success isn’t guaranteed. As with any other business, there is no guarantee that you will be successful.
Is a franchise right for me?
Just like any other business, you should practise due diligence before you commit to a contract. It’s a good idea to approach a franchisee of the company you are considering to ask them about their experience and any advice they may have.
Questions you should ask include:
- How many branches exist, where are they located, and what is the average profit level?
- What are the franchise and royalty fees?
- How long is the typical contract?
- Are financing options available?
- On average, how long does it take to make a profit, and what is the earning potential?
- What is the competition like?
- What type of support is available?
- How has their experience with head office been?
Once you’ve made an informed decision, only your drive and dedication can hold you back. Good luck!