What Is A Franchise Business?
The definition of a franchise business or franchised business is one in which the owners, or "franchisors" of the company, license the rights to use their business logo, name, intellectual property, operations and model to independent operators, who become the “franchisees” of the business.
Franchising a business can be a cheaper and less risky form of expansion than traditional company owned expansion, but it does still have its own unique challenges. When you franchise your business, the business model usually stays largely the same, so when franchisees buy into your franchise, they are buying the rights to use your tried and tested business model, as well as just the branding. They’ll also gain access to customers and the value that the brand offers to customers, and the reputation and products customers already know, love and understand.
Some of the most well-known franchises are fast food companies like McDonald’s and Subway, but a huge variety of businesses can create franchise models that work for them and their operations.
In a franchise business, the franchisees pay initial fees to the franchisor when they enter the business, and some form of ongoing management services fee for the continued use of the business model, IP and corporate identity during the term of the franchise agreement while the rest of the income and profits of the individual franchises go to the franchisee.
How To Franchise A Business
The process of franchising a business is different for every organisation, but generally follows the same basic steps:
Firstly, you have to develop your business model, and prove that the business will make a viable franchise. This stage involves making sure you have enough financial liquidity to pay the franchising fees upfront - while franchising is usually cheaper than company owned expansion, that isn’t to say it is cheap. We also need to ensure the company is stable and developed, and has been trading for ideally a minimum of three years, and make sure the business model of the company is suitable for franchising.
Some businesses that aren’t suitable for franchising include those with low profit margins, specialist services that require extensive training and a specific skill set and other complex businesses that are difficult to replicate. As a rule of thumb, the business model probably isn’t suitable for franchising if it takes more than a reasonable amount of time to train new franchisees in the skills they need to run the franchise.
Then, we can start to draw up a bespoke franchise model, including financial structures, franchisor and franchisee structures and confirm viability for franchising. When you work with The Franchise Company, your franchise consultant will take the time to visit your business and understand exactly how you work. Once we know what makes your business tick, we can draw up bespoke franchise models with this in mind and give you a franchise model that works for you and your business.
Once the model has been confirmed and is viable for a successful franchised business we’ll produce all the documentation you need to become a successful and legitimate franchise, including the franchise prospectus, franchise operations manual, a recruitment marketing strategy, the franchise agreement and recruitment, training and support plans for the organisation.
You can then start to recruit your first franchisees and pilot your franchise. During this time, you’ll need to have a consistent feedback loop between the franchisor and franchisee to help iron out any initial glitches and issues, before expanding your franchise network.
Once you and your initial franchisees feel that the network is running comfortably and that all the major difficulties and hurdles have been overcome, you can continue with franchise recruitment and expansion of the franchise network.
How To Finance A Franchise Business
Most high street banks have specialist services and divisions to help franchisors as they move their business into a franchise model. The BFA also offer help and assistance for franchising businesses and can give financial advice tailored to new franchisors.
For franchisees, the amount it costs to buy into a franchise varies massively depending on the franchise you are joining. It can be anything from a few thousand pounds to several hundred thousand pounds depending on the model.
In most cases with well develop franchises you can get franchise loans from major banks to help make the process of buying into the business easier.
Alternative Methods Of Business Expansion
When you want to grow your business, you may be faced with the option to franchise your business or choose company-owned expansion. There are advantages and disadvantages for both methods, so it’s important to consider all the options before deciding on a method.
If you want to grow your business as quickly as possible, expanding the reach and network of your company, then franchising could be the perfect option for you. As the company doesn't need to take on the financial burden of expansion, you can grow your business far quicker with a franchise model.
Franchising your business also allows you to enlist dedicated franchisees, who are often more motivated than managers in company-owned structures, as they have invested their own money and have a financial stake in ensuring their section of the business does well and is successful.
If you need to maintain a high degree of control over your company, whether it’s for legal reasons or just how you prefer to run things, franchising can also enable you to do this as franchisees are required to run their businesses in line with the methodology developed by the franchisor. In some networks, franchisees need to be given a degree of control over how they run their franchise units locally in line with the market demands and opportunities.
Company-owned expansion allows the parent company to keep 100% of the unit’s profits. In a franchise system, the franchisor company normally income related to turnover (management services fees are calculated on gross sales net of VAT) leaving the profits after all overheads and running costs with the franchisees, who have invested their own capital into the business and provide the local management support.
How Does A Franchise Business Model Work?
A franchise business model is all about the relationship between franchisors and franchisees. The franchisor grants the franchisee with the rights to their business model and brand, while the franchisee runs their arm of the business and takes care of day-to-day operations. Maintaining a positive, supportive relationship between franchisors and franchisees is vital to the success of the franchise as a whole.
In most franchises, the franchisee will pay a fee upfront to join the franchise, and then take on the initial costs of setting up the unit. Going forward, franchisees will pay the franchisor ongoing fees for the continued use of the franchisor's brand and corporate identity. This is usually calculated in a percentage of sales, with the average fee being around 8% of sales, however, these can vary depending on the franchise, usually from around 5-15% of sales.
Franchises in a system with more independence for franchisees and less input from franchisors will tend to have lower fees, while networks that are more hands-on and offer support and resources to their franchisees usually ask for a higher percentage in fees. However, this is entirely dependent on the franchise network, and is part of the development work required to assess the model viability. The key features of a franchise model should be indicated in the franchise prospectus and franchise agreement. Other fees may also be required depending on the franchise, such as for a central marketing budget or network-wide software. The profit from each individual franchise unit goes to the franchisee so franchised units that make higher profits will directly impact on the franchisee and give them a higher income and return on investment.
How To Franchise A Small Business UK
When franchising a small business, the keys aspects are that your business is established enough to become a franchised organisation and that you have sufficient management and financial resources to enable you to commit to the development process.
Small businesses can be very well placed to become franchised businesses, as it is a great way to expand your operations quickly and efficiently and give you the opportunity to increase brand awareness.
Small businesses also make good franchisors as you should be able to adapt to new market opportunities throughout the franchise process, which is something that is much more difficult in larger businesses.
The franchising process is similar for both small and large companies - going through initial discussions and proving that the business is appropriate for franchise, designing the franchise model, producing documentation, initial recruitment and piloting of the franchise, and then moving into the next stage of franchise growth. In smaller companies, this can often be a quicker process than large organisations, as there are less people to go through and agile movement of the business is easier.
How To Purchase A Franchise Business
Buying a franchise is a way of starting your own business without the same level of risk or capital than you’d traditionally need. When you join a franchise, you buy the rights to the franchisor brand, identity and services, and subscribe to the ideals of the franchisor company.
There are a variety of options for financial assistance when looking into buying a franchise. You can get help from banks, many of whom have a specialist franchise division and services, friends and family or the franchisor may offer you assistance if it is actively recruiting franchisees.
The amount of capital you need to buy a franchise will vary depending on the size of the franchisor, how well known and established the brand is, and the kind of service they provide.
What Are the Advantages To Franchising A Business?
There are many advantages and benefits to franchising as a way of growing the business.
When you franchise, business growth is quicker and more efficient as you build up a solid franchise network. You don’t have to cover the costs of new premises and staff and your network can grow rapidly if you have a good recruitment strategy in place. A franchised business also allows you to develop and expand your brand, as each unit takes on the same identity and visual branding. A larger network also gives the business credibility and security, and means you can capitalise on economies of scale that aren’t available to individual businesses.
Franchising is a way to expand not only faster, but more affordably. As franchisees pay for their franchise license upfront and cover the finances of their own outlet, while the franchisor collects ongoing fees in exchange for management support. Once the franchise is developed and established and upfront costs paid, a franchise network can become very profitable.
As your franchisees essentially run their own businesses, the franchisor can spend less time managing locations than they would have to in a non-franchised system. As your franchisees are entrepreneurs in their own right, they should have experience running a business or franchise, and so won’t need the supervision you may need to give new branches in company owned expansion models.
Franchisees are also more motivated than managers in an organisation, as they have invested their own capital into the organisation. This belief in the brand encourages them to work hard for the success of their own franchise, and as higher profit for the franchise unit means directly higher profits for franchisees, there is a lot of incentive to improve the performance individually.
As entrepreneurs, your franchise network can also contribute new ideas to the business to help improve the performance of both individual franchises and the network as a whole. The franchise network can also offer support to both each other and the franchisor.
How To Create A Franchise Business Model
Turning your business into a franchise and creating a franchise model for your business isn’t something that can happen overnight. There are several steps that go into creating a strong franchise model, to ensure your business is right for franchising and that is it successful within a franchise model.
Designing a successful franchise model is of vital importance when it comes to moving into a franchise system. If you have an accurate and attainable model, then you will find it much easier to move into the franchise system, and future franchisees will be able to get up and running when they join your network quickly.
A franchise model that is created with your business in mind and takes into account the way you work is the best way to ensure ease of replicability in the future.
What Do You Need To Franchise A Business?
There are several things you need to franchise a business successfully.
First and foremost you need a successful and proven business model in a market that has growth potential in other geographical areas.
After that one of the most important things you need to successfully franchise your business is capital to invest in the development of the franchise. While franchising is a cheaper option than company owned expansion for many businesses there is some investment required as you are in effect developing a new business (the business of becoming a franchisor) and so your original business’ finances should be liquid enough to accommodate this.
You should also have established processes, products and models to ensure that the business is stable enough to handle a move into a franchise system. Once franchisees start joining the business, the processes your business uses must be stable and consistent, to ensure performance remains the same across the network, and give all franchisees the same potential for success.
A replicable business model is a necessity for a successfully franchised business. As the franchise generally offers the same core products and services in every location, being able to easily replicate the business model is vital for a successful franchise. The business model should be replicable both in multiple locations, and by lots of different franchisees, so shouldn’t require a highly specialised skillset, for example.
Having high-quality documentation is vitally important to the development of a successful franchise, as it allows you to clearly set out the roles of the franchisor and franchisee, protect both parties in case of legal disputes and help to ensure the operations of the business are clear and consistent.
Things like the standards of the business, checks and review processes, suppliers and all the other day-to-day processes of the franchise are included in a franchise operations manual, while the franchise prospectus and agreement are tools for potential franchisees to understand their role within the organisation. Marketing and training materials for franchisees are also vital to recruiting high-quality, motivated franchisees to your organisation.
What Is International Franchising?
Franchising in international business is a method of expansion that allows businesses to expand into international markets in a way that is much lower risk than company-owned expansion.
Franchising internationally is when a company grants the rights to their brand, operations and business model to an individual or company in a new geographic area or country. This person or organisation then becomes the master franchisee for the area, and acts in the same way a franchisor would domestically. There are also other methods of international franchising (such as franchising a single unit), but master franchising and similar models are the most common ways to franchise a business internationally.
Master franchisees bring knowledge of the local market and culture and often have established contacts within business and government organisations that will enable the business to access and develop much more quickly than it could without an international partner (who also provides the capital).
How To Franchise Internationally.
The process of franchising internationally has to be well planned and structured and the franchise model developed should be bespoke to your organization and scaling opportunity.
The Franchise Company are experts at helping to create successful international franchise models and provide ongoing assistance to help you develop the international network based upon our experience in this area. If you think your business might be right for international franchising we will arrange an initial meeting and give you our advice on how to progress with the development of an international franchise model. If it’s a realistic opportunity for you to progress with we will then work with you to carry out an initial review of all the elements of your business that relates to how you could franchise internationally, and the best way forward for your organisation as you expand into international markets.
Franchising internationally, whilst less risky and more affordable than company-owned expansion, is still a significant commitment and will require work from the franchisor to establish and manage the franchise network. During the initial development stage, we’ll assess your core operational model, business financial structure, internal resources, staff and operational systems to help determine whether your business can successfully move into an international franchise model. If we find for any reason that your business is not suitable for development as an international franchise model, we will tell you this at the earliest possible stage and can then discuss other options for growth. We won’t ever recommend franchising if we do not think it will be a success for your organisation.
If during this initial phase we believe that your business has the potential to operate successfully as an international franchise model, we can start to plan and create a bespoke model for you. Our specialist franchise models are designed to ensure the long-term success of your business for both the company as the world wide franchisors and master and unit franchisees and give you the tools all parties need to become profitable and effective.
In order to create the right model for your business, we’ll spend time within your organisation to find out exactly how you operate, what is important to you and what it is that really makes your business work. We will carry out an in-depth review of your operations, finances and marketing, among other elements of the business, to give us a deeper understanding of how we can move your model into a franchise system.
We use this understanding to create a franchise model that incorporates all the important things about your business and the things that make you stand out from the crowd. We don’t want to lose these elements, which is why we take the time to understand them and incorporate them into your new model as an international franchise.
We’ll also carry out territory analysis, create in-depth financial models and create realistic fee structures for franchisors and franchisees as part of our bespoke model creation process.
Once we have developed your franchise model, we will recommend a plan going forward, based on how your business works, the level of control you want to maintain over international franchisees, the resources available to you and the territories you are looking to move into.
Our models are designed based on the best way to ensure long-term success for franchisors and franchisees. Our franchise consultants have been helping businesses grow to become international franchise models for many years with great success, and the results are clear to see.
How Does An International Franchise Work?
An international franchise model can work in a variety of different ways, depending on the expansion model that is right for you and your business.
When you franchise your business internationally, there are a few methods and models to choose from. The right model for your business will depend on how much resource you are willing to put into new franchises, how much control your business model needs you to retain over new franchisees, the markets you’re moving into and how well you know their culture, laws and any restrictions on franchising.
Master franchising is the most common model of franchising internationally, as it is generally considered to be the easiest and most cost-efficient method for expanding a franchise network internationally. In a master franchise system, the franchisor grants a company or individual the rights of master franchisee. The master franchisee then takes on the role of the franchisor in the new area, and expands their network as a franchisor would domestically. Regional franchising is a similar model to master franchising, only the new area is split into regions with multiple master franchisees. This model is good for franchising in very large or diverse geographic areas.
Area development is also a viable method in areas where the rules on franchising are stricter or more complex, or where sub-franchising isn’t allowed. In area development models, a development agreement is made between the franchisor and the franchisee, who then takes on a similar role to that of a master franchisee.
Direct franchising is a more time and labour intensive model to franchise internationally, but it also allows the franchisor to maintain a higher level of control over the network. Direct franchising works in exactly the same way as regional franchising, just over a larger area. It requires more input from the franchisor as the network is considerably larger, and training, operations and marketing will need to be more diverse. However, profit margins for franchisors are also higher in a direct franchising model, as they only need to be split between the franchisor and franchisee, while in a master franchise model, the master franchisee also takes a share of the revenue.
How To Franchise A Social Enterprise.
The process of franchising a social enterprise can be quite similar to franchising a commercial enterprise, but with a few key differences – the main one being that the main driver is social impact rather than profit.
Like commercial franchising, not every social enterprise is suitable for a franchise model, so we only recommend this course of action to organisations that have an operational model that will work within a franchise system. It is also a long-term endeavour, so enterprises should be reasonably well established and ideally have been operating successfully for a couple of years before looking into franchise expansion.
The franchise model in a social enterprise has to be considered carefully depending on the type of social enterprise, what the enterprise does, where and how they carry out their work and how specialist the skills needed to run the franchise are.
Social enterprises with a higher, more centralised level of control are better for higher-risk operations, such as where an error by one franchisee can have a big impact on the organisation as a whole. Centralised models also work well for enterprises that rely on economies of scale, strict, standardised processes and those that have a complex model. Many social enterprises also rely on central or local funders, so the system should be able to to provide evidence of the social impact achieved.
Projects with less need for a centralised model, including self-funded social enterprises, can have franchise units that are more flexible and franchisees that work more independently, allowing them to adapt to new locations and territories.
Once the viability of the social enterprise has been established and the kind of franchise model to use has been developed, we can begin to document your franchise. Franchise documentation is a vital part of the franchising process, as it ensures that all the relevant parties - franchisors, franchisees, investors, funders and potentially beneficiaries of the service are all on the same page when it comes to their roles and responsibilities and understand what is expected from them and what they can expect from other parties within the franchise system.
Franchise documentation involves the creation of several vital documents in a way that is comprehensive, clear and legal for all parties, including:
The franchise agreement, which is a legally binding document to ensure both franchisors and franchisees understand each other’s roles within the franchise system.
The franchise operations manual, which dictates the day-to-day running of the franchise and the standards set for all franchisees.
The franchise fee structures for franchisors and franchisees, including start-up fees and payment structures going forward.
A territory analysis to show potential growth for the franchise network as a whole. This gives franchisors and franchisees an idea of the planned development of the organisation going forward, and can be useful for helping to recruit potential franchisees.
The brand and marketing for the franchise. In commercial franchises, marketing budgets are usually centralised, however in social franchises can be anywhere on the spectrum of completely centralised to almost completely independent with regards to their marketing budget. The brand and materials of the franchise are also important to develop the business and improve the sense of corporate identity for franchisors and franchisees. Within franchise models, the franchisors brand are usually licensed out to franchisees as part of the franchise agreement.
The training and support available for franchisees, both at the start of the process and on an ongoing basis. This also includes the learning and feedback culture of the franchise, allowing franchisees to feedback to the franchisor and help to innovate and contribute ideas to the business.
What Is Social Franchising Thinking?
The philosophy or thinking behind social franchises aims to help expand social enterprises and help them spread their operations and message, in a lower risk model and socially conscious manner.
Social franchising is an excellent opportunity for growth for a variety of social enterprises, as it can help to:
Increase the social impact of the enterprise without creating a traditional tall organisational structure. In traditional growth structures, the founders are often distanced from the work and ground operations of the organisation, which for many social enterprises is an undesirable way to grow. Social franchising reduces the amount of distance between the top of the organisation and the socially beneficial work that they do.
Take advantage of the benefits of larger organisations such as economies of scale, funding opportunities, credibility and joint purchasing, while also allowing individual chapters to maintain their independence and flexibility to carry out the work needed in their area.
Expand into new areas more quickly and easily, as the operational model and central support systems are already established and successful, so opening a new franchise is often simply a case of replicating the model in a new area or territory.
Encourage entrepreneurship among franchisees and provide opportunities for entrepreneurs in new areas to enter the organisation in a less expensive and risky venture than starting their own operation from scratch.
By doing this, social enterprises can increase the good they do without the risks and complexities of traditional, company owned expansion.
In a commercial franchise, the key objective of the business is to make profit, while in social franchises social impact is the key objective. The thinking behind social franchising is that the franchisor and franchisee can attain traditional financial goals and benchmarks to be successful and re-invest in the business, while also, and often more importantly, work towards the social goals of the project or organisation.As a growing method of replication and scaling it has become popular amongst funders as a safer way to invest in organisations knowing that the model is proven and the support system is in place.
To find out more about franchising your business, social franchising and international franchising, contact our team of experienced franchise consultants today.