What is a franchise business?

If you’re keen to carve out a new career as your own boss, there’s a whole world of opportunities you can potentially pursue, from online business ideas to opening your own food and drink venue. There’s also what many entrepreneurs might consider a bit of a curveball option – namely, launching a franchise business.

It’s estimated there are currently at least 48,000 franchise business units throughout the United Kingdom, providing jobs for over 710,000 people. What’s more, they tend to be reliably fruitful when it comes to cash flow, with research showing that an impressive 97% of franchise business operators have reported turning a profit over 20 consecutive years.

So just what is the franchise business model? What are the advantages and disadvantages of franchising? What kinds of companies are currently offering franchising business opportunities? This guide will run through the key facts so you can make an informed decision on whether a franchise business is the right fit for you.

What is a franchise business?

A franchise business model involves the owner of a pre-existing brand (the franchisor) selling the rights to the brand and its established products, services and business practices to an independent entrepreneur (the franchisee).

Depending on the specific franchise agreement, a franchisee may pay an initial licensing fee and ongoing royalties on all sales made, in order to trade under the brand’s name and/or sell its products.

This means the franchisee doesn’t have to spend a lot of time sifting through small business ideas, and even more time building a brand from the ground up. All of that will have been done already, by the franchisor.

Meanwhile, from the franchisor’s point of view, a significant advantage of franchising is being able to expand, generate more profits and increase brand visibility without having to invest money and resources in directly operating new outlets.

There are two main types of franchise business to consider: product franchising and business format franchising.

Product franchising

Product franchising, also known as product distribution franchising, is where the franchisor makes a deal with a franchisee to allow the latter to sell its products. One classic example of a product franchising business is when a car dealer enters into an agreement with a car brand to sell its vehicles at a showroom.

While a product franchisee may put up signs bearing the franchisor’s branding, they operate on their own terms with little or no involvement from the franchisor.

It’s essentially a supplier-distributor relationship, without ongoing training or guidance, which means the franchisee doesn’t have to concern themselves with coming up with original ideas for things to make and sell.

Business format franchising

Under this franchise business model, the franchisee operates using equipment, processes and marketing assets provided by the franchisor, with extensive training and ongoing support also provided. 

In other words, the franchisee is essentially operating a branch of the franchisor’s business, while retaining independent ownership of that branch. From the customer’s point of view, specific franchisee outlets are indistinguishable from the “parent” franchisor company.

Indeed, some very well-known businesses will boast both company-owned and franchisee-owned outlets. For example, the overwhelming majority of McDonald’s restaurants in the UK are business format franchises, but there are also a few hundred company-owned outlets. The franchisee and company-owned restaurants look the same and operate in the same way.

Pros and cons of starting a franchise

In answering the key question of “what is a franchise business?”, we’ve already briefly touched on some of the benefits that the model can bring. But now let’s clearly break down the advantages and disadvantages of franchising for a new entrepreneur.

Advantages of franchising

A ready-made formula for success

The question of how to come up with a business idea can turn out to be a significant barrier for many people who want to work for themselves.

While some prospective business owners may be inspired by, say, hobbies that make money or side hustle ideas which they’d like to expand into a full-time career, others may not have a clear notion of what kind of business to create.

A key advantage of franchising is that you don’t have to expend a lot of energy into developing an original idea, or wait patiently for inspiration to strike. You’ll be handed a ready-made business formula, with every aspect of operations – from what to sell, to which suppliers to utilise, to how to price a product – already decided for you.

This also typically makes running a franchise a less rocky process than creating your own business from scratch, since you’ll be working to methods that have been tried-and-tested. By contrast, starting a fresh enterprise may involve trial and error when it comes to, say, developing pricing strategies and taking orders from customers.

Built-in brand recognition

Another great advantage of franchising is that you’ll be taking on the mantle of a market-tested brand which may well have a pre-existing customer base.

Instead of needing to invest a lot of time into brainstorming business name ideas, working out how to identify your target market, and strategising how to gain visibility in a crowded sector, you’ll be launching a business which already has marketplace presence, complete with (hopefully) favourable reviews online.

While the creator of a new brand will naturally feel some uncertainty over whether it will go down well, a franchisee can rest easier knowing the brand has enjoyed success. You’ll also know that, as long as you meet people’s established expectations regarding the brand, you can be reasonably sure they’ll be happy.

Training, equipment and support

Becoming your own boss can be a liberating and immensely satisfying experience, but it can also be daunting to go it alone. After all, even ventures which carry less risk, such as low cost business ideas, will inevitably come with challenges which – as a solo entrepreneur – you’ll have to deal with on your own.

By contrast, opening a franchise business typically means you’ll be supported every step of the way. There may well be initial open days and webinars introducing you to the franchisor company. Once you’ve signed up, there will almost certainly be weeks of training and work experience, and ongoing support on things like maximising sales and employee retention.

Many business format franchises also provide premises, equipment and staff uniforms, with the company’s staff on hand to help with any questions or challenges you might face during the lifetime of your franchise business.

Disadvantages of franchising

Potentially high costs

All the training, equipment and baked-in customer loyalty comes with a price tag, and it’s fair to say the franchise business model probably won’t be suitable for entrepreneurs seeking business ideas with low investment.

What you’ll pay in terms of initial franchise fee and continuing royalties will very much depend on the size and status of the franchisor. For example, buying into McDonald’s, one of the world’s most-recognised brands with revenues to match, will require a chunky investment.

According to the most recent data from the fast food giant, the cost of purchasing franchise rights and equipment can range between around £350,000 and £1.85 million. You’ll be expected to provide 25% of this yourself in unencumbered funds, while the rest can be funded through a bank loan.

On top of this, you’ll be expected to pay anything up to 21% or more of your monthly net sales to the franchisor, plus further payments towards McDonald’s marketing fund and the running of its tech infrastructure.

While you’ll pay a lot less to join a smaller franchisor’s network, the costs can still be considerable. 

For example, the upfront franchise cost for becoming a part of the Oven Rescue oven cleaning company is around £12,500. For this, you’ll get training, marketing materials, branded workwear, tools, and access to a territory encompassing 60,000 households.

Lack of creative control

As a franchisee, you will be your own boss to the extent that you’ll be responsible for running your branch and hiring staff, and the profits will go into your pocket (after paying the franchise fees of course).

However, you will be bound by your specific franchise agreement, and may be expected to follow the franchisor’s stipulations regarding any of the following:

• What kinds of products and services you offer

• What equipment and software you use

• What marketing materials and tactics you use

• What hours you work

Such stipulations allow the franchisor to maintain its brand identity and to ensure customers get the same or very similar service no matter which franchised outlet they go to. But it does mean you won’t be able to introduce your own innovations or otherwise take your business in a new direction.

Lack of reputational control

We’ve discussed how buying into an established brand is a significant advantage of franchising. However, there is a flipside to this, which is that your success can be tied to how the brand is perceived on a regional or national level at any given time.

The worst case scenario here would be a news story that impacts the franchisor company, causing the public to turn against your brand. Think health or hygiene issues hitting a food franchise, or corporate financial misdeeds being reported.

Less dramatically, your brand may simply slip out of fashion over time, either because it’s been overshadowed by a competitor or consumer tastes change. This can have the knock-on effect of hampering customer acquisition.

Ultimately, the reputation of the brand is outside the control of any one franchisee, so this needs to be taken into account when you’re weighing up opening a franchise versus, say, setting up a limited company of your own.

Possibility of being misled

One of the plus points of looking into how to start a business of your own is that you won’t have to place your trust in anybody but yourself.

By contrast, franchising carries the risk of being misled by the parent company, whether in terms of what it’s really like to run one of its franchises, or how much money you can expect to make.

Many franchisors are globally-known companies which can largely be trusted to act in good faith towards franchisees. However, a glance at one of several franchise directories online will quickly reveal there are numerous smaller, lesser-known companies offering franchise business opportunities. 

It may be tricky to work out whether or not they’re overpromising when it comes to profit margins for franchisees, so it’s important to be vigilant and look closely at the numbers.

What makes a good franchise?

Embarking on a franchise business is a major endeavour. Depending on the franchisor, you may have to undergo a vetting process involving interviews. And then of course there’s the upfront investment. So it’s important to ensure you’re buying into the right company.

Signs that a franchise is worth pursuing

Here are some green flags to look for when assessing a franchise opportunity:

It’s a well-known brand

As discussed in the previous section, franchisors come in all shapes and sizes. If it’s a large, long-established company whose track record is obvious – say, a Costa Coffee or a Domino’s – then you’ll know you’ll benefit from very high brand recognition. You can also be reasonably sure that its profit projections are believable.

Of course, it’s not essential that your franchisor is one of those universally-known brands. They can be prohibitively expensive to buy into, for one thing. Plus, many franchisors will never have household name status no matter how successful, due to the nature of their industry (for example, domestic cleaning).

That said, the better known the brand, the more of a green flag it is.

It has a transparent franchise model

Clarity is key when you’re entering into a franchise business agreement, and it’s always a good sign if the franchisor doesn’t make you work too hard to find out the details of how the arrangement will work.

 Many reputable franchisors will have specific websites, or sections of their websites, dedicated to their franchise operations. These allow you to get the lowdown on what financial commitments are required and what kinds of benefits you’ll receive.

It already has a thriving franchise network

The existence of an already large and thriving network of franchisee outlets is a great sign that the brand is effective and its franchise model is viable. If it isn’t already clear that the company has many franchisees, it’s something well worth asking during the initial stages.

There’s a well-organised training programme

Launching a franchise means getting to grips with a new way of working. It’s therefore important that the franchisor has a meticulous training programme which will make you feel comfortable with the ins and outs of the business, and positive about moving forwards on this fresh career path.

It doesn’t hard-sell its franchise model

Entrepreneurs should be wary of any franchisors which take a highly “salesy” approach to franchising. 

This can include promising very high, easy profits right off the bat, and following up your initial query with high pressure emails and calls hyping up the money-making potential of their business.

Reputable franchisors will take a calm and professional tone in their franchise marketing materials, emphasising how success depends on hard work and dedication, and presenting believable profit projections.

It’s a member of the BFA

The British Franchise Association has been in existence since 1977 and holds its members to high ethical standards. So, whether you’re thinking of becoming a part of a major, global company or a smaller business which is offering franchising opportunities, it’s worth checking the BFA directory to see if it’s a member.

Do a franchise SWOT analysis

When assessing the pros and cons of a specific franchise business, it can be helpful to draw up a SWOT analysis for small business success. This is a very straightforward way of arranging your thoughts on the page (or computer screen) so you can weigh up the attributes of a business idea.

The SWOT analysis takes its name from the words “Strengths”, “Weaknesses”, “Opportunities” and “Threats”, and consists of a simple 2x2 grid template which you can simply sketch on a piece of paper.

Strengths and weaknesses

The top two boxes of the grid are headed “Strengths” and “Weaknesses”, and these are where you should jot down the inherent pros and cons of the franchise business. That is to say, the pros and cons that aren’t affected by external factors.

For example, if the franchisor is a globally-recognised company, key strengths can include high brand visibility and an extensive support network, while weaknesses can include high initial investment and a more strenuous, high-pressured workplace culture.

Opportunities and threats

The lower two boxes of your SWOT analysis are headed “Opportunities” and “Threat”. Here, you’ll list the external factors which can positively and negatively impact franchise business.

Under “Opportunities” you might list the fact that no other franchisee represents the company within a short distance of your prospective location. On the other hand, a threat might be the presence of several very similar companies that have already established roots in the area.

How to start on a franchise business

Every franchise agreement is different, but here are the general steps you should take if you’re interested in this business structure.

1. Pick the right franchise business for you

 This may sound self-explanatory, but the fact is that there’s a wealth of franchisors out there vying for new entrepreneurs to help them expand their brand. While many may have immediate appeal, you need to take the time to really consider which option is the best fit for you.

For example, while a fast food outlet may have the potential to bring in high revenues, working in this kind of environment – with its frenetic pace and very strict health and safety regulations – isn’t for everyone.

As well as feeling genuinely galvanised and excited by the prospect of working within a particular sector, you need to be realistic about whether your skillset matches the responsibilities of that particular industry.

The good news is there are franchise opportunities within a whole range of sectors, including:

• Food and drink

• Cleaning

• Automotive

• Business consulting

• Photography

• Health and fitness

• Event planning

• Pet care

2. Carefully assess the franchise business 

Be sure to be clear on the smallest details of the franchise structure, including what the length of the franchise term is and the extent of support provided.

Follow our guidelines in the previous section and draw up a SWOT analysis of the franchise opportunity. This will help clarify the enterprise in your mind and allow you to prepare for any challenges that lie ahead.

3. Follow the application procedure to a T

A reputable franchisor will be assessing you just as much as you will be assessing it. You’ll want to present yourself as a reliable, professional, diligent entrepreneur with an eye for detail, right from the very start.

So, pay close attention to how the application process works, what information is required of you, and how many interviews are set to take place. If the company offers webinars or open days for potential franchisees, be sure to attend.

Bear in mind that the application process for some companies can be relatively lengthy – for example, the average timeframe for McDonald’s franchisees is three to six months.

4. Gather the necessary funds

It’s vital to be sure you have the required funds – or potential access to the required funds – before progressing with a franchise business application. It may well be that you’ve already got enough savings to fully cover the startup fees, in which case you’ll be good to go once your application has been approved.

However, given the high prices which franchisors – even smaller ones – charge for on-boarding new franchisees, many entrepreneurs will need to obtain business loans to tick the funding box.

Check with your franchisor to see if they offer guidance on getting financial support – some will already have partnerships with banks and other lenders, which could make the process more seamless.

Banks often have franchise specialists who can tailor a funding package to suit your particular franchise model. It’s also worth checking what government-backed funding schemes, such as a Start Up Loan, can come in handy.

You should be clear on how to write a business plan when approaching lenders, as they’ll want to be clear on what kind of enterprise they’ll be supporting. Putting one together is fairly straightforward for a franchise, since the salient details should be provided by the franchisor.

The plan should include:

• An executive summary, providing information on the parent company and what your franchised outlet will do

• Your skills and experience, emphasising why you’re well-placed to make a success of the business

• An overview of how your franchise will operate – including details of the business hierarchy and your marketing strategy for small business success

• Revenue projections, which may be provided by your franchisor (although it’s a good idea to learn how to do a cash flow forecast)

• The terms of the franchise, including what payments will be required to the franchisor

5. Launch your franchise 

Once you’ve undergone the application process and paid the initial fees, you’ll be given the official go-ahead to operate your franchise. Whether this means overseeing the hustle and bustle of a hospitality business or running a quieter establishment, it’s sure to be an exciting new chapter which will hopefully live up to expectations.