What is a franchise?

Looking to start your entrepreneurial journey?

Learn how buying and running a franchise can be the perfect way to become your own boss.

You'll find franchise business opportunities in almost any sector, from coffee shops to car dealerships, gyms, estate agencies, and burger restaurants.

A franchise can be a great way to become your own boss without building a business from the ground up.

You can enjoy the independence of small business ownership while working with an established business model and brand.

In this article we’ll talk about the history of franchises, famous examples, how much it costs to operate one and much more.

It’s a good idea to seek independent legal advice when deciding if starting a franchise is right for you and your circumstances.

What is a franchise?

A franchise is a business where an established owner sells the rights to use their company name, trademarks, and business model to independent operators.

This is usually in return for a one-off franchise fee plus an ongoing percentage of sales revenue and other fees.

The key parties who participate in a franchise agreement are:

• the franchisor – the business owner who sells the right to trade using their name
• the franchisee – the person who buys the right to use an existing business name, brand, and business model.

When a company (the franchisor) licenses its business model and brand, it can expand quickly and potentially without some of the risks associated with a large investment.

For individuals, a franchise offers a great way to start running your own business without having to start from scratch.

Not only do you have the reassurance of a proven business plan and products or services, but you may also have the backing of a team of experienced people who can help you achieve your business goals.

For this reason, franchises can have a higher success rate than other start-up businesses.

Franchise types explained

There are three main types of franchise arrangements:

Business format franchise

This is a popular type of franchise.

An established business (franchisor) allows another business (the franchisee) to trade using its branding and business model in exchange for a fee and ongoing royalties.

The franchisee must run the franchise according to the parent company’s guidelines and rules.

In return, they receive ongoing support such as help with store location, design and layout; product and market research; staff recruiting and training; and preferred supplies contacts.

Product franchise

This type of franchise, more common in the fast food and car industries, is essentially a supplier/dealer relationship.

It involves the franchisee exclusively selling the franchisor’s products.

Ongoing franchisor support may include national marketing and advertising campaigns, logos, and trademarks.

Manufacturing franchise

A manufacturing franchise is licensed to produce and sell goods and services using the franchisor’s name and trademark.

The history of franchising

The franchising concept is believed to have originated in the Middle Ages, although it has evolved over the centuries.

The idea became popular in the UK in the 1970s, with well-known American brands such as McDonald’s and KFC leading the charge.

The British Franchising Association was founded in 1977 to encourage growth through franchising and establish standards for businesses adopting the concept.

As the success of early franchises became apparent, more industries began to recognise franchising as a viable business model.

In the 1990s, there was a franchising boom in the UK, with franchises springing up for everything from pet services to hotels.

Famous franchises in the UK

McDonald’s

Famous worldwide for its fast food, McDonald’s operates mainly as a franchise business in the UK.

Franchise owners operate under the McDonald’s banner and benefit from a universally renowned brand, well-established operational procedures, and extensive marketing strategies.

Kumon

One of the world’s largest after-school enrichment programs, Kumon provides children with tutoring in maths and reading.

Operating a Kumon franchise in the UK means entrepreneurs can use an established learning method that promotes self-learning and helps children reach their potential.

Franchisees are supported with training programmes and national marketing materials and assistance.

Anytime Fitness

Franchisees in the UK can operate a gym under the Anytime Fitness brand. 

They have access to a business model, training systems, marketing, and business support.

Members have access to gyms all day, every day, which is a unique offering in the fitness market.

Costa Coffee

Costa Coffee, the largest coffee shop chain in the UK, operates on a franchise model.

Entrepreneurs who franchise with Costa Coffee can open a shop under the brand name, benefiting from strong brand recognition, established operational systems, marketing strategies, training, and support.

Holiday Inn

Holiday Inn (part of the InterContinental Hotels Group) operates on a franchise model in the UK and worldwide.

Entrepreneurs who want to start a hotel business can buy a Holiday Inn franchise, giving them the right to operate a hotel under the brand name.

This allows franchisees to take advantage of the brand’s reputation, established business model, training, and support.

The advantages of starting a franchise

• brand awareness – starting a franchise means you begin a business with a recognised brand name and reputation, which can help you attract customers and foster trust
• proven business model – franchisors provide franchisees with a proven business model, decreasing the risk of failure compared to starting a business from scratch
• predictability – you’ll enter the market in a strong position with an existing customer base, and profit and success are easier to predict
• access to training and support – you don’t always need related business experience to run a franchise; franchisors often provide training and ongoing support
• marketing assistance – franchises often benefit from national advertising campaigns run by the franchisor, as well as guidance on local marketing efforts
• purchasing power – being part of a larger network often allows franchisees to benefit from collective buying power, leading to cost savings on supplies and equipment.

The disadvantages of starting a franchise

• initial and ongoing costs – not only must you pay a purchase fee upfront, but there may be ongoing fees and royalties involved, which can restrict the amount of profit you’re able to make in the long term
• less creative control – as a franchisee, you’ll need to operate your business according to the franchisor’s brand guidelines, which could feel restrictive for some entrepreneurs
• restrictions on products and services – the franchise agreement can dictate how the business should be run, including where and how you operate, the products you sell, and the suppliers you use
• dependence on the franchisor’s reputation – if the franchisor or another franchisee behaves poorly or the franchise fails elsewhere, this could affect your business
• terminations and renewal – if you violate the terms of your franchise agreement, the franchisor could terminate your contract, plus there may not be a guarantee of contract renewal
• limited territorial rights – your agreement could limit where you can operate, potentially limiting your growth.

How much does it cost to start a franchise?

The cost of starting a franchise depends on the type of franchise you intend to start.

For example, home-based franchises and personal services could be cheaper than those that require premises, equipment, or a fleet of service vehicles.

Typical initial costs associated with starting up a franchise can include an upfront fee plus the cost of stock and equipment, the premises, and initial training.

You may also be required to pay a marketing fee to contribute to national or local marketing campaigns and materials overseen by the franchiser.

Read our full guide to the costs involved in buying a franchise.

Where to find franchises to buy

There are several ways to find franchises for sale.

Some franchisors advertise directly on their websites, offering detailed insights and FAQs for budding franchisees.

If considering buying a franchise, think about what type of business would suit your particular skills and lifestyle, as well as what’s available within your budget.

Online franchise directories and websites such as Franchise Direct and Franchise UK have extensive listings across a number of industries.

Franchising trade shows, franchise consultants and brokers, or franchising magazines could also be potentially useful sources of information.

Consider thoroughly researching the opportunities available to ensure that you’re making the right choice.

Franchise rules and regulations

Your franchise agreement

Your franchise agreement is key when buying a franchise – it is the legal document that outlines the terms of the franchise licence.

Consider using a franchise solicitor to review this document before signing – It should include key details like fees, the obligations of both parties, and termination conditions.

The UK doesn’t have specific franchising legislation, but various laws apply to franchises, including contract law, intellectual property law, and competition law.

As the owner of a franchise, you may find that the franchiser also imposes rules on certain aspects of the business, such as operational procedures or employee uniforms.

These should be stated in your franchise agreement.

When it comes to standards and ethics, the British Franchise Association has its own Code of Ethical Conduct, which, while not legally binding, is considered a good source of best practices.

Tax and accounts

As a franchisee, you will need to pay income tax on the profits of your business, just like any other business owner.

If your annual turnover exceeds the current VAT threshold, you’re required to register for VAT.

If you employ staff, you must deduct Income Tax and National Insurance contributions from their pay through the Pay As You Earn (PAYE) scheme.

Franchisees must keep accurate records of income and expenses, and file annual accounts with HMRC.
You must also register with Companies House if you operate as a limited company.

Similar business opportunities

If you decide that running a franchise isn’t for you, there are a number of potential alternatives that you could consider.

Partnerships

Partnerships involve shared business ownership where profits and losses are divided among partners.

This arrangement allows for the pooling of resources and shared responsibility, but it is not linked to an established brand or business model.

Dealership

Dealerships represent another business opportunity.

In this arrangement, you buy goods from a manufacturer and sell them directly to customers.

This differs from franchises as the dealer (you) maintains more control over the business operations.

You could also try selling white label goods, which involves buying a product or service created by another business, attaching your own branding, and selling it to your customers.

Distributorships

A Distributorship involves buying products from a manufacturer and selling them to retailers or customers, often within an exclusive territory.

The distributor has to market the products and manage the sales process – benefiting from access to products that can be sold for a profit without investing in product development.

This arrangement provides greater business control, albeit without the brand recognition of a franchise.

How to fund buying a franchise

There are a number of financing options available to help you to buy your own franchise.

Bank loans, loans from friends and family loans, and personal savings are some common sources of funding used by franchisees.

You could also consider taking out a personal loan, such as a Start Up Loan.

A Start Up Loan is a government-backed personal loan. 

The scheme offers up to £25,000 at a fixed 6% interest rate.

In addition, you can receive a year of free business mentoring to help you become a stronger, more capable business owner.

Read our full guide on how to fund your franchise.