Introduction to Franchising
Business franchising involves an established business (known as the franchisor) allowing a third party (known as the franchisee), to trade as their own businesses under the franchisor’s brand. This licence is usually granted on the condition that the franchisee pays the appropriate fee to the franchisor whilst following its standard business model. The franchisee will usually also receive training for key staff, ad hoc assistance with operational matters and centralised marketing.
Franchising is a continually growing market. The British Franchising Association (BFA) reported that at the date of its most recent survey (2018):
- 93% of franchisees claim profitability and less than 1% of franchisors close each year due to commercial failure
- 60% of franchised units turn over more than £250k per annum
- Franchised businesses turnover £17.2bn (with average growth in the market of approximately £1bn per annum)
- Franchised business employed 710k people and
- Lots of franchisees experience growth in their franchises, with 36% of franchisees now running multiple units.
The market research carried out by BFA proves that franchising is an effective and profitable method of establishing a business. The operational business support and the benefit of franchisor’s economies of scale significantly reduces the risk of business failure, mixed with the scope for rapid growth into multiple units contributes to the ever growing franchise market.
Franchising has numerous other advantages over starting a new business, including:
- Proven business model and ongoing support
A franchisor will provide operations manuals detailing the know-how and business techniques used to run a successful franchise. Additionally, a franchisor will usually provide ongoing guidance and training to the franchisee on general business or management skills, or the requisite industry specific knowledge in relation to the business. This will prove useful to a first-time business owner.
- Trading under an established brand name
A franchisee can take advantage of the franchisor’s pre-established name and reputation. This will significantly reduce the lead time in making a business successful and reduces the franchisee’s working capital requirements.
- Increased availability of finance
Franchisees may be able to benefit from more readily available finance and obtain that finance at a higher borrowing ratio than individuals setting up their own business. Most banks have dedicated franchise departments. The lower risk of business failure with franchises increases the likelihood a bank will lend to a franchisee and may also increase the sum the bank is willing to offer. Depending on the how established the franchise is, banks may be prepared to lend two or three times the amount to a franchisee than to an individual starting their own business.
- Economies of scale
The franchisee may benefit from the franchisor’s purchasing power and size in reducing the overall unit costs in supplying goods and services.
- Shared advertising and marketing budget
Franchisees will usually benefit from a shared advertising budget with other franchisees and the franchisor. Additionally, the franchisor will usually undertake its own advertising (sometimes on a national scale) to increase its brand.
Joel Gocool specialises in advising on and negotiating franchise agreements. Joel has a wealth of experience in identifying the key considerations a franchisee should make before starting a new franchise venture. If you require advice on franchising, please contact Joel Gocool on 01276 686 222 or at Joel.Gocool@Herrington-Carmichael.com.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
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