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What is franchising?

The term franchising can describe some very different business arrangements. It is important to understand exactly what you're being offered.

Business format' franchise

This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchiser) grants a licence to another person or business (the franchisee) to use its business idea - often in a specific geographical area.The franchisee sells the franchiser's product or services, trades under the franchiser's trade mark or trade name and benefits from the franchiser's help and support.In return, the franchisee usually pays an initial fee to the franchiser and then a percentage royalty on sales, although some franchising arrangements do not include a royalty payment.The franchisee owns the outlet it runs. But the franchiser keeps control over how products are marketed and sold and how their business idea is used.Many well-known businesses offer franchises of this kind, including famous brands in sectors such as fast food, drain clearance, print and copying, cleaning chemicals, pet food deliveries, and automotive repairs.

Other types of sales

Different types of sales relationships are also sometimes referred to as franchises. For example:

Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
Agency - you sell goods or services on behalf of the supplier.
Licensee - you have a licence giving you the right to make and sell the licencor's product. There are usually no extra restrictions on how you run your business.


Advantages and disadvantages of franchising


Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

  • Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
  • You can use a recognized brand name and trade marks. You benefit from any advertising or promotion by the owner of the 
  • franchise - the "franchiser".
  • The franchiser gives you support - usually including training, help setting up the business, a manual telling you how to run 
  • the business and ongoing advice.
  • You usually have exclusive rights in your territory. The franchiser won't sell any other franchises in the same region, 
  • though there will be competition from other businesses.
  • Financing the business may be easier. Banks are sometimes more likely to lend money to a franchise with a good reputation.
  • Risk is reduced and is shared by the franchiser.
Disadvantages
  • Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and 
  • you may have to agree to buy products from the franchiser.
  • The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to 
  • suit your local market.
  • The franchisor might go out of business, or change the way they do things.
  • Other franchisees could give the brand a bad reputation.
  • You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
  • Reduced risk means you might not generate vast profits. 
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