Franchise Business Definition: A Beginner’s Guide To Franchising
Looking for a simple franchise business definition? In this guide, we break down how franchising works and whether you should consider it for your next business venture.
When it comes to starting a new business, there are plenty of routes you can go.
Limited companies, partnerships, sole ventures and everything in between – understanding the differences between different types of businesses can be tricky.
Franchising is just one of those options.
Franchises dominate global markets. But not everyone knows exactly how they work.
In this guide, we’ll be providing you with a simple franchise business definition and explain exactly how franchising works.
What Is a Franchise?
The term ‘franchise’ is broad.
Investopedia defines a franchise as ‘a type of license that grants access to a company’s proprietary business knowledge, processes and trademarks, thus allowing the licensee to sell a product or service under the business’ name.’
The original company who established the business model, branding etc. is called the ‘franchisor. While to business who is being granted access to the license is known as a franchisee.
There are many examples of enormous international corporations that adopt a franchise model – some of which include McDonald’s, Dominos and Subway.
While those corporations have thousands of franchisees in hundreds of countries worldwide, franchise business models can be implemented on far smaller scales.
Coffee Blue, as a mobile coffee van franchise, has 15 franchisees operating throughout the UK.
Like all businesses, franchises come in all sorts of shapes and sizes.
Where a McDonald’s franchisee might use their franchise as an investment opportunity for passive income, our franchisees use theirs as a chance to change their career – building their own business with the support of our team.
How Franchising Works
Franchises can work in a whole manner of ways.
How the core franchise has set up their agreement determines the structure of licensing, fees and more.
Typically, to gain licensing rights to the core franchise, franchisees must pay an upfront fee that grants them access to business plans, branding, merchandising, products and more.
In some instances, there then comes added costs in the form of premises, decorations, equipment and royalty fees.
Some franchises even take a percentage of profits as part of the licensing agreements.
Say we used McDonald’s as an example:
*Note: We do not know precisely how McDonald’s franchise agreements work. We are simply using them as an example.*
A franchisee will pay McDonald’s a franchise fee to access their business plan, recruitment, products, branding and more.
Then, the franchisee will choose a location for their restaurant.
In some cases, the franchisor will buy the land themselves and lease it directly to the franchisee.
Once the restaurant is up and running, the franchisee then pays regular royalty fees to the franchisor, in addition to a percentage of profits – but this isn’t the case with all franchise agreements.
The franchisee then keeps all net profits.
So, no – McDonald’s do not primarily earn their money from food sales.
The bulk of their earnings, as a franchisor, will come from fees and royalties paid to them by franchisees.
Coffee Blue franchises work in a much simpler way: our franchisees pay a franchise fee that covers their training, support, first month’s supplies and more.
They then have to fund their coffee van, which can be done so either by outright purchase or finance through our lending partners.
Finally, our franchise agreements come with a £60 weekly royalty fee that covers stock deliveries, petrol and monthly check-ins.
That, in essence, sums up how some franchise agreements work.
Benefits Of Franchising Vs Starting From Scratch
Why start a franchise when you can save thousands and start your own business from scratch?
There are a number of benefits to franchising, and plenty of reasons why small business owners seek franchise opportunities over starting from scratch. Here are some of the main ones:
The Business Model Is A Proven Success
With a franchise, most of the work is already done for you.
The franchisor has already created a proven business plan, branding, product range and more. All you need to do is take their framework and apply it to your franchise.
No need to conduct extensive market research, source manufacturers or test products.
All you need to do is to take their already successful model and use it to fastrack your success.
Support & Aftercare
Another benefit for franchising vs starting your own business is the support and aftercare you’ll receive.
For budding entrepreneurs looking to start their own business for the very first time, it can be tough.
Having the backing of a team who know the business model inside-out and what needs to be done to make it a success can help massively.
In most cases, the franchisor will even take care of all the marketing.
Franchisors want their franchisees to succeed and will use all the resources they can when needed to make that possible.
Easier To Borrow Money
To put it bluntly – banks, brokers and other lenders are more likely to lend money to businesses they know can pay it back.
When starting from scratch, you’ll need to sell them your business idea and why you believe it will succeed.
They will analyse business plans, previous accounts, forecasts and more.
In some cases, they’ll base applications off your personal credit score. This might result in you having to sign a personal guarantee against the loan as security.
With a franchise system, however, the process is much simpler.
Lenders will know the business you’re requesting funding for works. Therefore, they are more likely to lend you money.
Banks, such as Natwest, even have specific schemes dedicated to franchise loans.
Franchise costs can depend on two things: the size of the franchisor and what you’re actually getting for your investment.
The total cost of a franchise can vary anywhere between £1000 – £1,000,000.
Large brands like McDonald’s or Subway can charge more for their franchise because they’re globally recognised companies that are proven successes.
In these cases, you’re paying mostly for brand recognition.
Though, a large portion of the costs will also come in things such as land, the premises, fittings and more.
At Coffee Blue, our franchise costs are broken down into three categories:
- The franchise fee
- Our mobile coffee van
- Royalty fees
Whatever franchise opportunity you choose, it’s important to know exactly what you get for your investment.
How Do I Choose The Right Franchise For Me?
The answer is simple: it depends on what you want to get out of franchising.
If you plan to use your franchise as an additional revenue source to add to your investment portfolio – choose one that’s value for money and provides a great return on investment.
However, if franchising is more of a career change and you’re looking to become your own boss – choose something you enjoy.
Having a job you like will make those 40+ hours a week you spend working far more pleasant.
When you’re doing something you enjoy, you’re more likely to succeed.
And in business, success is everything.
Franchise Business Definition: Conclusion
To summarise: a franchise is a type of business where an established company (a franchisor) allows another party (a franchisee) to set up a business under their brand name in exchange for upfront and ongoing royalties and fees.
Hopefully, you’re now ready to venture deeper into the franchising world!
Now, we’d like to hear from you.
What sort of franchise have you been looking for?
Are there any other topics you’d like to see us cover in detail?
Let us know in the comments.