If you like the idea of being self-employed but aren’t sure about building a company from the ground up, then buying a franchise could be an option worth considering.
The franchise industry contributes a huge amount to the UK’s economy each year, with recent data from the British Franchise Association showing that franchising in the UK is worth an estimated £17 billion. Almost 50,000 different franchises exist across the country, and over 90% of these are thought to operate at a profit.
But how does franchising work, and how much of the money involved in setting up a franchise will come out of your own pocket? We’ve written this guide to answer all your questions.
How do franchises work?
Think of a company like Costa – they have locations everywhere, but they aren’t all run by the same team. Rather, the vast majority of Costa cafes are run by independent local business owners, who have entered a business deal with Costa to use their branding to set up and manage their own branch.
This is the essence of franchising, when a company allows an investor to use its brand, trademark, business plan and proprietary system (that is, their particular way of running a business) to operate their own business as an outlet for that brand. The company will often provide training or guidance to investors as well, so that they can run their business in line with the brand’s image and strategy.
Ideally, this type of structure is a win for both the company and investors buying into the franchise, as the former gets to expand, while the latter gets to be their own boss, work with a proven brand and strategy, and receive support from the franchisor.
People tend to associate the franchising industry with fast food and drinks, but franchises exist in almost every sector. Other well-known brands which operate as franchises include shoe company Skechers, fitness clubs Anytime Fitness, jewellery business Pandora, second hand goods chain Cex and many, many more. Some of them, like food businesses, involve running a store and managing staff, while others allow you to work independently, for example, as a driving instructor.
The terminology around franchises can get a bit confusing, but the basics are as follows:
- The company that has established a brand and offers franchising opportunities (eg. McDonald’s) is known as the franchisor
- The investor who buys the right to use the brand is known as the franchisee
- The term franchise itself technically refers to the contract between the franchisor and franchisee, but is commonly used to describe the company as a whole, as well as the business that the franchisee runs.
What are the different types of franchise?
There are three main types of franchise.
Business format franchises are the most common kind of franchise in the UK. With a business format franchise, the company effectively sells you a ‘business in a box’ – you pay the fee, and in return get the rights to the brand name, trademark, business plan and so on. From there, you will be responsible for the day-to-day running of the business. How involved the franchisor is in your business will vary – some will simply issue guidelines and mostly leave you to it, while others may be very hands-on and involved.
This structure is considered a good option for first-time business owners, as it gives the franchisee experience in running a business themselves using a reliable business plan.
Management franchises are generally suited to franchisees who prefer behind-the-scenes work to customer-facing duties. As the name suggests, management franchises tend to involve managing a team to carry out the brand’s primary work, while you focus on behind-the-scenes tasks such as business strategy and marketing. While business format franchisees tend to be heavily involved in the day-to-day operation of the business, management franchisees are often ‘bigger picture’, focusing on developing the business even further.
This structure is usually considered suitable for those with previous management or administrative experience, who like the idea of running a business without having to be involved in its day-to-day or customer-facing aspects.
Product distribution franchises are structures which involve the franchisor distributing a product that the franchisee then sells. This type of franchise is less common than the other two kinds of franchises, and comes with certain pros and cons. Product distribution franchisees tend to have fewer rules in place for how they operate their business, meaning they can work with greater independence. On the other hand, this hands-off approach means that franchisees typically don’t receive direct training or support from the franchisor (unlike the other kinds of franchises), meaning as a structure it is less suited to first-time business owners.
This type of franchise structure is generally best suited to those with previous business experience, particularly in selling or marketing a product.
What are the costs of setting up a franchise?
Like any other form of self-employment, starting a franchise business means having to cover start-up costs – the franchisor won’t do this for you.
The cost of buying a franchise will vary dramatically depending on the brand and business involved – with some, you may be able to buy in for only a few thousand pounds, while for others, the initial fee alone can cost over a million pounds. The average set-up cost for a franchise in the UK is estimated to be around £40,000, according to the British Franchise Association.
The costs associated with buying a franchise tend to include:
- The initial franchise fee, the right to use the company’s brand, intellectual property, business plan and so on. Usually this is around 5-10% of the total investment you will pay
- Premises if your franchise needs to have a physical outlet. Sometimes, this will be rented to you by the franchisor
- Initial stock if your franchise sells a particular product
- Equipment such as machinery, computers, uniform, or anything required to operate as a business every day
- Payroll for employees, as well as your own living costs
- Insurance, such as employers’ liability insurance, which is a legal requirement for businesses. You may also need to get buildings insurance if you have a mortgage on the premises, or contents insurance to cover the contents of your workplace.
Our list of tips if you’re starting a business in your 50s covers some of the costs associated with starting a business in more detail.
We at Rest Less offer several franchising opportunities with trusted affiliates. For example, you could consider starting a business as a business consultant with Auditel, become a self-employed exercise instructor with Move it or Lose it, or find out more about franchising with the Quality Franchise Association.
If you want to keep looking, you can search for franchise opportunities using Franchise Direct. This site allows you to filter for franchises in your preferred field and price range, while breaking down the finances associated with buying into them.
Can I borrow money to buy a franchise?
Yes – in fact, it is very common for budding franchisees to take out a loan to cover the cost of starting a franchise business. This is referred to as ‘franchise finance’, and helps cover both startup and ongoing costs. It can be supplied by a traditional lender like a bank, or sometimes by the franchisor themselves. The franchisor can also support you through applying for an external loan if you have limited experience as a business owner.
When approaching lenders, you should bring the franchise’s financial projections and business plan, which the franchisor should have provided you with. This will help show them that you’re serious, and that lending you money will be a reliable investment.
As with any form of borrowing, your application can still be rejected for a number of reasons. This could be because you have a poor credit score, or because the bank doesn’t trust the franchise itself. Read our article Do I need a good credit score to borrow money? to learn more.
You should wait until you have reached an agreement with a franchisor before you seek franchise finance, so that you will be able to provide the necessary documentation and know how much you will need to borrow.
You should always seek financial advice before borrowing a significant amount of money or buying a franchise, particularly if you do not have much experience running your own business or investing. Read more in our article Should I get a financial advisor?
Are franchises and chains the same thing?
Not every company with multiple outlets is a franchise – it’s important to understand the difference between a franchise and a chain.
The key difference is that chains do not sell the rights to use their brand name and proprietary systems to franchisees, instead opting to set up new locations themselves. This means that in order to expand, chains need to fund new outlets themselves, either by seeking investments or loans, or by waiting for existing locations to generate enough money.
Franchises, as mentioned, do sell the rights to their brand name and systems, meaning the company doesn’t have to put in as much of its own money to open new locations – the set-up costs are paid for by the franchisee.
How is owning a franchise different from other types of self-employment?
Becoming a franchisee is technically a form of self-employment – your business exists under the umbrella of the brand at large and usually has to follow their business plan and other rules, but you are still running your own business and making decisions yourself.
Buying into a franchise might therefore be an attractive proposition if you like the idea of being your own boss, but don’t have an angle for a new business, or want to execute a business plan that has been proven to work.
Our article A complete guide to self-employment contains more information on franchising and how it compares to other forms of self-employment.