What Is A Franchise And How Do They Work?

Want to run your own business but are scared of going it alone? Then a franchise might be the solution. Starting up a new venture can be a risky affair, you can painstakingly research your market, open your business where demand is high, outdo the competition, offer the best range of products and services available, advertise in the right places and still your business can fail. In fact in the UK, one half of new businesses close within the first 3 years of trading.

It is no surprise that some entrepreneurs who want to run their own businesses but also keep their exposure to risk to a minimum often choose to buy into a business that has already proved to be commercially viable.

By buying a franchise in such a firm, the new business owner can get a head start in the market, benefiting from the experience, support, market presence, buying power, research and innovation of the host business (franchisor).

The franchise is the legal arrangement where the franchisor gives permission for the franchisee (the buyer of the franchise) to use its name, brand, product, trade mark, operation and service in return for payment. Franchised businesses are more likely to succeed that many other new businesses because they have a proven track record and have established and effective processes in place. Most of the large businesses you will see on a regular basis are franchises, Starbucks, McDonalds, Rent a Kill – the list is long but endless.

There are however, both advantages and disadvantages to buying a franchise and these are as follows.

The Advantages

The franchisor has experience of its market and the franchisee will reap the benefit of this. They are already an established and trusted name.

Market knowledge

The franchise will know where the best opportunities lie, what the most successful products are, the best way to advertise, where the pitfalls are, the potential of the market, the effectiveness of the competition and so on. Passing on this accumulated learning will enable the franchisee to save time and money.

Training and Support

Since it is in the long-term interests of the franchisor that the new franchise business will succeed, it will often provide the franchisee with relevant, structured, comprehensive and on-going training and support. This may also extend to employees and ensures that everyone involved has a shared understanding of the objectives of the business and what its brand values are.
Access to a Successful Business Formula

The franchisor will have put processes in place that act as a map showing the franchisee the route to business success. They have been successful in their line of business for a long time and will have an exact formula that has been tried and tested for you to follow.

References and Testimonials

Before taking on a franchise, you have the opportunity to speak to as many other franchisees as possible – in private – and ask them what the franchisor is like to do business with, what problems they have encountered, whether they are happy with the contract terms, how their businesses are doing etc. This way, you can get an insight into the actual day-to-day running of the business before you commit your funds

Economies of Scale

Being a franchise also enables you to operate in a larger business arena than you would be able to if you were a standalone firm. This wider commercial environment means that you can benefit from economies of scale and better business deals and it may also enable you to recruit higher-skilled staff and offer better employment benefits.

Innovation

Your franchisor will keep you abreast of developments and new products in the market, they will effectively do all your research for you. Being in the know about these new products and concepts will help you to plan your business and stay ahead of the competition in the knowledge stakes.

Exclusive Territory Rights

Your franchisor should give you exclusivity in your geographical area meaning that you will not be competing head to head with another business that has bought a franchise from the same firm.

Finances

Because franchises are a safer business proposition, you will find it easier to raise finance through your bank or from a business angel or to get a grant.

The Disadvantages

If you value your independence, buying a franchise is probably not for you.

Agreements may vary from business to business but many franchisors will only allow you to sell the products that they approve and normally supply, which can be very costly for you as they will not necessarily be the cheapest and best on the market. You may have no flexibility to modify your product range or service to suit your market.

You also sacrifice your freedom to make important business decisions and are obliged to implement those made by the franchisor, even if you don’t agree with them.

You may find yourself exposed to risks that are out of your control. For example, the franchisor might make a decision to strategically move the business one way while the market goes another. He may lose his position in a competitive market or go out of business altogether.

Buying a franchise can be expensive. You will probably be required to pay an upfront fee to buy into the franchise as well as pay royalties on sales or management fees. You will probably be required to buy all your supplies and raw materials from the franchisor or his favoured supplier, even if it is not the cheapest supplier available. All these fees are on top of your usual operating costs.

It is possible that the franchisor does not live up to its side of the bargain. Supplies may be late or erratic, training may be inadequate, support may not be forthcoming etc. It is more likely that a franchisor will over-promise rather than under-promise and this is why it is vital that you speak to other franchisees, you need to make sure that your earning potential is realistic and that you are making the profit you have been promised. Do your research and get professional legal advice.