Franchises are a type of business opportunity that allows the purchaser to acquire the proprietary knowledge, goods and services, and trademarks under another business’s name. It is generally the case that the franchisee pays the franchisor an initial start-up fee as well as on-going annual licensing fees. In return, they are given access to products and services, branding rights, support, location advice, and more, depending on the individual terms of the contract.
Franchises are one of the most common ways for people to start new businesses. They are especially popular in highly competitive areas of business, where a trademark can be an essential advantage in a crowded marketplace – for example, the fast food market. Having access to the branding and marketing materials means franchisees do not have to spend resources on promoting products and services to customers.
The history of franchises
The first franchises were offered in the mid-19th century, with a key early exponent the Singer sewing machines. They created franchises in order to promote the machines to a wider market. In the early 20th century, restaurant franchises became very successful in the USA, with McDonald’s perhaps being the most famous example. Other successful examples today include Subway, Pizza Hut and Denny’s, with franchises accounting for a large percentage of all business in both the US and UK.
How do franchises work?
Although the basic principles are simple, the details are individual: franchise deals differ for each franchisor and can involve complex agreements. The extent of use of trademark and promotional materials can vary, as can the level of training and support offered. The percentage or amount of royalties paid also depends on the individual contract, and agreements can last anywhere between five and 30 years.
Advantages of franchises
The most widely recognised benefits of a franchise include access to a ready-made and successful business model. Franchisees get access to products and trademarks that are already established in the market place. This means they can avoid the work and investment involved in brand recognition that can inhibit many new businesses.
Inclusive training allows new franchises to hit the ground running, without taking time to ‘learn the ropes’ and develop an understanding of how the market is operating.
Drawbacks of franchises
Depending on the franchise, the start-up costs can be large and the ongoing royalty costs can range from 4 to 8% of the turnover. There can also be a lack of creativity or control if franchisees are legally bound to follow certain contractual obligations, although, on the whole, this is not the case.
Unlike the US, in the UK there is no specific regulation of franchises. Rather, they are regulated by general law and contracts need to comply with contract law, including factors such as data protection and the Unfair Contract Terms Act. Franchisers are also required to comply with the European Code of Ethics for Franchising.