What is a franchise?
A franchise is a business that gives another individual or company the right to sell goods or services using its name. It does this by providing the individual or company with a licence. Buying into a franchise is an excellent alternative to setting up a new business as it means that you can build onto an already-successful company.
Franchises aren't difficult to understand, but the terminology can be pretty tricky to get your head around. Let’s take a look at this quick breakdown below:
- Franchise - the right given by one business to another to sell goods using its name
- Franchisee - a business that agrees to manufacture, distribute or sell branded products under the licence of a franchisor
- Franchisor - a business that gives franchisees the right to manufacture, distribute or sell its branded products in return for a fixed sum of money or royalty payment.
Let's use an example. Say you were thinking about setting up a pizza takeaway service, you could either choose to set up your own shop, or you could approach an already popular pizza franchise and benefit from having their equipment, ingredients, training and marketing support. Most of all, they can provide their well-known brand name, which is super powerful because people already recognise and like it. As a result, you benefit from the success of other franchisees and vice versa.
Examples of franchises
Franchises are way more common than you think; chances are you've bought (or eaten) something from a franchise before. Let's look at some popular ones:
- Pizza Hut
- Burger King
Advantages of setting up a franchise:
- The franchisee gets access to free training and marketing
- The franchisee becomes part of an established business, benefiting from a good reputation and an established customer base
- It can be easier to make money; franchisees can focus more on selling the product rather than other business functions such as marketing
- It's usually lower risk. Unlike setting up a new business, a franchise has a tried-and-tested business model!
Disadvantages of setting up a franchise:
- The franchisee has to pay a percentage of its profits to the franchisor (known as royalties)
- It can be expensive to set up because the quality has to be good and match the existing brand and reputation
- The franchisee cannot make individual business decisions without consulting the franchisor, meaning there is little flexibility
- Other franchises can be set up locally, which can mean your business must compete for customers.
Fun facts about franchises
Although we mentioned some of the world's biggest franchises earlier, how about some staggering franchisee facts?
- There are over 250,000 possible ways to order a burger at Five Guys
- Franchises contribute £15 billion to the UK economy
- Celebrities are often involved in franchises, in fact, Kanye West owns 10 Burger Kings!
- Mcdonald’s is the largest franchise - with more than 38,000 locations worldwide.
Want to know more about running your own business?
Why not check out our business management virtual work experience programme? You'll learn loads about the different functions within a business - from finance to human resources, take part in quizzes and activities that’ll test your knowledge and speak to the real business experts.