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If you have your heart set on becoming your own boss, but haven’t had that flash of inspiration that’s given you a business idea yet, a franchise can be the perfect route to work independence.
But is buying a franchise right for you? Here we look at everything you need to know about franchises, including the pros and cons of becoming a franchisee. Let’s get started.
What is a franchise?
A franchise is an established business that is up and running, whereby the business model – including the company name, trademarks, and marketing assets – can be rented and taken on by individuals who wish to set up their own branch of that business.
- The franchise is the overarching business
- The franchisor is the owner of the overarching business
- The franchisee is the person who has bought the rights to use the business model of the overarching business
Franchises can be split into three categories:
1. Business format franchise
This is the UK’s most popular form of franchising. After paying a fee to the franchisor, the franchisee can use a business’s name, trademarks, and overall business model, to set up a version of that business that they will own and run (for the period of time set out in their contract with the franchisor).
This business should be operated in line with the rules set out by the franchisor. The person making the payment does not receive a share in the main business.
2. Product distribution franchise
The franchisee is permitted to use the branding and stock of a franchise, but generally, that’s where the support ends.
3. Management franchise
This is when the franchisee employs other people to carry out the day-to-day operations of the franchises they have purchased, whilst they take care of the managerial duties.
Examples of franchises in the UK
Some of the most well-known fast food and coffee brands in the UK are franchises:
However, franchises are not the sole domain of fast food restaurants and coffee shops; the concept has spread across all industries. Here are some more franchises that you may be familiar with (to name just a few):
- Autosmart
- Bang & Olufsen
- Greene King
- Little Kickers
- Mail Boxes Etc
- TaxAssist Accountants
- Winkworth Estate Agents
What is the process for buying a franchise?
The exact process will depend on the franchise that’s being bought. However, the process will typically follow these steps:
- Having researched the different franchise options available and decided on the franchise that’s right for them, the franchisee enters discussions with the franchisor
- If all the terms are agreeable, the franchisee pays an initial fee that will allow them to use the branding and business model of the franchise (and other assets, such as stock) for a set period of time
- The franchisee is provided with sufficient training on being able to deliver the service(s) associated with the brand
- If a physical location is needed (for example, a shopfront), the franchisor will assist with finding suitable premises and fitting these out
- The franchisee opens for business, paying an ongoing royalty fee to the franchisor
- Support, through guidance, is provided by the franchisor as and when it’s needed
The advantages and disadvantages of buying a franchise
If you are giving serious consideration to buying a franchise, it pays to know both the pros and cons of going into business with this model.
1. The advantages of buying a franchise
Less risk
When you conceptualise your own business, there are no guarantees that there’s a demand for the product or service that you are offering.
You may already possess industry knowledge, but your particular take on how to deliver a service relating to this may fail.
With a franchise, whilst there’s risk regarding your location and ultimate delivery, there is the safety net of the ‘tried and tested’. The methods set out in the franchise’s business plan should work and be financially lucrative for you.
Customers already know about you
Marketing a new business is a huge endeavour. When you take on a franchise, the majority of the work has already been done for you. The branding is in place. The tone of voice has been set. The websites are up and running. Essentially, the customers are ready and waiting for you.
Train up and go
If you have created a business entirely off your own back, you will have probably done so using your previous experience and expertise – which will have taken considerable time and effort.
The concept of a franchise means that anyone with a good amount of business acumen, regardless of their experience, can take on the role once they have been through the training process.
Ongoing support
A major benefit to the franchise model is the level of support on offer if you do encounter a problem.
It’s in the franchisor’s best interest that you are successful (because of the royalty payments you will make and your role as a brand ambassador). When you encounter an issue, your contact should be on hand to provide solutions informed by a wealth of previous experience.
Access to funding
Because you are working with a business model that has already provided success, you will be seen as less of a risk to banks and other lenders if you ever do decide to seek funding.
Plus, your franchisor will probably provide you with detailed account information when you do go about doing this, making the process considerably less stressful than if you were looking for investment for your own startup.
2. The disadvantages of buying a franchise
High costs
The cost of buying a franchise will depend heavily on what you are purchasing, with prices starting in the thousands and going into the millions. As you would expect, a successful, longstanding franchise will cost a lot more than a relatively new, riskier franchise.
If you want to negate any business risk and purchase a franchise where success seems highly likely, you will need access to a large amount of money.
Permanency is not guaranteed
The contract you sign with the franchisor will define how long you hold the franchise.
Once this period of time is over, you may be given the option to extend your contract, especially if your branch is proving to be successful; but there is nothing from stopping the franchisor ceasing your relationship or increasing their rates. This adds an element of uncertainty to the franchise model.
It can be prohibitive
With a franchise, you must work in accordance with the terms set out in your initial agreement with the franchisor. This will determine the core offering of your business, as well as any marketing activity; however, this can also steer other aspects of the business, such as the hours in which you operate and your recruitment policy.
This lack of control can be stifling to anyone who is more entrepreneurial-minded.
Lack of succession plan
As the owner of a business that you started from the ground up, when the time comes for you to step down and pass the business on to someone else, you will have the final say over who takes the reigns.
This privilege is not typically afforded to someone who has purchased a franchise, with the ultimate decision-making powers falling to the franchisor.
If the franchise fails, you fail
If the franchise as a whole were to collapse, despite maybe years of hard work and success on your part, your business could suffer the fallout of failure too. This will be concerning to anyone who wants full autonomy.
The intricacies of what happens when a franchise fails will depend on your contract, so, our advice would be to scrutinise all franchise documentation before you sign anything.
Choosing the right business structure for a franchise
As with any other type of business, when setting up a franchise you will need to decide what business structure to move forward with. In the UK, your two main options are to set up a limited company or operate the business as a sole trader.
In most cases, the franchisor will provide guidance on what business structure you need to operate the franchise as. They may even demand the structure. If they give you the freedom to choose, it’s worth taking a look at this article: Sole trader or limited company?
To highlight one major advantage of the limited company structure (and disadvantage of the sole trader structure), it’s worth considering financial liability.
A franchisor does not generally support its franchisees financially. This means if the franchisee’s business were to run into financial difficulties and incur debts, the franchisee would be responsible.
See also: Different types of business structures for your startup See also: Tax implications of forming a company while still employed See also: How to sell your business
Whether or not you, the franchisee, end up paying out of your own pocket will depend on the business model you are using. If you are a sole trader, you would be personally liable. However, if you are operating as a limited company, you would only be financially liable for the nominal value of any unpaid shares that you hold.
In short, the limited company structure provides a level of financial protection that the sole trader model does not.
Thanks for reading
Franchises can be a great way to get into business and become your own boss; however, there are limitations on how free you actually are. We hope this article has proven useful in helping you decide whether buying a franchise is right for you.
Please leave a comment if you have any questions about franchises, choosing the company structure that’s right for you, and forming a limited company.
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