What is Franchising? Definition and Meaning
The franchise industry is thriving in the UK. What is franchising and where did it originate? Find out how you could benefit from this fantastic business model below.
What is a Franchise?
You've seen the slogans:
- Be in business for yourself, but not by yourself.
- When you succeed, we succeed.
- Be your own boss; we’ll help you get there.
These quotations from franchisors convey the idea that even though you work for yourself, franchising is first and foremost about partnership. Franchising is everywhere in our world, so partnership with a proven brand is clearly a winning formula for many small business owners.
Put simply, a franchise is the right or licence granted by a company (franchisor) to an individual (franchisee) to market and/or trade products and services in a specific area or territory. Once a franchise has been purchased, the franchisee must comply with strict guidelines and rules regarding the business in order to maintain brand consistency. As well as the initial franchise fee, a franchisee will normally pay regular royalties to the franchisor in order to avail of things such as training, support and marketing assistance. The agreement is governed by a contract, the 'franchise agreement', and it is important to remember that the franchisee is tied into a partnership arrangement for a defined period of time, usually ranging from five to 20 years. The contract is generally renewable.
There are three types of franchise:
- Product: This is when a franchisor gives a franchisee permission to sell a product using their logo, trademark and brand name.
- Manufacturing: The franchisor authorises the franchisee to manufacture their products and sell them using their logo, trademark and brand name.
- Business: This is without a doubt the most popular form of franchising. The franchisor licences their brand to a franchisee with regulations surrounding how the business is managed.
You want to be your own boss running your own business, but you are not sure about factors such as where to start, what resources you need, how to market products and services, and how to hire and train employees. Don't despair – a franchise opportunity provides guidance and could be the right choice for you!
The Origins of Franchising
The origins of franchising as it is now defined can be clearly traced to one man: Isaac Singer. After the US Civil War in the 1860s, Singer had achieved the ability to mass-produce his famous sewing machines, but had no economically viable way of repairing and maintaining them across a country as geographically vast as the US. He began to license out servicing and repairs to local merchants around the country, who were later permitted to become regional salesmen for the machines too. Singer’s use of a contract for this arrangement introduced the earliest form of franchise agreements, and the first modern franchise system was born.
Franchising grew rapidly during the Second World War, propelled by companies looking to expand quickly like soft drinks giants like Coca-Cola and Pepsi. This was the beginning of business-format franchising as we now know it; offering a turnkey package from franchisor to franchisee in many instances. In the 1950s and 1960s, the popularity of franchising really took off in the UK, in tandem with huge growths in population, economic output and social change. An early UK practitioners was food giant J Lyons & Co., who franchised the hamburger chain Wimpy in 1955, as well as ice-cream brands Lyons Maid and Mr Softee in the 1950s.
By the mid-1960s some of the largest fast-food brands had become well-established international franchises, led by McDonald’s and KFC. Eight of the largest franchise brands in the UK at the time decided they needed to do something to differentiate their own ethical business practices from those companies with bad ones, and as a result in 1977 the British Franchise Association (bfa) was formed.
Franchising has since grown into a vast industry which now has nearly 1,000 brands in a multitude of different sectors. Long-gone are the days when it revolved around cars and catering, and nowadays its eclectic mix of businesses includes everything from pet grooming to homecare agencies, from beauty salons to recruitment companies.
The authoritative annual research into the state of the industry, the NatWest/bfa Franchise Survey, has shown both short- and long-term growth trends to be very strong in the sector, including prior to and since the economic downturn in 2008. After a slight downturn in that year, every year following has shown growth in terms of numbers of brands franchising, numbers of franchisees, numbers employed in franchise businesses and the overall turnover of the franchise sector.
These figures combine with impressive trends going back to before the turn of the century, uninterrupted by the recession, which consistently show around 90% of franchisees reporting profitability and less than 4% of franchise businesses failing for commercial reasons each year. Between half and two-thirds of all independent start-ups close within their first 3 years.
Research has shown the UK’s franchise sector is operating at record levels with all-time highs reported in turnover, employment and numbers of franchisee-owned businesses. Franchising contributed £17 billion to the economy in 2018 and employed 710,000 people, according to data from the British Franchise Association and NatWest. Both figures are up more than 14 per cent since 2015. The number of franchisee-owned businesses amounted to 48,600 in 2018, with 4 in 10 systems being run from home and 18 per cent of all franchisees under 30. Women are a force to be reckoned with since they account for 37 per cent of new franchisees, a 20 per cent jump from 2015. The performance of those businesses also set new benchmarks, as 90 per cent reported profitability for the last 20 years and 6 in 10 turned over in excess of £250,000 per year. Franchising, therefore, has proven itself to be an industry that is both Brexit- and recession-proof.
There are several terms used in franchising that require explanations. Even the word 'franchising' itself is used every day, but is not always used correctly.
Franchising: A Definition
According to the International Franchise Association (IFA), franchising is defined as an agreement or license between two legally independent parties which gives:
- A person or group of people (the franchisee) the right to market a product or service using the trademark or trade name of another business (the franchisor).
- The franchisee the right to market a product or service using the operating methods of the franchisor.
- The franchisee the obligation to pay the franchisor fees for these rights.
- The franchisor the obligation to provide rights and support to franchisees.
What are you buying when you invest in a franchise?
A franchise is a fully operational business concept that has been proven to succeed. The running process is clearly described for the franchisee in an operations manual, and most franchisors give comprehensive training on how to operate the business as well as provide the visible elements such as trademarks, logos, uniforms, and so on.
However, acquiring a franchise is not as easy as paying an upfront fee. Prospective franchisees go through a screening process which includes an interview, completing a detailed application form and submitting financial information. This information is needed to demonstrate whether the franchisee would be a suitable business owner and whether the business would be sustainable. It is vital that the franchisor shares all elements of the business with the franchisee before a franchise agreement is signed. Prospective franchisees need to understand the history of the franchise business, who the other franchisees are and where they are based, what the turnover is, other fees that will be applicable during the lifetime of the franchise agreement and the rules each franchisee will need to abide by. Once a franchise has been purchased and the franchise agreement has been signed, the franchisee has permission to market and sell products or services under the franchisor’s name.
What kinds of businesses are franchised?
Franchising is a very popular business model in the UK today with approximately 1,000 franchise brands. While the most common types of business in the franchise industry are B2B and food, franchise opportunities are everywhere, and their success and widespread popularity offer endless potential. Think about all the purchases you make in a single day – many are from franchised businesses.
You stop on your way to the office for coffee.
You arrange to have your dry cleaning picked up and returned to you at work.
You have an important document fast-tracked to a client overseas.
You schedule a meeting with your business coach before enjoying a Subway sandwich at your desk.
You collect your child from her day care on the way home.
On the phone, you order a meal to be delivered.
Every one of those product or service purchases is likely to be franchised, including the day care. Franchises have become part of the fabric of people’s lives because they deliver an increasing array of familiar products and services.
What other types of business opportunities are there?
For the individual who wants to start a business, franchising offers a wide array of new opportunities. For the existing successful business, franchising can be the model for rapid expansion.
However, it should also be noted that there are other sorts of business opportunities that involve partnership but are not franchises. Business opportunities simply get you started in the business, while franchises are ongoing, contractual relationships between someone and a franchising company. Every franchise is a business opportunity, but not every business opportunity is a franchise. Example of business opportunities include:
- Dealerships – where an existing business owner, such as a home décor store, is licensed to sell a company’s line of products, such as floor tiles or paint.
- Distributorships – this is an opportunity where a business owner invests in equipment, such as coffee makers, and distributes them in high traffic locations, like malls or offices.
Make sure to research both types of business partnership – franchises and business opportunities – before you enter into any agreement. Franchises are typically more expensive to buy.