A franchise is a type of business that offers an entrepreneur the opportunity to buy into a proven and successful business model. Buying a franchise means you get all the benefits of running your own company, but with the backing of an established brand. The best thing about franchises? You can find one in just about any industry or niche! Starting a franchise in the UK can be an exciting experience, but it’s also daunting. There are many different aspects to consider and you need to make sure that you’re making the right decision.
In this guide we will take you through everything you need to know, from how to choose the best franchise business, to how you can maximise your chances of success from day one.
What is a franchise?
A franchise is simply a business agreement between a franchisor and a franchisee, where the franchisor grants permission to the franchisee to sell or produce goods or services using its trademark. There are various types of franchise businesses such as food and beverage outlets, retail stores, and service-based businesses like dry cleaners. There are also businesses that provide consulting services for other entrepreneurs who want to start their own franchise – these are often known as “business coaching” franchises. Franchises can be both residential (a coffee shop) or non-residential (the right to use a commercial premises).
How do you get started?
As a franchisee, you will need to sign a legal agreement with the franchisor before you can start operating. A good contract will protect both of you by ensuring that everyone knows what compliance standards are expected, which rights and responsibilities belong exclusively to one party or another, and how any disputes should be handled.
You will usually have to pay upfront fees to be granted permission by the franchisor to use their unique brand name, business system and marketing plan. These are often negotiable and vary depending on the type of service/product being offered.
The franchisor will usually provide training on how to run your business and will be responsible for promoting the brand name and making sure that the products or services you are selling remain appealing to consumers. In exchange for this, the franchisor will receive royalties from each sale you make.
As the franchisee, you will then be responsible for hiring employees for your branch and implementing the franchisor’s training programmes to get all staff up to scratch. Once you have everything in place, you can then start operating your business.
How does a franchise agreement typically work?
In the UK, and in most of Europe and the US, the most important elements of a typical franchise agreement will include:
- Financial information about fees, royalties, expenses and commissions paid by both parties.
- Terms that outline what happens if one party breaches the agreement.
- Terms for how to deal with disagreements.
There will also be certain clauses outlining confidentiality obligations and intellectual property rights. There may also be special provisions such as requiring arbitration rather than going straight to court as well as which courts should settle any disputes.
What are some famous franchise businesses?
There are many famous and successful franchise businesses. Some examples include: McDonald’s, Dunkin’ Donuts, Subway, and KFC. These are all well-established franchises with hundreds of locations around the world. The franchise model gives individuals the opportunity to run their own businesses without having to go through many of the usually processes like product and market research, while enabling the franchisor to expand their operations quickly and efficiently without needing to rely on outside investors.
What are the benefits of owning a franchise?
There are a variety of benefits to owning your own franchise:
First of all, you can start making money straight away because someone else has already done most of the hard work for you in terms of research, marketing, and product creation. For example, if you open a McDonald’s, you won’t need to come up with recipes or even source the ingredients, because all of that has already been done for you.
Second, you won’t need to build brand recognition or trust because it will already be long established. Again taking the McDonald’s example, the company is already famous so there will already be a certain demand for your new franchise to supply.
Third, it is usually cheaper to open a franchise than a standard business because so much is made available by the franchisor. Everything from uniforms to marketing materials are usually provided for free or at a very low price in the initial fee.
Finally, there may be tax advantages depending on where your company is located and the nature of your franchise agreement.
How can you choose the right franchise business?
There are a few criteria to consider when choosing the right franchise business:
The first thing you need to do is assess your expertise and skill set. If you don’t have any experience or skills, it might not be in your best interest to start up an expensive venture until you have found your feet in business. Identify your strengths and find a franchise that is the right fit. For example, if you have excellent customer service skills, you may want to consider a restaurant franchise, while if your strength is sales, a retail store may be the most potentially lucrative.
Second is how much capital you’re willing (or able) to invest into opening your new business. However small or large this amount may be, this is an important consideration, as the amount of money you have to spend will directly influence what type of franchise business you can afford.
Restaurants or retail stores are popular options because they usually yield more profits, but they do tend to have higher start-up costs. On the flip side, if finances are tight but your heart’s set on owning a franchise business anyways… maybe consider opening up a cleaning service or a pet care centre.
The third thing to think about when choosing a new franchise venture is how much time you’re willing (or able) to commit. The more hours you can work, the higher your chances of success, but some types of franchise are more time-intensive than others.
And last but not least, you need to choose the right location. It can be easy to just open your franchise where you live, but what if a neighbouring town has a bigger potential market. Do your research, speak to different franchisors, and choose the best type of business for the area.
Why is the right location so important?
If the location is not right, you will have trouble attracting customers and making sales. The neighbourhood should be accessible to your targeted customer base in order to increase foot traffic and create opportunities for word-of-mouth advertising. Choosing the right location also means considering factors like public transport accessibility, and proximity to competitors who offer similar products or services. You will also need to consider any zoning laws, proximity to suppliers, ample parking space and premises rental rates.
The time you spend researching the location will depend on how long you think you will need to prepare, but in general, most people start their research six months or more before they are ready to decide.
How can you fund a new franchise business?
Apart from the initial investment, there are several ways to fund your new franchise business:
- Use your own savings – This will enable you to buy more of the company shares and have a better chance to make an earlier profit.
- Take out a loan – This might be difficult if you don’t have any equity in your business but many banks offer franchise loan schemes which are specifically designed for franchisors. There are also alternative lending companies such as Funding Circle, Virgin Money or M&S Financial Services who are always on the lookout for entrepreneurs with a great business idea.
- Use friends or family members as guarantors – If they’re happy to put their personal finances on the line then this is one way that some people fund their new franchises, although it will depend on whether there’s enough collateral behind your guarantors to protect against defaulting.
- Apply for a government or charity grant scheme – These can help to subsidize new businesses and cover some of the initial investment costs.
You should always weigh up all of these options before making any decisions because the right funding avenue can have a major bearing on your chances of success.
What taxes and legal considerations come with owning a franchise?
You will need to consider a range of different legal and tax implications of owning a franchise before you commit:
The first type of tax you will likely have to pay is VAT, which stands for Value Added Tax and this applies at 20% in the UK on any sales as well as some purchases. There may also be other taxes that apply depending on what products or services you sell, as well as the turnover and profits of the business.
National Insurance Contributions
In addition there are some costs that come with being self-employed in general – these include things like National Insurance Contributions (NICs) which cover sickness, unemployment, and pension. The NIC is charged at 12% on profits up to £8944 per annum; however if any net profit exceeds £8944 then you will also need to make an additional contribution of £3000.
What are the potential downsides of opening a franchise business?
One of the key downsides to opening a franchise is that you are giving up your creative freedom. The franchisor will decide how much you will sell, how to design the store and what uniforms your employees will wear. If you want a more customized business experience then opening up on your own might be better for you. There are also risks associated with owning a franchise like having to pay an ongoing royalty fee and large upfront costs that can put pressure on any small business, particularly if you don’t have a lot of start-up money or collateral.
What advice can you seek?
Franchise consultants and other franchise owners can provide advice on which franchises are worth consideration. They will have experience within the industry, so they will know what to look for in a good franchise opportunity. Franchisees may also be willing to help you find a location, as well as offer tips about how to start your business or promote yourself once it is up and running.
The downside of seeking advice from other franchise owners is that not all people who invest in franchised businesses succeed. It never hurts to speak with others before making any decisions, but just make sure you do thorough research beforehand so that you don’t take the wrong advice.
What is a franchise discovery day?
A franchise discovery day is an event that helps you discover what it’s like to be a franchisee and evaluate different franchises opportunities in your area. You’ll get the chance to talk with current owners, ask them questions about their experience, and find out more about the business model of each company from those who live it every day. The length of these events varies based on the number of companies present; one-day programs can last anywhere from four hours up to one full workday for eight or more companies. It all depends on how much information you want. Franchisees are usually happy to share their thoughts because they’re eager to dispel myths and answer any question you have before committing time and money into owning a small business.
To sum up
Starting a franchise business can be an excellent business opportunity as there is no need to do research, develop or manufacture your products, build a new brand, or take care of marketing. In order to be successful, however, it is crucial that you do your homework with regards to profitability, location, and competition. Make sure you have everything in order in terms of taxes and legal necessities and get advice from experts and other franchisee owners about anything you are unsure of. Good luck!