Franchising can unlock a world of opportunities for your business. But exactly what is franchising?
Find out more with this in-depth introduction to franchising, brought to you by franchise4u.
Answers to all your Franchising questions.
Franchising is one of the most versatile ways for enterprising individuals to make their mark in the world of business. While it has been around for decades, franchising has well and truly made an impact, around the world, only in the last few years. Much of this growth is owed largely to the birth of the internet and the subsequent IT revolution – but what is Franchising?
Businesses no longer have to stay localised, nor do they have to worry about managing the markets all by themselves. Franchising allows them to use to good effect the potential of motivated individuals without having to invest huge sums of money. On the other hand, small businesses that are light on resources can harness the popularity, goodwill and proven strategic ideas of bigger businesses to further their own interests. This two-way utilisation of resources is what makes franchising an indomitable business phenomenon in this day and age. But exactly what is franchising? How does one define ‘franchising’? Is there more to it than meets the eye?
We will try to answer all these questions for you here.
What is Franchising?
There exists no universal definition of franchising as the idea bears differing meanings around the world. We can, however, derive the following definition of franchising from the generally accepted meaning:
Definition of Franchising
Franchising is a business arrangement between the franchisor and the franchisee. This arrangement allows the franchisee to use the brand, products, services, know-hows, technology and other business facets developed by the franchisor to book profits. In the simples of forms, franchising allows both the parties to benefit from a mutually agreeable business relationship.
The ‘franchisor’, in this case, is the business that provides the business know-hows, products, brand or services. The ‘franchisee’, on the other hand, is the business that uses the said value as provided by the franchisor to run a sales-point in the franchisor’s name.
For a business model to qualify as a franchise business, certain necessary conditions must be met. Some of these conditions are noted below:
- The franchisor must own the intellectual property rights or trademark to the business services/products being franchised.
- The arrangement must be based on a proven business strategy.
- This arrangement must be backed by due licensing of the trademark. This is usually accomplished through a detailed Franchise Agreement. Please visit our Economics of Franchising page to learn more about Franchise Agreements and how they are drafted.
What is Not A Franchise?
Many business models market themselves as franchise businesses, albeit incorrectly. The most common example of such business models is the model of expansion. Typically, such models rely on finding local distributors that are not involved in the business to any extent that exceeds the buying and selling of products for a fee.
A common example is that of real-estate agencies. Such agencies recruit local agents across the country. However, these agents are neither the employees nor the franchisees of the agency. They are merely sales agents who earn their share of the business on the case-by-case commission basis. So, it’s fair to say that the operation of the agency in any given district, although handled by a local agent/business, is not a franchise business.
How Does Franchising Work?
The inner working of any franchise business is simple yet complex at the same time. While the underlying idea, that of allowing two businesses to work for profit in association, may seem straightforward, the intricacies involved at the operational, economic and legal fronts are anything but simple.
Franchising works on the principle of expertise and value sharing. The franchisor brings their brand, consumer goodwill, marketing strategies and other aspects to the table, while the franchisee takes care of ground-level distribution, sales, staffing and so forth. The profit sharing takes place on multiple levels. Some franchise businesses are based on fixed licensing fees and monthly franchise fees, while others run on a variable monthly profit sharing basis. Our How Franchising Works page discusses this in greater details.
Types of Franchise Businesses
Each franchise business is unique in its own right. Multiple factors such as the fee structure, the extent of support offered by the franchisor and the sharing of control in various business operations can differentiate franchises from one another. Based on these, franchises in the UK are generally classified into three broad types. These types of franchises are detailed below:
Business Format Franchising
This is, by a fair margin, the most popular type of franchising in the UK. As the name suggests, Business Format Franchising allows the franchisee to make use of the business format laid down by the franchisor. The franchisor may have spent years, along with considerable resources, in the development of the said business format. The term ‘business format’ is used here as an umbrella term to include the brand name, business expertise, distribution network, personnel, quality control and other business aspects. The franchisor shares these with the franchisee to enable the latter to register sales. Most franchise businesses in the consumer products and services category are based on Business Format Franchising.
Business Format Franchising is often described as the most convenient type of franchising for franchisees that do not have considerable franchising experience. This is largely due to the fact that the franchisor is expected to offer thorough support throughout the lifetime of the franchise – from the initial site selection to everyday business management.
The franchisee is expected to pay an upfront franchise fee, along with any applicable licensing fees as per the contract. In addition, the franchisor is, in most cases, entitled to a share of the sales registered by the franchisee. This share is marked as ongoing royalties.
A common example of Business Format Franchising is that of a gym franchise business. A well-established, well-known gym business licenses its brand name, popularity and goodwill to a franchisee, along with trained fitness instructors, supervisors, equipment and confidential know-how. The franchise pays an upfront franchise fee, along with the peripheral costs and starts booking profits as the authorised regional location for the said fitness brand. The franchisor offers continued support and help to the franchisee, while also charging quarterly royalties. While the franchisor gains from an ongoing stream of income and improved brand exposure, the franchisee gets to benefit from the established business strategies.
Product Distribution Franchising
This type of franchising is much simpler than Business Format Franchising. Product Distribution Franchising is, in many ways, a franchise-form of the traditional wholesale and distribution business model. The franchisor, in this case, offers the franchisee their products and/or services at a discounted rate. The franchise then gets the exclusive rights to sell these products and/or services in a particular region. Along with the product, the franchisor also shares with the franchisee the use of their brand, logo, advertising budget and so on. It’s worth noting here that the franchisee, in such an arrangement, holds a bigger stake and hence controls the franchise to a larger extent. Product Distribution Franchising usually involves no recurring payments or royalties.
Packaged beverages are perhaps the best-known exponents of Product Distribution Franchising. For example, a London based aerated drink business may sell the exclusive distribution rights to a local franchisee. The franchisee can then buy the drink in bulk quantities from the franchisor and sell the same to the customers in their region for profit. The franchisor profits here by helping the product move off their shelves faster.
This is a specialty type of franchising that is often used in cross-border and international franchising. A business may hold the global manufacturing rights to a certain product or to a specific technology. It can then sell these rights, limited to a particular region/country, to a franchisee for a set number of years. The franchisee can subsequently use these rights to manufacture the product at lower costs using local resources, and thus book profits. Manufacturing Franchising can be either royalty based, or licensing based.
Let’s consider the example of an electronics business. The business, based originally in Japan, wishes to sell its products in the UK. The costs of setting up an entire business for the same, however, are prohibitive. So, the business franchises their UK operations to an already operational UK business for a period of 10 years. The franchisee can now use the technology provided by the franchisor to manufacture the product locally, under the brand name of the franchisor. This allows both the parties to book profits.
Franchising and Profitability
Franchising is one of the most secure ways for inexperienced business owners to make money. At the same time, it’s worth understanding that franchising – like any other business model – has its risks.
(Read: Pros and Cons of Running a Franchise Business )
Before dissecting the profitability of franchising any further, we must realise that some of the world’s best-known brands and businesses have successfully based their operations on franchising. From Coca-Cola to Subway and from Kia to Mercedes, multi-billion dollar brands, thanks to franchising, have broken into markets that would otherwise have been off-limits for them. So, it’s clear that franchising is, when done right, extremely profitable.
The eventual profitability of any franchise business depends upon the market conditions and the state of competition.
Should You Run a Franchise Business?
If you are thinking of running a franchise business for the first time, there are quite a few factors you need to be aware of. On our website, we have compiled all the resources that a would-be-franchisee may want to keep handy. You can also visit these pages to learn how to acquire , run, finance and sell a franchise.
Important – It is imperative to use your best financial judgment and seek professional financial counsel before you get into any business contract.
Franchise Businesses in the UK – Steady, Solid Growth
Over the years, franchising has become a key business metric for many successful businesses. From retail giants to luxury car makes and from reputed real estate players to hotel chains, many businesses have adopted the franchise route to establish their stronghold on their respective markets. A quick look at some of the franchising stats gives us an insight into this trend.
- Franchise businesses collectively add over £15 billion to the UK economy.
- The average rate of growth for franchise businesses in the UK, over the past five years, has been around 10%.
- Of all the franchise businesses currently operational in the UK, over 80% are domestically developed.
- Franchise businesses currently employ over 620,000 people in the UK.
- As many as 50% of the franchisees claim to turn over £250,000 per annum, while nearly a third succeed in opening multiple units.
- Over 50% of all the franchise units in the UK manage to post profits within the first two years of business – a rate that is significantly higher than what independent businesses and start-ups can boast of.
Source: Proactive Marketing, UK
Staying on the Right Side of Things
The impressive growth of franchise businesses is not without its problems. Franchising, inherently, is a trust-based business format. As is the case with every walk of life, there are no guarantees to be had in franchising. However, over the years, a number of ‘bad actors’ have managed to merge the idea of legitimate franchising with the smokescreen of illegal pyramid schemes.
Therefore, before you sign up for any franchise opportunity, it’s important to make sure that you are dealing with legitimate franchisors.
Make Your Mark with a Successful Franchise!
Running a successful franchise business is no mean feat. From handling the staff to keeping a strict eye on the finances, you will have to ace many fronts at the same time to make it all work. Therefore, choosing a franchise opportunity that you are passionate about is as important as the fine print of the franchise agreement itself.
Hopefully, the above has now answered all of your questions and clarified exactly what is franchising.