An Introduction to Franchising Part 1

I think it is fair to say that the pace of change over the last few years has been phenomenal and the impact on people and businesses alike has been significant, people are far more connected and have access to information which has given the consumer far more power than they’ve ever had. This is, of course, a good thing for all of us as consumers but it does present businesses with the challenge of trying to keep pace and meet the needs of an ever-demanding consumer

We can all think of examples of businesses that have learned to embrace this digital revolution and adapt or fundamentally change and have therefore prospered whilst those that couldn’t or wouldn’t adapt went to the wall.

And then of course we have the coronavirus pandemic. Although, at the time of writing, lockdown has eased somewhat there is no doubt that the long-term effect of this virus on all of us is still very uncertain.

What has this got to do with franchising?  Well – it’s a fact that franchising as a concept and franchise businesses, on the whole, tend to be more resilient and fare somewhat better during crises so franchising is well worth considering as an opportunity in these uncertain times, whether that’s looking for an opportunity to acquire a business as a franchisee, expanding a current business using the franchising model or, although less common, converting an existing business to an established franchise brand!

But what do we mean by the term ‘Franchising’? it has a number of different connotations, for example the government grants franchises to train operators to run different parts of the network – you’ll be pleased to know we’re not going to be talking about trains today!

Definition

Franchising is a business format for marketing goods and/or services based upon a close and ongoing collaboration between two parties; the franchisor and the franchisee. The relationship is governed by a legally binding agreement which sets out the terms of that relationship – there are four key elements that must be present for it to be classed as a franchise system; typically the franchisor allows the franchisee to use the brand, obtain access to intellectual property or know-how and receive direction or support from the franchisor. In return the franchisee makes some form of payment to the franchisor. It’s not the same as a Distributor or Agency type of arrangement.

You might be interested to know that the concept of franchising goes way back into the late 1800’s and is generally attributed to Isaac Singer who started to issue licences to companies across the US to carry out repairs and maintenance of the sewing machines he had sold – they were later to become regional sales people for the machines and so that was pretty much the start of franchising as the business model we recognise today. Franchising as a concept developed over the years particularly with automotive sales and repairs  and became very much more popular in the 1950’s when some well-known companies started to licence their brand names and operating models – of course probably one of the best known franchises was born in the 60’s I think most people have heard the story of how Ray Kroc acquired a small hamburger business called McDonalds?

Fast forward to 1970’s UK and the image of franchising became somewhat tarnished when it was likened to various ‘get rich quick’ or ‘pyramid’ schemes where a lot of people lost a lot of money – to combat this, a number of ethical business owners decided to form the bfa – British Franchise Association  a self-regulating body which sets out a framework of standards for franchising in the UK. The bfa has done a tremendous amount of work developing and promoting franchising in the UK which is one reason why franchising is so popular today and offers many advantages.

In UK franchising today, typically, a Franchisee is granted a licence to use the franchisors brand and established system and gets;

  • Proven business model

  • Branded products or services

  • Full training

  • Experience and know-how of the franchisor

  • Comprehensive Operations Manual

  • Ongoing development and support

  • Essentially it’s an entire “Business in a Box”

The Franchisor gets:

  • Development/expansion using someone else’s money

  • Upfront Licence Fee and ongoing Royalty payments

  • Network of committed local business owners

  • Regional, national, and/or international brand

Franchising isn’t necessarily right for everyone, there are a number of potential disadvantages;

For the franchisee

  • You have to follow the system

  • Franchisor can, and often does dictate various terms eg which accountant to use how to market your business

  • What you can and can’t sell – which is understandable if you are a McDonalds and you want to start selling your own products like franks whoppers!!

  • Franchise Agreements are pretty fixed – most franchisees will not agree to any amendments

For the franchisor

  • They lose a little control of their business

  • They must support their network and keep their franchisees happy

  • Although it is weighted in their favour, the franchisor too, is of course governed by the franchise agreement

Franchising is working

Franchising in the UK continues to grow in depth and breadth. The bfa commission a comprehensive survey of UK franchising – It is conducted and compiled by NatWest and provides some very useful insights. It really does highlight how well franchising as a sector is doing.

The last one was completed in 2018 and highlighted the industry was growing both in number and levels of business. It also appeared that franchises were less likely to fail when compared to non-franchised business start-ups.

The total contribution of franchising to the UK economy is reckoned to be in excess of £17 billion, up over £2 billion since the previous stats in 2015. There has been a significant increase in the estimated number of people working in franchising, with over 700,000 people employed in the sector, with a little over half of those in full-time employment.

More under 30s are also getting into franchising by becoming franchise business owners, with 18% of all franchisees now under 30.

37% of all new franchisees in the last 2 years are female that’s a 20% increase over 2015

There are an estimated 48,600 franchised units in the UK, the highest number ever.

Franchisees claimed profitability remains high at 93%, and over two-thirds of franchised units that have been running for five years or more report being either quite or highly profitable.

60% of franchised units turn over more than £250,000.

Failure rates for franchises remain very low, with fewer than 1% per year closing due to commercial failure (a franchisor will often step in and help a struggling franchisee out)

It’s unsurprising that banks in the UK have typically favoured lending to franchised businesses as they have the benefit of an established brand and a proven business model and are therefore much less likely to fail,

There are franchise businesses that provide a modest income from a part-time business right up to multimillion pound operations employing hundreds of people so whether you want to be home-based, a man in a van, run a shop or have a management business where you employ lots of people there’s lots to choose from.

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