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Starting a Business: Franchises (GCSE)

AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

A business idea for a start-up doesn't have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that.

The basic idea for a franchise is this.

A franchisor grants a licence (the "franchise") to another business (the "franchisee") to allow it to trade using the brand or business format.

That might sound a bit complicated! The trick is to remember that the franchisor is in charge - the franchisor is the original owner of the business idea.

Franchises are a significant part of business life in the UK. Examples of well-known businesses that use franchising to expand their operations include:

  • Subway
  • McDonalds
  • Starbucks
  • Pizza Hut
  • Thorntons
  • Molly Maid
  • Prontaprint

You might have noticed from the list above that nearly all those businesses provide services rather than produce goods. Franchising is particularly suitable for service businesses.

Advantages of running a franchise

For a start-up entrepreneur, there are several advantages to investing in a franchise:

  • It is still your own business – even if you are sharing the profits with the franchisor
  • The investment should be in a tried and tested format and brand
  • The franchisee gets advice, support and training. The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business
  • It is easier to raise finance - the high street banks have significant experience of providing finance to franchises
  • No industry expertise is required in most cases
  • The franchisee benefits from the buying power of the franchisor
  • It is easier to build a customer base – the franchise brand name will already by established and many potential customers should already be aware of it
  • The franchisee is usually given an exclusive geographical area in which to operate the franchise – which limits the competition (since operators of the same franchise are not in direct competition with each other)

Overall, investing in a franchise is a lower risk method of starting a business and there is a lower chance ofbusiness failure

Disadvantages of running a franchise

There are several disadvantages for the franchisee:

  • Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up
  • There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business
  • There is always a risk that the franchisor will go out of business
  • The franchise needs to earn enough profit to satisfy both the franchisee and franchisor - there may not be enough to go round!

There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise

A franchise is a kind of "halfway house" for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.

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