Franchises

You want the challenge of running a business but want to minimise the risks. Above all, you want to know your business idea is viable before you start. A good solution may be to take on a franchise.

If you want to run a business venture but want the security of knowing the business idea is workable, then franchising is an option well worth considering. It allows you to benefit from an existing brand name, and the business back-up of the brand owner.

What is a franchise?

The most common type of franchise is where the owner of a business grants a licence to another business to use their business idea. This is usually referred to as ‘business format franchising’. The franchisee pays a fee to the franchisor plus a percentage of sales revenue. In return, they sell the franchisor’s product.

To give a fictitious example, a national brush company trading under the name of Brushes grants a licence to individual shops to use their business idea. Each individual shop then becomes a franchisee, running a business called Brushes. The individual shops pay a fee plus a share of their revenue to Brushes. In return, Brushes offers the shops support and advice on marketing, design and sales. The franchisees own their businesses, but Brushes controls the way the products are marketed.

As well as an established product, marketplace and brand name, the franchisee benefits from the bulk-buying power, training opportunities, advertising and market intelligence of the franchisor. Compared with other start-up businesses, franchises are less likely to fail and take less time to turn a profit. The downside is that the franchisor may impose restrictions on the way the franchisee runs their business.

McDonald’s, Kentucky Fried Chicken and Toni & Guy are three well-known examples of franchised businesses, but there are many more examples. Franchises could be gyms, restaurants, clothes shops, mobile phone outlets, garages, car showrooms or any viable business.

The franchise could also take the form of a dealership, where the franchisee sells the product but operates under a different name. Or the franchisee could act as an agent for the franchisor, selling goods on their behalf.

The small print

The devil is in the detail with franchise agreements. It is best to seek independent legal advice before you sign, preferably from a solicitor accredited by the British Franchise Association.

Before signing up, you should pay particular attention to the following.

• How long does the franchise last? Do you have the option to renew the franchise and if so, on what terms? What is the geographical area of your franchise, and do you have exclusive rights to sell within it? If not, what sort of competition is there?
• What are the costs involved? How are they worked out, and are they reasonable? How much of a share do you have to pay the franchisor? What is the initial fee? (A high initial fee may indicate a lack of confidence on the part of the franchisor.) What if the venture is not profitable?
• Will the franchisor offer training opportunities for you and your staff? How much support do they offer, in terms of problem-solving, marketing advice and other help? What restrictions are in place? What can you do, and what can’t you do?
• What happens if you need to give up the franchise? Are you tied in? What is your exit strategy should you have to give up the business?