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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.