In the UK, there are over 1,000 franchise businesses, employing over 710,000 people and, in many cases, registering a turnover of £250,000. Despite this, a lot of people are still in the dark as to how a franchise operates.
As the popularity of this business model continues to increase, the following is a guide to everything you need to know about the operation of a franchise business.
To begin with, a franchise is a model which allows individuals to own and run their own business without the expense and risk of having to build a company from the ground up. First, we’ll take a look at the players within this model:
The Franchisor will generally be a company that has been operating for a significant period of time and has an established client base.
The company will have enjoyed a level of success that has allowed it to ‘branch out’ by offering franchise opportunities to individuals. By doing this, the Franchisor can expand its business quickly and at a relatively low cost, including expansion overseas.
The Franchisee is an individual who will buy a franchise from the Franchisor. For example, they may buy a franchise in order to be able to open their own branch of the company within their local area.
The benefit to the Franchisee is that they are able to go into business for themselves at a considerably lower cost than if they were starting a brand new business. The Franchisee also benefits from ongoing support and low prices on materials and equipment.
How a franchise operates
There are many different franchise businesses to choose from, spanning a wide range of industries, so the first task for any wannabe franchisee is to choose the franchise business that is right for them.
Once this has been accomplished, the process will begin as follows:
Looking good on paper
The franchisor will supply the franchisee with a Franchise Disclosure Document (FDD). This extremely important document will detail everything the franchisee needs to know about their potential new business, including what they can expect from the franchisor and, more importantly, what the franchisor will expect from them.
The FDD really is the Holy Bible when it comes to committing to a new franchise business so, not only should franchisees read this extremely carefully but, they should also hire a solicitor to give it the once over too.
Paying the franchise fee
With most franchise businesses, a successful application will involve the payment of an initial fee. This varies widely from business to business and can range from a couple of hundred pounds to a whopping £5 million for a huge, corporate-based franchise business.
This initial fee is paid to secure the new franchise business and will often include things that the franchisee will need in order to get up and running, such as shop fitting, equipment and enough stock to get started.
Some franchisors will expect the franchisee to come up with at least a portion of the initial fee themselves, either from savings or, perhaps, from family. The rest of the fee can be raised through funding such as a bank loan.
Franchisees have an advantage here because, if they are buying into a well-known, established business, they will find that banks and financial organisations will generally be more receptive to accepting their loan application.
The initial fee will usually need to be paid to the franchisor on signing the contract and is non-refundable.
Once the franchise contract has been signed and the initial fee has been paid, there will usually be a training and induction period whereby the franchisee is taken through the company’s rules and guidelines as well as learning the ropes.
Franchisees should always take full advantage of any training and help offered as this will stand them in good stead for when they start running their business.
Setting up for success
With the training under their belt, the new franchisee will then begin to set up their business. If the franchise is a brick and mortar one, such as a coffee shop, restaurant or retail franchise, this will involve overseeing the preparation of the premises, the ordering of stock and equipment and, the hiring of employees.
On the market
Now that the countdown to opening the new franchise business has begun, the franchisee will be responsible for marketing the business to ensure that those all-important customers appear once the doors have opened.
Marketing activities may include email outreach, social media, PPC advertising and live events, such as street promotions.
Starting the franchise business
Once the franchise business is up and running, the franchisee will have access to help and support from the franchisor to help them stay on track.
For businesses that deal in physical products, the franchisee will also benefit from low stock prices due to the franchisor’s bulk buying discounts.
On signing the contract, the franchisee will be provided with details of the company’s approved suppliers.
At your service
As the franchise business goes full steam ahead, the franchisee will be responsible for paying a service fee to the franchisor. As with the initial fee, this varies from franchise to franchise but will usually be between 7% and 8% of the sales made and will generally be paid monthly.
In some cases, the fee will be based on sales rather than profits (which is not always great for the franchisee). This fee allows the franchisee to continue ‘ownership’ of their business and allows them continued access to benefits such as advertising by the franchisor and low prices on stock.
If the franchisee is successful, they might consider buying a second franchise from the franchisor. Most franchisors will have guidelines for this, including the number of years a franchisee should be operating in profit before buying further franchises.
In the UK, franchising is an incredibly robust business model, but it is possible for a franchisor to go into liquidation in very rare cases if the business fails. In this unlikely scenario, the franchisee will be required to continue operating their franchise and pay service fees until a new owner/franchisor is established. If such a new franchisor is not found, the franchisee’s contract will be terminated.
The be-all and end-all
Although there are variations, the franchise contract will usually be set to run for a duration of five years. As the end of this period approaches, the franchisee (if successful) will be given the option to renew the contract for a further term, at which point a new fee will need to be paid and a new contract signed.
If the franchisee chooses not to renew the contract (or the franchisor chooses not to renew), the contract will be terminated, and the franchisee’s business will revert to the franchisor, who will then appoint a new franchisee.
While this article has most likely given you a lot to think about, the process of becoming a franchisee is usually fairly quick and straightforward. Still, it is a good idea to have all the facts beforehand so that you can put in the prep to make the process go even more smoothly.