Franchises

A franchise is where a business sells another the right to set up a business using their
name.

Examples of major franchises are:

McDonalds
Clarks Shoes
Pizza Hut
Holiday Inn

The
franchisor is the business whose sells the right to another business to operate a
franchise.

A
franchise is bought by the franchisee.

What the franchisee gives the franchisor

Once a franchisee has bought a franchise they have to pay

- An annual fee and
- a proportion of their profits to the franchiser on a regular basis (known as
royalties)

What the franchisor gives the franchisee

A well known brand
training,
management expertise and
national marketing campaigns.
raw materials and
equipment.

Advantages of being a franchisor:

Large companies see it as a means of growing rapidly as the franchisee provides most of
the finance.

If the franchise model works, then there are large profits to made from

selling franchises
royalty payments
selling raw materials and equipment.

Advantages of setting up as a franchisee are:

The franchisee is given support by the franchiser. This includes marketing and staff
training.

The franchisee may benefit from national advertising and being part of a well-known
organization with an established name, format and product

Less investment is required at the start-up stage since the franchise business idea has
already been developed

A franchise allows people to start and run their own business with less risk. The chance of
failure among new franchises is lower as their product is a proven success and has a
secure place in the market


Disadvantages of setting up as a franchisee are:

Cost to buy franchise can be very expensive (hundreds of thousands of pounds).

Have to pay a percentage of your revenue to the business you have bought the
franchiser from.

Have to follow the franchise model, so less flexible. You would probably be told what
prices to set, what advertising to use and what type of staff to employ.

In conclusion, a buying a franchise a good way of an individual setting up a business
because:

They do not have to establish themselves in the same as a sole trader might have to.
They will have the support of a tried and tested business model, often with a national
marketing campaign behind them.