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If you are thinking of running a business or expanding your existing business model, you may want to consider becoming a franchisee or a franchisor. Running a franchise often has many advantages, such as utilising brand recognition and giving franchisees access to a proven business model. However, it is also necessary to understand the potential disadvantages before assessing whether franchising will benefit your business. This article will:
- explain what a franchise relationship is;
- consider some of the pros and cons of operating a franchise business; and
- provide you with a base level of knowledge to assess whether a franchise agreement might be something worth pursuing for your business.
What is Franchising?
Franchising is a business system. To take on a franchise, you have to enter into a franchise agreement with a franchisor. A franchise agreement will typically give you:
- the right to use the intellectual property and trade marks of the franchisor;
- the right to operate your business using their business structure and systems; and
- any additional terms that you can negotiate as part of the franchise agreement.
Some examples of franchised businesses that you may have encountered include:
- Costa Coffee;
- Kasha’s Desserts; and
- Nisa.
This handbook covers all the essential topics you need to know about franchising your business.
What Forms Does Franchising Take?
Franchises can take many forms, including:
- a business format franchise;
- a product distribution franchise; and
- a manufacturing franchise.
Business Format Franchise
In a business format franchise, the franchisor provides the franchisee with their name, products, and services, as well as a complete system for running the business. In turn, the franchisees gain an established business model.
Product Distribution Franchise
A product distribution franchise model means that franchisees sell the franchisor’s products, but they are not given access to the business’ operating system.
Manufacturing Franchise
A manufacturing franchise is where the franchisee manufactures and produces the franchisor’s products under the franchise’s name and trade mark. After meeting the product specifications, this model allows franchisees to have greater independence than other forms of franchises.
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Pros of Franchising Your Business
There are several benefits to expanding your business model as a franchise.
Business Expansion
Franchising provides an excellent opportunity to grow your business sustainably. This model will allow you to expand your business without the need for substantial investments of money. Franchisees invest their money into opening and operating their franchised business, paying you fees for using your business’ name, brand, and products.
As all business owners know, time is money. Franchising allows you to expand your business without investing significant time in the day-to-day operations of a new business site. This is the responsibility of franchisees. You will support the franchisees to get the franchised business up and running and continue to offer support throughout your business relationship.
Local Expertise
Franchisees’ local market knowledge can help your franchise adapt to new geographic areas. Their expertise in local demographics, culture, and market niches can increase the chances of success as your franchise expands into new regions.
Franchisees can also provide helpful market feedback, which may guide your strategic decisions. As they are on the ground running the operation, franchisees can provide you with an understanding of emerging trends and further market insights. You can use these insights to benefit other franchisees and the franchise network overall.
Attracting Entrepreneurs
Your business will already have suppliers, a customer base and recognition. As a result, entrepreneurs who want to start a business but want to reduce risk by becoming a part of an already-established brand may want to become a franchisee. Compared to starting a completely new business, the risk of failure is slightly reduced in a franchise, given the business model is proven to work.
Management Ease
As well as covering their costs, franchisees will deal with the management of staff and the day-to-day running of their business. This removes the responsibility of management from you. This allows you to focus on new opportunities to grow your franchise.
Brand Recognition and Goodwill
Entering into a franchise agreement may also expand your customer base because of the brand recognition of the franchise business. Brand recognition can be beneficial, as your customers will associate your product or service with a certain quality. This can be very useful as it allows you to benefit from the business’ ‘goodwill’. Goodwill simply refers to the reputation of your business (usually because of the high quality of your customer service or your product), which adds value to the business.
Cons of Franchising Your Business
In saying that, there are some disadvantages to franchising that you should consider.
Loss of Control
Outsourcing the day-to-day operations of individual franchised businesses to franchisees may sound ideal. However, this can come with a loss of control. As your business expands through franchising, you relinquish a degree of control to franchisees. They may have their own interpretation of how their business should operate, which can differ from yours. This can lead to inconsistencies in customer experience or the public understanding of your established brand. You can take steps to offset the risks of this loss of control and maintain consistency across your franchise network. Importantly, ensure that you set out clear and detailed guidelines in your franchise operations manual, a document that informs franchisees how they should run their business. Also, ensure you update franchisees on significant changes to the network and maintain open lines of communication.
Complicated Franchisors-Franchisee Relationship
The relationship between you and your franchisee may be complicated. To prevent issues, when starting a franchise, it is essential to clarify the roles and responsibilities of you and the franchisee from the beginning of your relationship in the franchise agreement.
Further, a franchise business will be highly structured. The structured nature of a franchise business can be beneficial, but it may also be a negative factor, as there is limited room for independent ideas. Because of this, a franchisee may not be able to use their ideas in the business itself. In other words, your business may struggle to develop independently.
High Set-Up Costs
Setting up a franchise often comes with a high cost. This may discourage entrepreneurs from joining your franchise if you extend these costs to their franchise fees.
It can also be expensive for you to begin franchising. Costs may include:
- investment in legal advice;
- marketing; and
- the development of a franchise operation manual.
Additionally, a franchisee will have to pay the franchisor a franchise fee. Franchising, then, comes at a financial cost to a franchisee’s business. Because of this, a franchisee will want to make sure that the extra money you receive from being a franchised business will outweigh the costs. This is most likely to be the case if your business would not have made much money without the help of the franchise’s brand recognition and business plan.
Initial and Ongoing Support
Franchising is not a completely hands-off system. That is to say, franchisors must ensure that they provide reasonable support to franchisees. This means franchisors must provide training to franchisees when new franchise businesses are forming.
Moreover, as a franchisee, you should also make sure that you are familiar with your obligations to the franchisor, as the terms of a franchising agreement can be skewed against you. For example, a franchisor may require you to pay ongoing fees amounting to a cut of your profit. This might be worse than paying a flat fee every week. Similarly, you may have to pay marketing fees to the franchisor. You may also be obliged to order all of your products from a supplier selected by the franchisor, which might be at a higher cost to other suppliers.
Finally, at the end of the franchise agreement, there may be additional obligations, such as a restraint of trade restricting your ability to operate a similar business.
How to Franchise Your Business
Some of the critical steps to franchise your business in the UK include:
- ensuring that you can franchise your business;
- developing a plan for your business’s long-term success by creating a comprehensive strategy;
- choosing a fee structure that is suitable for the franchise;
- writing your franchise operations manual;
- developing training for the new franchisees; and
- attracting potential franchisees through marketing.
Key Takeaways
Franchising can be a great way to run a successful business. However, it will depend on the type of business that you want to operate and your business experience. Before entering into a franchising agreement, make sure you have thoroughly understood the terms of the agreement. This will be very important because you may take on legal obligations, which could be bad for your business if the franchising model does not work out.
If you need help with deciding if franchising is right for you, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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