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 license (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:
- Franchises generated annual sales of £12.4 billion in the UK in 2007
- There are over 800 different franchised business formats in the UK and that number is rising by around 5% each year
- The average sales turnover per franchise outlet is £360,000
- 90% of franchises are reported to be profitable
- A franchise has average borrowings of £70,000, suggesting that banks are happier to make loans to franchise businesses than other start-ups
- The typical franchisee is aged 47. 66% are men and 86% of franchisees are married!
- Franchises are particularly popular in the service sector
Examples of well-known businesses that use franchising to expand their operations include:
- Pizza Hut
- Molly Maid
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 of business 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.
By: Jim Riley http://www.tutor2u.net