Thomas Coe, solicitor at Wright Hassall, examines whether franchising is the option for you.
Q: “I’m thinking of setting up on my own, is franchising a good option to consider?”
Franchising is the granting of a licence by one person or business, (the franchisor) to another (the franchisee), allowing the franchisee to operate its business under the brand of the franchisor. Famous franchises in the UK include Subway, McDonalds, CeX and The Body Shop.
The overall contribution of franchising is estimated to be £13.7 billion to the UK economy. This has been steadily growing over the last five years despite the economic conditions over the same period.
There are numerous advantages and disadvantages, from the perspective of both the franchisor and the franchisee. Here are a few:
The key advantage to a franchisee is its access to the franchisor’s brand reputation; having an immediately recognisable brand reduces both the time and resource required to make the business a successful one.
Other advantages that would attract someone to invest in a franchise over a start-up include:
- Advertising – undertaken by the franchisor nationally for the benefit of the franchisee;
- Assistance and training – given throughout the franchise, meaning that general business management skills, or specialised knowledge are not always required to start;
- Finance – may be easier to obtain as banks are more likely to see the identity of the franchise as less risk;
- Economies of scale – franchisee may be able to benefit in savings; and
- Overall chance of success – the risk of business failure is substantially reduced.
With these considerations in mind it is no surprise that as many as 50% of franchisees under a franchise agreement would not otherwise become self-employed were it not for the franchise format.
Your own start up may be preferred
The main deterrent from becoming a franchisee is that the franchisor can impose stringent restrictions on a franchisee, such as with its project range and scope for innovation. Other factors to consider are:
- Control – The franchisee is subject to substantial control from the franchisor (compared to setting up independently);
- Cost – A franchisee will have to pay royalties and/or a mark up on the goods or services which he receives from the franchisor/their supplier;
- Restrictions – may be placed on the franchisee’s ability to sell the business or to pass it on to a relative; and
- Out of hands – the operation will be directly affected by the actions or insolvency of the franchisor.
So what now? Is franchising for you?
Choosing to become a franchisee over starting up independently is ultimately a commercial decision for the prospective business owner to make, with particular consideration to be given to their ability to manage the business outright as well as the risks that come with each.
It may be that choosing to start up on your own initially will turn into a success that can then be franchised out to assist in expansion in the long term.
In either event it is important to review all options and considerations and where appropriate, take appropriate legal and financial advice.