Many entrepreneurs looking to run their own business choose franchising instead of going it alone. In many cases franchises can offer proven business models with a reliable return but they’re not for everyone.
What is franchising?
Franchising is a marketing system involving two parties: a franchisor and a franchisee. In exchange for a fee, the franchise is granted rights to run a business using the franchisor’s name, business model and marketing rights for a contractually specified period of time.
Types of franchise
Franchises are split into two types: business format franchises and product and trade name franchising. These differ in the assets provided by the franchisor and where money changes hands.
Business format franchises: In exchange for an up-front fee and royalties, the franchisor provides the franchisee with a wide range of assets including use of logos and trademarks, as well as rights to use the franchisor’s business model or framework. General support is also provided, sometimes in the form of lead generation but often accompanying documentation and advice.
Product and trade name franchises: Franchisors provide the product or service in addition to logos and advertising (as part of standard campaigns), and in some cases help the franchisee generate leads and secure the best geographic location. The franchisor buys the products or services from the franchisor; the profit to the franchisor is in selling the product directly and there are no royalty fees payable.
For both types of franchise, multiply your savings by three; this is a rough guide to the start-up costs that you can afford, taking into account the potential for loans.
For business format franchises, the franchisee will typically pay an upfront fee which will cover start-up resources such as materials and equipment. Ongoing payments (known as royalties) will also be payable, at regularly intervals over the course of the franchise agreement. The ways these fees are calculated will depend on the franchisor, but may be a percentage of turnover, profit made by the franchisor on any products sold to the franchisee or calculated using another method.
For product and trade name franchises, franchisees will pay an upfront fee in addition to the mark up on any products bought through the franchisor. Both types of franchisee will also have to pay towards lead generation and marketing, particularly in the early stages of the franchise, and may also be required to pay separately for equipment upkeep.
Franchise agreements are contracts which lay out the terms of the franchise arrangement and include information about royalties payable and stipulations on the use of trademarks and imagery. They typically last for a minimum of five years and can be extended easily unless terms have been breached or there are new stipulations to be added.
Franchises often carry a particular geographic location. Some franchisors may choose to limit franchises to one in each town in order to keep costs down, whilst others may offer many franchises in a single town. Cleaning franchises, which have become particularly popular, often limit franchisees to work in the local area to avoid infringement on another franchisee’s potential. This can make lead generation hard; it’s important to ensure there’s the potential for expansion when taking on a franchise as the majority of profit will come once a customer base has been built up.