Starting up a franchise business - An overview

   

Many famous names operate franchises around the UK – from Kall Kwik to Coffee Republic. In fact, there are over 800 different businesses operating as franchises across the UK.

Franchising, or “business format franchising” is the popular term used to describe the granting of a licence by one party (the franchisor) to another (the franchisee) which allows the franchisee to set up in business using the trade name and using the trademarks of the franchisor.

Typically, the franchisor will licence the trademarks and proven methods of its business operation to the franchisee for an initial set up fee and a cut of future sales or profits.

Facts & Figures

According to the 2008 Natwest / BFA Franchise survey, the franchising industry in the UK grew at 15% last year, whereas the UK economy as a whole grew by just 3.1%.

There are over 800 active franchises in the UK, with an estimated 34,200 franchise units in operation, employing over 380,000 people. The industry as a while turns over an estimated £12.4 billion per year.

36% of those who responded operate on a sole trader basis, 15% partnerships and 49% limited companies. You can find more about these business structures in our Company Formation section.

Why buy a franchise?

Although franchises are far less likely to fail than other businesses, buying a franchise is not an easy route to success – it requires a great deal of hard work, as any business does.

One key advantage is that you will benefit from using an existing brand and business model and typically support in the form of advertising, training, business advice, and supply chain.

A key sign that the franchises are more likely to succeed than other start-ups is the average time a franchisee has been running their business. In 2007, according the Natwest survey, the average time in business was over 7 years.

How does it work?

• The franchisee will pay the franchisor an initial fee for the licence to sell their product of service. The average initial outlay to purchase a franchise in 2007 was £64,500, although these initial fees will vary according to the business sector you are in.
• The franchisee will own the store or outlet, independently of the franchisor.
• The franchisor keeps control over certain aspects of the business, for example how the products are presented, and sold.
• Alongside the initial fee, the franchisee will pay the franchisor ongoing fees for the licence – for example as a percentage of the monthly or annual business turnover. In 2007, the industry average ongoing management service fee was 7.5% of turnover, with an average advertising levy of 1.9%.
• The franchisor is responsible for marketing its franchised businesses, including providing support and assistance to franchisees.
• The key to success for a franchise agreement is for the franchisor and franchisee to work closely together – uniting the franchisor’s established expertise with the franchisee’s entrepreneurial skills.
• Franchise agreements typically last for a minimum of five years.

• Many firms operating as franchises will be members of the British Franchise Association (BFA) which lays down a set of guidelines for franchisors to follow.
• Franchiseinfo – a good source of franchise information, this is also the official website for the UK Franchise Exhibitions.
• Which Franchise – a leading website for franchise information.
• Natwest / BFA Franchising Survey 2008 - an excellent source for stats relating to the franchising industry.

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