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Study Notes

Franchising

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 22 Mar 2021

Franchising arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it trade using the brand / business format.

The franchisor is the business whose sells the right to another business to operate a franchise – they may run a number of their own businesses, but also may want to let others run the business in other parts of the country.

A franchise is bought by the franchisee. Once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns. They may also supply the raw materials and equipment.

Buying a franchise a good way of an individual setting up a business because:

  • They do not have to establish themselves in the same as a sole trader might have to.
  • They will have the support of a tried and tested business model, often with a national marketing campaign behind them.

Benefits to the Franchisor

The main advantages to the franchisor of growing a business using franchising include:

  • A classic growth strategy for a proven business format
  • Enables much quicker geographical growth for a relatively low investment
  • Still have the option to open locations that are operated by the Franchisor
  • Capital investment by franchisees is an important source of growth finance

Benefits to the Franchisee

The main advantages of setting up as a franchisee include:

  • The franchisee is given support by the franchisor. This includes marketing and staff training. So starting a business in this way requires less expertise and is less lonely!
  • The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product
  • Less investment is required at the start-up stage since the franchise business idea has already been developed
  • A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market

Drawbacks to the Franchisee

The potential disadvantages of setting up as a franchisee are:

  • Cost to buy franchise – can be very expensive (hundreds of thousands of pounds).
  • Have to pay a percentage of your revenue to the business you have bought the franchiser from.
  • Have to follow the franchise model, so less flexible. You would probably be told what prices to set, what advertising to use and what type of staff to employ.

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