What is Franchising: How It Works, Types, Pros, and Cons

So, you’ve made your decision – you’d like to be your own boss and run your own business. There are many advantages to this but if you’re on the road to starting your own business, you’ll face several choices: do you start your business from scratch, do you purchase an existing business or the best of both worlds: do you get into franchising?

If this is a somewhat new concept and you’d like to find out more about what franchising is and how it works, then this post is for you.

What is Franchising? 

According to the International Franchise Association (IFA), franchise means:

“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”

In other words, a franchise is not an ordinary business. Instead, it’s a very specific type of company that starts out with the franchisor who owns the business and who’s seeking to expand it in the same form, function, and structure as the original business. 

This is where franchisees come. They purchase the licences and rights to run the business in its original form all while ensuring that the brand name, trademark or trade name of the original business are respected with each action taken. 

They also agree to pay an initial fee and ongoing royalties for the right to run their business unit based on the original business in a specific location. 

This is the gist of franchising’s meaning and if you’d like to imagine it differently, you might consider a successful business that expands into different territories but also offers the same standards of products and services to the customers.

Ultimately, the franchisee or business owner purchases the rights to offer these products and/or services under a trademark or brand name for an extended period of time. In some cases, franchise agreements last between five and 20, or even 30 years. 

Some of the most popular franchises around the world that are easily recognisable include McDonald’s, Dunkin’ Donuts, and others. 

How Does Franchising Work?

In the UK, there are thousands of franchising opportunities. You will need to be very specific about your interests and passions and choose one that will suit you and your personality well.

One of the first steps you’ll need to take when you’ve identified the niche is to get hold of the franchise agreement. This will set out your duties, responsibilities, rights, and obligations as a franchisee.

Read this contract well and once you’re done, read it again. Preferably, do this with the help of a franchising consultant or an attorney to make sure you miss nothing.

These agreements are usually very detailed and cover everything you need to know about running your franchise – from the fees or royalties which you’ll be expected to pay the franchisor actively to the set of rules that will govern your relationship with the franchisor.

Also, consider speaking to other franchisees in your niche and ask them about their successes and challenges. 

Once you’ve chosen your franchise partner, you’ll need to ask about the needed know-how of the business. Enquire about marketing and advertising support, training support, customer relationship management support, and other factors to ensure you get the right help from your franchisor after you pay the initial franchise fee.

With that being taken care of, you can launch your franchise business in a specific location. Here’s where the hard work begins. This is where you’ll be offering either a product or a service to your customers and you’ll need to do this to the standards that the franchisor has set.

Anything below this means a potential disagreement with your franchisor and this is something to be avoided at all costs since you’re in it for the long haul.

In addition, ensuring high-quality standards across the product or service offering means that the brand name and franchisor’s reputation will be maintained throughout the industry.

The brand name and trademarks are some of the things you’ll be purchasing the right to operate under. Given that it takes years to build up, it’s something you’ll want to protect with your actions and service delivery. 

Types of Franchising

If you think that that’s all there is to franchising, you’d be in for a surprise as there are various kinds of franchises you can choose from. 

Here are the main types of franchising:

• Product;
• Manufacturing;
• Business.

Here’s what you need to know about each one.

Product

The product or product distribution franchise model is when a franchisor gives a franchisee permission to sell a product using their logo, trademark and brand name. 

This type of franchise is very similar to the traditional supplier-retailer relationship. However, it differs in the fact that the franchisee usually offers the franchisor’s items exclusively. 

In addition, in some cases, the franchisees pay franchisor fees in order to be able to offer the franchisor’s trademarked products. In other cases, the franchisee would prefer not to pay franchise fees, they agree to work in accordance with minimum purchase requirements. 

Product franchise models are most commonly seen in consumer goods, automotive, and electronics. 

Manufacturing

Another type of franchise system is manufacturing.

Manufacturing franchise businesses operate in the following way. The franchisor gives the franchisee exclusive rights to produce and sell their goods as long as the franchise relies on the established processes and intellectual property of the franchisor. 

In other words, franchisees are obliged to follow specific guidelines when producing items for quality control purposes. They’re also tasked with handling the supply chain, finding raw materials, managing production schedules, and guaranteeing that the items are delivered to the end user on time. 

Some of the industries where manufacturing franchises are popular include consumer goods, pharmaceuticals, and food and beverage. 

Business

Last but not least, there’s the business format franchising – one of the most frequently used models. 

Running a business format franchise is all about duplicating the franchisor’s business concepts and operating methods throughout all locations. Under this form of franchise, the franchisees not only receive approval to sell franchise-branded products or services, but are also provided support and guidance. 

All they have to do is follow a pre-established business system that is applicable to all other franchisees. 

In most cases, to participate in this form of franchise, franchisees must pay an upfront fee and are also responsible for recurring royalty fees based on a portion of sales revenue. There may be other applicable fees based on the franchising agreement. 

Pros of Franchising

Statistics reveal that in 2024, more than 8.5 million people will be employed by a franchise. This only proves that the franchise industry is stable and growing.

This is mostly due to the business opportunities and franchise benefits that both franchisors and franchisees can enjoy.  

Some of the most common franchise opportunities and benefits include:

• An existing and successful business formula and proven business model;
• Market-tested products and services;
• Established brand recognition;
• Training and support;
• Financial planning;
• Approved suppliers.

Considering these perks, it’s only natural that the franchise sector is thriving. 

However, making a franchise investment also comes with a set of drawbacks that we look into in the next section.

Cons of Franchising

Naturally, the world of franchising isn’t all a bed of roses. This approach to running a business comes with a handful of drawbacks and potential obstacles.

Here are some disadvantages and challenges of franchising you need to know about:

• Possible high start-up costs;
• Ongoing royalty payments;
• Inaccurate information is being provided to the franchisor and prospective franchisees;
• No or low franchise value;
• Lack of control over territory;
• Running a business based on other people’s guidance usually means no room for creativity;
• Financing could be scarce.

Of course, these potential drawbacks shouldn’t put you off course or cause you to underestimate the power of a good franchise. 

With enough experience and support, you can usually overcome the majority of these cons and simply enjoy all that a franchise has to offer. 

Conclusion

Franchising is a long-term relationship between the franchisor and franchisee and the franchise business definition essentially means that you’re operating units of a business under a given brand for certain territories.

On the upside, a franchisee can stand to benefit from a wealth of tools, training, and support when they become a franchisee. On the downside, there are the inescapable royalty payments that you’ll need to cover.

Either way, it’s one of many types of businesses that you might consider for your future endeavours, which could turn out into something quite profitable over the long term.