You may have heard the word franchise used in business terms but do you really know what it means?
A franchise, in simple terms, is an agreement between two parties which allows one party, the franchisee, to market products or services using the trademark and operating methods of the other party, the franchisor.
There are two types of franchise methods, business format franchising and product and trade name franchising.
Business Format Franchising
This is the most common form of franchising in the UK. When you buy a franchise, the franchisor grants you the use of their logos and trade-marks, as well as all the necessary training and support needed to set up your business. They will also help with site selection, store layout and design, recruiting and training staff. They will also do the brand promotion and marketing. Think of McDonald’s as an example.
In return you would need to pay an upfront franchise fee as well as ongoing payments, or royalties, to the franchisor.
Product and Trade Name Franchising
This type of franchising means you do not pay ongoing royalties to the franchisor but you have to purchase products directly from them. This is a much smaller business model compared to Business Format Franchising. The franchisor supplies the marketing and brand management, logos, trademarks and advertising campaigns.
This is more common with soft drink distribution and cosmetics rather than restaurants or coffee shops.
Advantages and Disadvantages of Franchising
A franchise is a relatively secure way of starting your own business. It is a formula of a locally owned and run enterprise with the backing and support of a wider network. A good franchise opportunity would be one where there is continuing support from the parent company that has an established brand and wide reaching advertising campaigns.
- Around 92% of all UK franchisees reported profitability over the last 12 months.
- The business format is proven.
- You have the opportunity to build your capital as well as your earnings.
- It is your business and you are the owner manager, providing you follow the system, you decide what goes.
- The major banks are very supportive of good franchising
What are the disadvantages of franchising?
Every aspect of the franchise is already set up when you buy it. This means that every aspect of it is defined and every outlet works strictly with this format. You will need to consider a few things before you buy in. For example:
- There is a degree of lack of independence and inflexibility. You can’t branch out with a new idea if it isn’t approved by head office.
- Running any business is hard work, demanding the highest level of personal and family commitment.
- You make a financial investment, however, no investment is guaranteed, especially when it depends on the efforts of both you and your franchisor as well as the fluctuations of the market place.
- You buy into a proven business system for its benefits but you also take on the responsibility for following it – not doing so may result in you losing the business.
If you are considering buying a franchise we suggest getting legal advice. There are many potential pitfalls but also some great opportunities out there. Call Slater and Gordon’s expert team of business lawyers who have many years’ experience working with franchises on freephone 0800 916 9052 or contact us online and we will call you back.
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