FranchisingHow Franchising Works

Franchise Library

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Why buy a franchise?

• Buying a franchise can reduce the risk of starting up a new business or working in a new area. Find out the issues involved with buying a franchise, such as the initial licence fee, ongoing payments and renewing your franchise agreement.

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Existing know-how

As a franchisee, you can use the proven business system of the company you've acquired the franchise from - the franchisor. You can use their know-how and trade using the franchise name, selling their products and/or services, to increase your business success.

Initial licence fee

You pay an initial franchise or licence fee, which mainly covers the franchisor's costs for setting you up in business. You should continue to receive support from the franchisor as long as you are trading under their name.

Ongoing payments

You make ongoing payments during the period of your franchise agreement. These are either in the form of a management services fee, calculated as a percentage of your turnover, or as a mark-up on the goods/materials that the franchisor sells you.

Renewing your franchise agreement

Franchise agreements usually last for 5 years or more. After signing the agreement you should be able to renew it in the future, provided you don't seriously breach its terms.

Franchising your Business• There are many issues to consider

when making a decision to franchise your business, including the cost of establishing a franchise and what steps to take. Find out about franchising your business and what benefits it offers.

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How franchising has increased

In 1984, sales of products or services through franchised outlets in the UK was worth less than £1bn. By 2002, this figure had risen to £9.2bn. The number of franchise systems and franchised outlets has also increased substantially.

Franchising helps companies expand

Franchising is growing globally, particularly in continental Europe. It makes it easier for companies to expand internationally - some franchising companies are now among the largest multinational operations in the world.

Franchising trade body

There's no regulatory legislation that applies specifically to franchising, as there is in the US. However, there is a trade body (the British Franchise Association) which sets the standards for the business conduct of franchising companies.

What is franchising?

Franchising is a system for marketing goods or services. You, the franchisor, grant a licence to your franchisees to operate a business under your name and system to market your products and/or services for a specified period.

The franchise agreement

The franchise agreement is usually subject to renewal by you, provided the franchisee is not in serious breach of its terms.

The appeal of franchising

Franchising can offer the franchisee less risk. The franchisee trades under your established name, using your proven, successful business system. They enjoy the benefits of your advertising and marketing programmes, and your purchasing power. They don't generally need any previous experience of your type of business, as you train them and provide ongoing support.

Franchisees and you

The franchisee also has the benefit of your full commitment to the continuing success of their business, since your income is dependant on theirs. If they aren't successful, neither are you. This close inter-dependence is unique to franchising.

What's in it for you?

You receive an initial franchise or licence fee for training the franchisee and assisting in the launch of the business. You then share in the success of the business, normally through a management services fee in the form of a percentage of their turnover, or through a mark-up on the goods you supply.

How successful are franchises?

Franchising relies for its success on its popularity with the franchisees. So it's important to know how successful franchisees generally are in the marketplace. You can find out from the annual NatWest/British Franchise Association survey. This has consistently shown that the failure rate of franchisees for financial reasons is substantially below that of the failure rate for independent small business start-ups.

Franchise Library

• A series of factsheets to help you through the process of buying a franchise or franchising your own business. These are based on our extensive experience as market leaders in franchising and serve as a useful starting point