Franchising

What is franchising?

It arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it to trade using the brand/business format

What is a franchisor?

They are business that sells the right to another business to operate a franchise – they may run a number of their own businesses but also may want to let others run the business in other parts of the country

What is a franchisee?

A franchise is bought by the franchisee

What happens during franchising?

Once they have purchased the franchise, they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns. They may also supply the raw materials and equipment.

Why is franchising a good way for an individual to set up a business?

• They do not have to establish themselves in the same as a sole trader might have to.

• They will have the support of a tried and tested business model, often with a national marketing campaign behind them

What are the benefits to the franchisor?

• The franchisee is given support by the franchisor. This includes marketing and staff training. So, starting a business in this way requires less expertise and is less lonely!

• The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product

• Less investment is required at the start-up stage since the franchise business idea has already been developed

• A franchise allows people to start and run their own businesses with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market

What are the drawbacks to the franchisee?

• The cost to buy a franchise – can be very expensive (hundreds of thousands of pounds).

• Have to pay a percentage of your revenue to the business you have bought the franchiser from.

• Have to follow the franchise model, so less flexible. You would probably be told what prices to set, what advertising to use and what type of staff to employ.