What is a Franchise?

Put very simply, franchising is a business model designed to enable established businesses to expand more quickly than through natural, organic growth. In return for certain fees and royalties, the franchisor gives the franchisee the right to market a product or service using the franchisor’s operating methods and intellectual property.

There are two main franchising models in the UK: “product and trade name franchising" and “business format franchising”.

Product & Trade Name Franchising

This franchise model is, essentially, a distributorship and is usually associated with industries like soft drinks, petrol and cars. In this model, the franchisor provides trademarks and logos, national advertising campaigns, and most importantly, product.

Business Format Franchising

In this model, the franchise agreement gives the franchisee rights to use a complete system of doing business, including logos and trademarks and the right to operate under the franchisor's trade name. The franchisee pays an upfront franchise fee and agrees to pay continuing royalties to enable the franchisor to provide ongoing research and development and support for the individual franchisee and the entire business system. This franchise model covers a wide range of businesses, including fast food restaurants, automotive services, estate agents, convenience stores, recruitment agencies and consultancy. Auditel is an example of a full business format franchise.

Within each franchise model, there are different types of franchise business. Before you consider individual franchise opportunities, you should give some consideration to which type of business you would like to run. Types of franchise include:

Retail
This type of franchise will occupy retail premises and will sell products or services for ‘walk-in’ retail. The business is totally dependent on the premises and turnover is generated from walk-in customers. Marketing and advertising will probably be carried out on a national basis by the franchisor but franchisees will need to invest in a lease-hold property, buy stock and may need to employ and manage staff. Depending on the product or service involved, the retail hours may be long and include weekends and bank holidays.

Business-to-business management
In this type of franchise, turnover is generated by business-to-business sales. An example would be a recruitment agency. The franchisee is responsible for overall management of the business and the staff who carry out the function of the business. They will also probably be responsible for marketing the business locally. This type of franchise will usually require office premises.

Single Operator Franchise - MANUAL
This type of franchise is sometimes referred to a Job Franchise. The franchisee will work as a sole practitioner, usually supplying, selling and delivering products or a service. It may be mobile (which may involve investing in a van), home-based or require small office premises. An example would be providing a mobile service for removing chips in car bodywork.

Single Operator Franchise - EXECUTIVE
This type of franchise is often referred to as a ‘white collar’ franchise because the franchisee is usually engaged in providing some kind of professional service. As a result, this type of franchise can be home-based, although some franchisees might prefer to work from a small office premises. The franchisee might have existing experience of the professional service provided under the franchise, but usually this is not necessary: most white collar franchises provide training and ongoing support under their franchise agreement. Auditel is a white collar franchise.

What Next?

In this section we also cover the following questions:

Other franchised businesses for sale

There are two other types of franchise available in the UK, although they are more like traditional business investment than a route to self-employment.

Investment Franchise
In this type of franchise, the franchisee invests a sum of money (usually significant) in the franchisor’s business, for example a hotel. In this case, the franchisee usually works at ‘arm’s length’ from the business and will employ a management team to operate it. This type of franchise is really only suitable for investors with experience of running a large business.

Master franchise
A master franchise is one that gives the franchisee rights to sub-franchise the business system. It is usually the method by which a franchise already operating in another country enters the UK market. As a master franchisee, you would be responsible for evaluating the market opportunity and would, essentially become the franchisor in the UK. This means you would be responsible for marketing the franchise opportunity, recruiting franchisees, developing and maintaining the business system, training and supporting franchisees. As a result, you will essentially be running two businesses: the core business and the franchise business.

Investing in an established franchise
Another option is to seek an established franchised business which the owner wishes to sell. This will usually cost you more than a standard franchise with the same company, but you will have the benefit of an existing customer base, goodwill and income from day one.

The ability to build a capital asset and sell your franchise on at a later date is something you should consider when carrying out your due diligence.

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