Everything you need to know about franchises

There are nearly 50,000 franchise units in the UK, and the figure continues to climb as entrepreneurs recognise the value of working for yourself under an established brand. One-third of these franchisees own multiple units; 93% of franchises are profitable and a remarkable 60% turn over £250,000 or more annually.

With such a high success rate, it’s unsurprising that popularity is higher than ever before – but what exactly does franchising entail?

What is a franchise?

Franchising is where an established business offers the opportunity to work with its name, branding and products in exchange for a cut of profits. As a rule of thumb, franchisors work closely with franchisees to train, support and monitor them. The franchisee owns their company but must operate to the franchise’s standards. As a franchisee, you are responsible for your business’s success, but the franchisor has a responsibility to help you to flourish.

When it comes down to it, franchising is a relationship between two independent companies: one offering its brand and wares, and the other building a local presence with them.

The history of franchising

Franchising has been around for hundreds of years. Some of the earliest British franchises were tied public houses or pubs that sourced exclusively from specific breweries, such as Bass. The publican would typically rent the pub directly from the brewer or purchase premises with a soft loan from the brewery in exchange for buying its beer. In comparison, free houses ran independently. Both business models are still popular.

Across the pond, franchising was popularised by Isaac Singer, founder of the famous sewing machine company. In 1851, Singer had developed and patented a groundbreaking home sewing machine, but found himself unable to finance its first run. His solution was to offer licenses to sell his products in defined territories, with the upfront capital funding his factories. 

Singer licensees signed legally binding contracts for the right to make and sell his machines in their territories; they also received training to show customers how the machines worked. Singer’s thorough approach to licensing laid the groundwork for a new business model, and he is generally seen as the father of the modern franchise.

Franchising ensures reliability

The popularity of franchising really took off in the post-war era. In 1954, milkshake mixer salesman Ray Kroc made history when he worked with two Californian brothers to create a fast food empire. The McDonald brothers had already franchised six locations, but Kroc saw the rise of television as an opportunity to reach global audiences.

By defining and streamlining the production process McDonald’s was able to offer a burger that was exactly the same everywhere, regardless of who made it.

The consistency of products is a major selling point for most franchises. Thoroughly written operation manuals and standardised training ensure that your car, smartphone and Starbucks latte are the same every time.

The financial value of franchises

These days, franchising creates almost $2 trillion USD in revenue worldwide every year. The International Franchise Association reports that one in every twelve businesses is a franchise, and these businesses account for half of all retail sales in the United States.

Here in the UK, the British Franchising Association estimates that the total contribution of franchising to the economy is £17 billion and rising.

The different 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 join a business like Starbucks, you buy the name and resources needed to set up an outlet. In return, you pay royalties and buy product and uniforms directly from the franchisor.

Single operator franchise

Also known as product franchise, this model focuses on individual contractors and their skill sets. 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. You benefit from a wider customer base, while they grow their brand.

Manufacturing franchise

Companies like Coca-Cola and Hyundai are examples of manufacturing franchisors. They produce ingredients or parts and sell them, along with the right to use their brand and trademarks. The franchisees then finish the product and sell it to suppliers. Coca-Cola alone has 250 franchisees worldwide; they sell the syrup and licensees dilute, bottle and distribute it.

How does a business become a franchise?

If you have a business with an established customer base and brand, you might consider creating your own franchise. To do this, you’ll need to work with lawyers, consultants, accountants and brand strategists to create legal documents, a marketing strategy and an operation manual. Together you’ll create a business flatpack that anybody can pick up and put together.

Your first franchisee could take a year to sign and start trading, but the process will become smoother as your network grows. 90% of franchisees turn a profit, according to the British Franchise Association, and less than 4% fail in their first year.

How does one become a franchisee?

If you’d like to start a business but aren’t keen to work from scratch, franchising can be a good option. By working with an established business you have the freedom of working for yourself without the solitude of a startup.

Once you’ve been accepted by a franchisor, you’ll sign a legal agreement that outlines what you can expect and what you need to provide in return.

Your upfront costs will likely include a start-up licensing fee, purchase or hire of specific equipment, inventory and marketing. After that, you’ll pay royalties as a cut of profits.

Is franchising right for me?

At its best, franchising can be an incredibly rewarding – not to mention lucrative – opportunity. However, it’s vital to think critically and research thoroughly before committing to any kind of contract. This is true of even the biggest household names.

Working under an existing brand can be very demanding, and the nature of franchising puts limits on your creativity. If you’re considering taking the plunge, read up on the pros and cons of franchising to find out whether this business model is a good fit for you.

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