2.3 What are Franchises?

Purchasing a franchise is an excellant way for an entrepreneur to minimise risk when starting a business due to the prominence of an already proven successful business and brand.

The owner of the business is usually referred to as the Franchisor and the buyer, the Franchisee.

Franchisee's tend to operate in a different area or region, executing the same concept and brand name as the franchisor. The franchisee will usually pay an upfront fee and at the end of a given period (a month or a quarter), the owner of the franchise will receive a percentage of the profits from the franchisee (or a percentage of the turnover). This is usually justified by allowing the franchisee to have a licence to duplicate the business concepts and make money from it.

Franchises can be highly rewarding for both parties and has been used by a lot of new businesses. Fast food restaurants such as McDonalds and Burger King operate in this manner.

The package offered by the franchisor usually includes several services and it also provides support to include the following:

• A product which the franchisee sells to consumers
• Purchase of the franchises products at a discounted rate to the franchisee
• Potential list of customers available in the geographical region where the franchisee will be based
• Provision of support services including insurance, advisory services, human resources support and loans often at a preferential rate
• Necessary training for optimum performance for the franchisee
• A leading brand name
• Advertisement benefits which will promote the location of the franchisee
• Essential equipment to commence business operations such as shop fittings

Benefits to the Franchisor

The most obvious benefit of establishing franchisees is the minimising of financial risk, while creating the opportunity to expand the business. All business operations expenses and costs are the responsibility of the franchisee. Furthermore, the franchisee has to pay initial start-up costs to the franchisor in order to start trading which is an immediate injection of cash to the franchisor.

Franchises strengthens relationships and business networks between the franchisor and franchisee, this relationship is mutually beneficial. There is a lot of motivation on both sides to ensure there is success as the potential financial prospects are huge. The franchisee has a strong drive for success after purchasing the franchise licence, plus the financial costs that have already been invested into the business. 

The business will generally tend to grow more rapidly with an established brand name over the door. There will also be an existing strong network of suppliers, customers and a host of numerous support available. 

British Franchise Association

In order to regulate the practices of franchise relationships, the British Franchise Association was formed. It has the responsibility of checking that members adopt a strict code of business practice.

The failure rate of franchises is small, only around 6%-7%, but even given this the association tries to provide advice and support for businesses to help them reach their full potential.

The concept of franchising is great and is designed to be a winning formula. Should it be well managed, the reputation of both the franchisor and the franchisee is tremendously enhanced. Furthermore, business gets better and there is scope for greater expansion in the near future.

Activity 9 - What is the difference between turnover and profit?

Turnover is the total sum of all sales made by the business within a certain time frame. Profit refers to the amount of money the business has made after subtracting all costs from the turnover figure.