What is franchising?

Wouldn't it be great if there was a way you could start a business of your own with a much greater chance of survival than the average start-up? Well, there is and that method is called business format franchising and here's how it works...

Statistics from the British Franchise Association (BFA), the UK franchise industry’s regulatory body, suggest that a franchise business has a much greater chance of surviving the first three years of trading than other types of new businesses. The 2005 NatWest/BFA UK Franchise Survey reports that 88 per cent of franchisees operating in the UK are profitable, and the contribution franchising makes towards the UK economy is estimated to be £9.1billion.

One of the reasons franchising works so well is because the buyer of the business model (the franchisee) operates under an established brand and uses a proven business system provided by the core company (the franchisor). When you join a franchise network and become a franchisee, you will pay an initial fee to establish your business using the brand and format of your chosen franchisor, but it will be your business. You will pay continuing fees for the support that will keep you operating successfully, earning profits on the trade you do and building a capital asset that you can resell.

Investment and goodwill

The NatWest/BFA UK Franchise Survey showed that 32 per cent of franchisees entered franchising through purchasing an established unit. Goodwill built up by the previous franchisee’s work represents a significant proportion of the investment required to take over an existing unit as a so-called ‘resale’, which indicates that franchisees are building real capital value into their businesses.

But clearly you don’t get something for nothing. The price of choosing the franchise route to running your own business can be high and there will be compromises to make along the way. You must therefore weigh up the costs of buying a franchise with the risks of starting from scratch.

Some of the costs are obvious; you may have to pay a lump sum at the outset as well as paying an amount each year to the person selling the franchise. Less obvious are costs such as those associated with buying a franchise in which you have to purchase products from the seller’s company at a price determined by it; in this way, you cannot benefit from shopping around to buy your supplies at the cheapest possible price.

One of the economic theories behind the success of franchising is that the franchise business can earn higher-than-normal profits on its products. The intention of the franchisor is to cream off the above-normal bit of the profits, for example, by charging the franchisee an amount derived from a percentage of sales each year, leaving only the normal bit of the profit for the franchisee. These higher-than-normal profits can help build up a brand image for the product or service by carefully positioning the entire business in the marketplace.

See also: How do I know if franchising is for me?

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