How does Franchising Work?

Pip Wilkins

Pip Wilkins QFP
bfa’s Head of Operations

The franchise industry can sometimes be seen as one of mystery to many.

‘Franchising’ is a term misused on a regular basis and one that many therefore misunderstand.

So what is franchising, and what does it mean to you as a business owner?

Business format franchising can be explained as the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to operate their own business under the trademark, brand and systems of the franchisor for a predetermined period of time.

In return for initial and ongoing fees, the franchisee receives a comprehensive package of support that comprises all the elements necessary for a previously untrained person to establish and run their business, as well as continuing assistance for the length of the franchise agreement; this is the legal contract determining the rights, duration and other elements of the relationship between the parties, and is signed prior to the purchase of a franchise.

That provision of ongoing support is a vital element.

Whilst the franchisee is the owner of their business, it is important to bear in mind that it is the franchisor’s system and brand that the franchisee is operating under.

Ongoing dialogue between franchisor and franchisee is crucial therefore in contributing to the success of each individual franchise unit, and, consequently, the franchise network as a whole.

To examine how the franchise model works, it’s worth noting what makes a business franchisable. There are three core elements:

  1. The business needs to be have been proven to work – not just the idea on paper or in someone’s head – with evidence that the product or service is saleable, and at a level of profit that will sustain a franchised network
  2. It needs to be transferable, i.e. run in multiple locations by multiple independent operators using the same system, brand and quality
  3. It must be teachable, often to people with no experience in the industry previously; there’s little point in franchising a business that only 3 people in the world can replicate!

This first point is especially salient when assessing franchise opportunities; franchising is based on proven systems, not the selling of a concept, and at the least a pilot operation should have been in operation for 12 months.

This way, the franchisor has ironed out early difficulties, honed the system that they are looking to sell, and satisfied all three points above for prospective franchisees.

Financial Close-Up

When investing in a brand, a franchisee should expect to pay an initial ‘franchise fee’ for the right to trade under the brand name for a set length of time.

The franchise fee varies widely according to how established and renowned the business name is, and also depends on what it includes – some franchises offer everything needed to set up and trade within this fee, while others will require further expenditure (such as for a vehicle or shop premises).

Then, ongoing fees will be payable to the franchisor. Most commonly this is a percentage of monthly turnover, though some franchise models may use mark-ups on products or raw materials brought (contractually) from the franchisor; and others have a flat fee, especially where the franchisee commonly trades in cash (a weight loss club for example).

In addition there may also be a separate marketing levy applied to the franchisee, but this money must be kept in separate accounts and used only for marketing for the benefit of the network.

These monthly fees give the franchisee the right to call on his or her franchisor for assistance on a continuing basis. For some this might be help with administering the business, while for others it may be assistance with sales or some other operational aspect.

This synergy between the two parties underpins the franchise model, and is its basis for success – better, more profitable franchisee businesses provide better returns to the franchisor, and therefore it’s in everybody’s interest to make each unit as successful as possible.

Time and again, franchising has greatly outperformed other start-up businesses.

Its formula of a locally-owned and run enterprise, driven by a small business owner, with branding, economies of scale and support from the wider network, gives the consumer the best of both worlds and the business a far better chance of success. It continues to be a successful and well respected business model.

For more information on any aspect of franchising visit www.thebfa.org.

About Pip

Pip Wilkins is the Chief Executive of the British Franchise Association (bfa). With 18 years’ experience in the franchise sector, Pip has worked her way up within the Association, gaining insight from all areas of the business and the franchise industry. She is well-known and highly regarded in franchising for her dedication and depth of knowledge.

Pip regularly speaks at conferences and seminars both domestically and internationally, as well as writing on franchising matters for national, local and franchising trade press. Pip is also a judge for the annual bfa HSBC Franchisor and Franchisee of the Year Awards.

Pip represents the UK at both the European Franchise Federation (EFF) and World Franchise Council (WFC). The bfa has grown to be one of the largest franchise associations in Europe, and one of the most successful associations in the world.

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