The first step is to get used to the basic, seemingly complex concepts related to franchising. You will learn what it is and what it is all about. You will also learn the basic expressions related to a franchise, such as franchisor, franchisee, franchise package or know-how. You will also know the difference between a franchise and a franchisee and also be able to distinguish between the types of franchises. You will see that it is not complicated or difficult at all.
Franchising, like any business model, has its advantages and disadvantages. In the second step you will find out if it is the solution for you. You will be able to consider all the pros and cons of running this type of business, and we will advise you on what to consider when choosing between starting your own business and using a franchise.
In this step, we explain exactly what it is and what constitutes a franchise package. You will also read about the role of a trademark and proven experience in running a business. You will also learn about the benefits you can count on from the franchisor if you join the franchise system of your choice.
The next step on the way to your own company in the form of a franchise is the choice of a specific franchise system, so we will tell you where and how to find a franchise and what to consider when choosing it. We have also prepared a list of questions for you that you can ask a potential franchisor in order to be able to make an informed and good decision about choosing one.
In this step, we will tell you how much it costs to start your franchise. You will learn what types of fees you can come across, as well as what other costs should be considered when choosing one. Finally, we will tell you how to find finance to start your adventure with franchising.
In the last step, we will take a closer look at the franchise agreement. From the article you will learn what each such agreement should contain, and you will also find out what conditions you should be careful about when going through one. You will also know the basic rights and obligations of the franchisor and franchisee.
What Is a Franchise, What Types Are There and How Does It Work?
What Is a Franchise?
Franchising is a form of business activity consisting of cooperation between two parties. One of them (the franchisor) has an established, well-known company with a proven and tested business model, and grants the other party (the franchisee) the necessary know-how, support, technology and the right to use the brand in return for a specific fee.
A franchise agreement is established between both parties, on the basis of which the franchisor authorises the franchisee to use the brand name, logo and know-how (knowledge about running a given enterprise).
In return, the franchisor receives a share of the profits specified in the contract, which will be generated as part of the franchisee’s activities.
Usually, the franchisor, in addition to the right to use the brand or expertise of the business, offers the franchisee specific assistance and shares their experience.
As a result, opening a business as a franchisee involves much less risk than opening a business on your own.
To better understand what a franchise is, think about the nearest McDonalds restaurant or Matalan store. These companies operate on the basis of a franchise model.
Thanks to the franchise, you can set up a company in your location with a recognisable brand and high-quality product or service.
- Interesting fact:
There are over 1,000 franchises on the British market, so choosing the perfect franchise for you is huge!
Franchise and Franchise Cover – The Difference in Meaning
Regarding the definition of a franchise, it is worth mentioning two terms that are extremely similar to each other, i.e. franchise and franchise cover.
Franchise is a specific business model.
Franchise cover is a term used in the insurance industry and means limiting the insurer’s liability. There is an integral franchise cover, i.e. the minimum value of the loss specified in the contract, for which the insurer is not responsible, and the deductible, i.e. own share in the loss – it consists in reducing the compensation by a specified amount.
As you can see, although these two terms sound very similar, they are semantically very distant from each other. Be careful not to confuse them with each other.
Franchise – Basic Terms
To better understand what a franchise is and how it works, please refer below for its basic terminologies:
A business model based on granting a license to run the business to another party.
The person or company that licenses the use of its brand.
A person or company that obtains the right to operate under the franchisor’s brand name.
A network of independent business entities that offer products or services under the same brand.
Franchise Package / Franchise License
A complete concept of running a business, including: trademark, know-how, operating manual, services provided by franchisors and franchise fees.
An agreement that describes the rights and obligations of the franchisor and the franchisee.
Franchise Fee / Royalty Fee
A fee that the franchisee pays on a regular (usually monthly) basis to the franchisor. Usually it makes up a certain percentage of your profit or turnover.
A one-time fee from the franchisee to the franchisor, usually for the right to use the trademark, for training needed to open your premises, for promotional and marketing activities.
Specific knowledge of a given field, usually a business method or production method.
Company identification, usually a company name and logo.
Types of Franchise
The franchise can be divided according to several criteria:
1. Type of activity.
2. Type of know-how transferred by franchisors.
3. Organisation of the franchise system.
1. Franchise – Breakdown by Type of Activity
Commercial (Distribution) Franchise
In this type of franchise, the franchisee sells a range of goods made available to him by the franchisor, that is, he is engaged in commercial activities.
In addition to the selection of the goods, the franchisor provides the franchisee with its trademarks, sales knowledge, marketing experience, customer service, merchandising shop visualisation (the way of fitting out the shop and the favourable presentation of goods in order to attract as many customers as possible).
A special model of a commercial franchise is the deposit franchise. In her case, the franchisee does not buy the products from the franchisor, but gets them as a deposit. The product remains the property of the franchisor until the customer purchases it. The franchisee is a kind of transaction broker, and his earnings depend on the value and quantity of the goods sold.
Typical industries that use this franchise model are: the clothing and footwear industry, the food and industrial products industry, the cosmetics industry, petrol stations and pharmacies.
As part of the service franchise, the franchisee receives from the franchisor the right to use its trademarks and access to recipes, technical software and methods of performing a specific service, as well as support in arranging a service point and training staff in customer service.
The most popular industries that operate in the service franchise model are the restaurant, education, financial and banking industries.
2. Franchise – Division According to the Type of Know-How Transferred to the Franchisee
Product Distribution Franchise
It is a type of franchise that involves cooperation between companies on a supplier-seller basis. In this franchise model, the supplier is the franchisor and the seller is the franchisee.
By setting up a company in the distribution franchise model, you will get from your franchisor the right to use its brand and the goods you will trade or knowledge in the field of performing specific services. However, you will not get extensive support, marketing or operational plans.
This type of franchise works well when selling products, for example, in the sale of cars or clothes. In addition, it is used when a franchisor is committed to the rapid expansion of their franchise network and often gradually evolves into the model we discuss below, the franchise business concept.
Franchise Business Concept
In this model, the franchisee, in addition to the right to use trademarks and the range of goods or services, receives full access to know-how and support from the franchisor. The franchisor sells you their method of doing business, trains you, provides you with a marketing plan and operations manual.
The four types of franchise mentioned above are often confused with each other (especially distribution franchise with product distribution franchise).
In the table below you will find the differences between these systems:
TYPES OF FRANCHISE
Due to the Type of Activity
Due to the Scope of Know-How
Commercial (Distribution) Franchise
Product Distribution Franchise
Franchise Business Concept
You sell goods and get the know-how from the franchisor.
You sell services and get the know-how from the franchisor.
You sell goods or services, but only get the right to use a trademark and a range of goods / service delivery, without full access to know-how.
You sell goods or services and get full access to the franchisor’s know-how.
3. Franchise – Division Due to the Organisation of the System
This franchise system involves entering into an agreement directly between the franchisor and the franchisee. The franchisor himself grants the license and controls the performance of the contract by the franchisee himself, and also directly helps his franchisee in doing business.
Under this system, the franchisee may operate more than one unit, usually within a specific territory. Typically, the franchisee commits to creating a certain number of network points within a certain period of time.
This form of franchise was created in order to minimise the number of franchisees by the franchisor, but not at the expense of the number of points of the franchise network.
Simply put, in a multiple franchise franchisee runs more than one franchise point.
Master Franchise (Sub-Franchise)
Master franchise is based on the fact that the franchisee has the exclusive right to use the franchise package to conduct business in a specific territory.
How Is a Master Franchise Different From a Multiple Franchise?
First of all, in this model, the franchisee takes over many of the franchisor’s responsibilities and has much more freedom to act. He himself may recommend certain changes in the operation of the franchise network and in the agreement, and may introduce them after the prior consent of the franchisor.
This option is widely used in international franchises where the main franchisor is unable to control all units by itself. In addition, legal standards and economic conditions in different countries differ from each other, so it is worthwhile to focus on the master franchise system.
Larger networks can also choose an organisation system based on regional representatives, i.e. on individuals or companies that search for franchisees for them in a given region. The regional representative only seeks out and mediates the franchise contact – the agreement, all rights and obligations and all fees bind the franchisor with the franchisee.
In order to make it easier for you to distinguish individual franchises, we have summarised the most important differences between them in the form of a table:
DIVISION OF THE FRANCHISE DUE TO THE ORGANISATION OF THE SYSTEM
Master Franchise (Sub-Franchise)
Agreement concluded directly between the franchisee and the franchisor.
The franchisee creates more than one unit.
The franchisee has the exclusive right to open units in a given territory (usually within a given country) and has quite a lot of freedom in action and may affect the change of the agreement.
The regional representative searches for potential franchisees in the territory for the franchisor.
Advantages and Disadvantages of Running a Franchise.
Franchising, like any form of business, has its advantages and disadvantages. Everyone is different – which for one person will be an advantage, for another it may be an unacceptable disadvantage.
In this step, in addition to the obvious advantages and disadvantages, we have distinguished a category of factors which, depending on individual perception, may be either an advantage or a disadvantage. In the article you will also find a list of things to pay attention to when choosing: “own brand or franchise?”.
In the table below you will find an overview of the advantages and disadvantages of a franchise. You can read the detailed pros and cons of the franchise later in the article:
CHARACTERISTICS OF FRANCHISING
Advantages or Disadvantages
► Easier start.
► Limited franchise time.
► Franchise Fees.
Advantages of the Franchise
By starting a business as a franchise, you have a much easier start than starting a business under your own brand.
When you start your own company, you build it from scratch, from the very foundations. You have to analyse all the pros and cons of individual business solutions, acquire some knowledge of the market and industry in which you want to operate. You probably won’t miss learning from your mistakes (especially if it’s your first company).
You also need to, completely from scratch, attract customers and build their trust, advertise your business and build a team of trusted and educated employees.
In the case of a franchise, many “doors” are already open. Joining a well-known brand guarantees your recognition in the market. You are not alone, you feel the support of the franchisor who provides you with experience, i.e. the principles of running a business.
During many years of business activity, the franchisor has developed an optimal way of managing the company. By following the franchisor’s guidelines, you do not have to “reinvent the wheel”, but develop your business based on the previously developed program.
From the franchisor you will receive the necessary training and knowledge, and often also advertising materials and first customers. As an entrepreneur, you become part of a larger network and you can constantly count on the advice and support of the franchisor.
Ready Idea for Business
If you are one of the enterprising people who have always wanted to have your own business, but do not have a specific business idea, a franchise is the perfect solution for you.
When developing a company, unfortunately, you often have to make many mistakes and devote a lot of time to checking what works and what does not, whether the service provided or the product offered corresponds to the customers expectations and what features of the product should be presented in the marketing to make it work as effectively as possible, etc.
Franchising provides a ready and proven business idea. You don’t have to spend your time and money testing different solutions. Currently on the market you can choose from over 1000 available franchise systems from many industries that have already been tested in the market.
Running your business as a franchise is much less risky than opening a company from scratch under your own brand.
Why is it like that?
► A well-known and recognisable brand: You open a business under a well-known and recognisable brand, which means that you can count on customers from the first day of running your business.
► Franchisor support: Experience, training, business experience, consulting – most often franchisors conduct special training for their franchisees, during which they will teach you their know-how and show you how you can increase your turnover. During the functioning of the company, a reliable franchisor manages your activities, and in the event of organisational and financial problems, helps you to get out of them.
► A business idea proven on the market: If the company being opened is the tenth, twentieth or hundredth franchise outlet, it means that the market has already verified the business idea and there is a need for it. In other words, if other franchisees have made it, why should you fail?
► The commercial franchise deposit model minimises the financial risk: In the event of unsold goods (the franchisee does not buy the goods, but receives them as a deposit from the franchisor; therefore, he does not lose money when, for example, the end of the clothes collection is not sold).
Research shows that as many as 80% of companies survive the full period of the franchise agreement. How is the situation compared to the general statistics? The survey shows that 30% of new companies fail in the first year of running a business, while over 80% of companies fail after 5 years of running a business.
A Well-Known and Recognisable Brand
Building a brand often takes many years of hard and consistent work. One of the most valuable values associated with a franchise is the use of a recognisable brand.
Often people entering their favourite restaurant, banking institution or shopping in the nearest local store do not even realise that a given business is run as a franchise.
By joining the franchise system, you get the right to use a brand and trademark that is recognisable on a large scale. It is often a nationwide scale, sometimes a European or even a world scale (such as in the case of McDonald’s).
However, please note that:
► By engaging in a franchise, you become co-responsible for the good of the brand. You can contribute to its development with your reliable work and commitment. You are harming the good of the entire brand by lack of work and commitment.
► Even the best and most recognisable brand will not benefit you if you simply do not work. You cannot count on profit and success in business just by waiting with your arms crossed. A famous brand will not bring you profit by itself.
Support and Know-How From the Franchisor
Franchisors are people with extensive business experience who are willing to share their knowledge. How much turnover you achieve will also depend on their remuneration (usually the franchisor receives a certain percentage of your income or turnover). Therefore, the franchisor cares as much as you do to ensure that your business is as profitable as possible.
The franchisor’s support manifests itself in activities such as:
► Assistance in finding the appropriate location of the facility.
► Negotiating more favourable terms of renting or purchasing premises for the company.
► Negotiating better prices for goods with suppliers.
► Conducting a promotional campaign for the opening of the facility.
► Creating and delivering advertising and marketing articles to the company.
► Promotion of the facility in nationwide media.
► Access to the franchise customer base.
► Organisational, legal and financial consulting.
► Training for the franchisee.
► Training for company employees.
► Providing space on the franchise website.
► Providing professional IT software.
► Assistance in recruiting employees.
Advantages or Disadvantages of a Franchise
Limited Franchise Time
A franchise agreement is usually signed for a certain period of time. Therefore, there is a problem of uncertainty whether the franchisor will extend the contract with you after this time.
For some, it will be a disadvantage, because such a solution introduces a feeling of instability, for others – an advantage, because during this time they can consider whether a given form of cooperation suits them. If not, after a certain period of time, they will be able to simply resign from it without additional consequences resulting from breaking the contract.
Dependency on the Franchisor
When choosing a franchise as a form of running your own business, you must remember that you are bound by the terms of the contract with the franchisor.
Based on these provisions, you will have to meet a number of requirements and standards so as to maintain consistency and elements characteristic of the entire franchise network. The franchise agreement usually lists the activities that are allowed and prohibited.
The franchisor also has the right to carry out inspections in the franchise units and to inspect the documents, bills and invoices of the franchisee’s company. The license provider is “on the pulse” to know the company’s situation and possibly react, initiate changes, etc.
For some people it will be a great help.
For people who value independence, this will of course be a disadvantage.
Little Room for Innovation and Creativity of the Franchisee
The franchisee has a relatively small “field to show” in implementing new business and technological solutions. The direction in which the company’s operations are to go is determined primarily by the franchisor and he has the final say when it comes to decisions related to it.
This does not mean that the franchisee is merely an employee of the franchisor. It is his business partner and can initiate certain changes in the enterprise.
However, if you value individuality and independence above all else, franchising is not a good solution for you. Franchising is also not for people who have discovered a brilliant, breakthrough product or service and want to sign it with their name.
For people who in business prefer safety and certainty over individuality, relatively low flexibility and decision-making in actions will be advantages.
Disadvantages of a Franchise
If you want to start a business as a franchise, you have to take into account that you will not get anything for free and you will have to bear the costs. The franchise fees will slightly reduce your earnings.
At the beginning, you will have to pay a fee for the package, i.e. the possibility of using the trademark, know-how, training, help and advice.
In the course of the company’s operation, you must take into account that the franchisor will probably expect you to pay a certain percentage of profit or your turnover. Some franchise systems also have monthly fees and contributions to a marketing fund.
The types and amounts of fees should be described in the franchise agreement. If a fee is not stipulated in the contract, the franchisee is not obliged to pay it.
Possible contractual penalties for a serious breach of the principles of franchise cooperation are a rare issue that is included in the contract. The franchisee must pay the franchisor a predetermined amount of penalty as a consequence of very serious offenses (such as competitive activities during the term of the contract or breach of the confidentiality of information).
A Domino Effect in a Brand Crisis
If a brand suffers from the actions of one of the franchisees or its owner, all members of the franchise network may suffer.
If a customer gets poisoned with food served in his favourite restaurant in Krakow, not only will he never go there again, but also will not go to a restaurant of the same brand in Warsaw. It’s even worse if it gets high profile in the media. We are talking about the domino effect.
As you can see, one mistake of another trader can affect your income. That is why many franchisors have prepared the so-called rescue packages to get franchisees out of trouble. They monitor the activities of their franchisees on an ongoing basis and when something disturbing begins to happen, they introduce measures to eliminate threats.
When you decide to choose a franchise, verify that the franchisor conducts activities monitoring the activities of its franchisees and whether it has worked out ways to deal with possible crises.
The Collapse of the Franchisor
The collapse of the franchisor means that you can no longer run your business under its brand.
The good news is that you will not be liable for your franchisor’s debts.
Unfortunately – the bad news is that you will have to deal with the rebranding of your business and a change in the way it is run, because your contract with the franchisor will probably be terminated.
When faced with this situation, you can:
► Close the company.
► Open your own brand.
► Move under the wing of a competitive franchisor (which often turns out to be a beneficial solution. It is much more profitable for a franchisor to take over a franchisee who knows the realities of a given market and is oriented in franchising).
The collapse of your franchisor does not necessarily mean the end of your business. Such a situation may become an opportunity to switch to another franchise network on better terms or to start a business under your own brand.
Own Brand or Franchise?
If you decide to start your own business, you are probably wondering whether to open a company in the form of a franchise or run a company under your own brand. Each of these solutions has advantages and disadvantages.
Own business or franchise? You can use a simple test to answer this question.
Answer the following questions honestly:
► Do I want to start a business but I don’t have any specific business idea yet?
► Do I want to run a business, but feel that I have too little experience in this field?
► Do I want to open a business that will be instantly recognisable among customers?
► Do I want to be trained and prepared to run my own business?
► Do I want to enjoy running my own business while minimising the risk?
► Would I like to be able to use the advice of people who are more experienced in running a business than I am?
► Do I prefer to be led by the hand in company management than to be completely independent?
If you answered yes to most of the questions, a franchise may be a better solution for you than starting a business under your own brand.
Characteristics of the Franchise:
► You bear a low risk of doing business thanks to the fact that you use a recognisable brand and have the support of the franchisor.
► You use a recognisable brand, so you don’t have to spend so much on broadly understood marketing.
► You are trained and receive the know-how of running a specific business.
► You can use a business idea that has already been tested by the market and works.
► You can count on the help of a franchisor who is experienced in running a business.
► You must have a specific amount of equity to start.
► You become part of a large network and it is more difficult for a larger entity to fail than for a small company that is just developing (as the saying “too big to fail”).
► You must pay franchise fees.
► You are not independent in making business decisions.
► You have to adapt and meet all the requirements of belonging to a franchise network.
Characteristics of Running a Company Under Its Own Brand:
► You are independent in making all decisions.
► You build your own brand – on the one hand, you incur more expenses on broadly understood marketing, on the other hand, you feel satisfied with creating something unique.
► Your actions are not limited by anyone.
► Your own company requires more time and energy from you.
► You can start a business without having a lot of equity.
► You have to do everything yourself (no support and know-how).
► Your idea is not verified by the market.
► It can be difficult for you to compete with large companies and franchise networks.
The Franchise Package – What the Franchise Offers.
The Right To Use the Brand – Trademarks
A trademark is any figurative sign that can be used to distinguish the goods and services of one enterprise from the goods and services of other enterprises. A trademark is the designation of a given brand – most often it is the company’s name and logo.
One of the most valuable things you will receive by joining the franchise system is the ability to use a well-known brand, i.e. the ability to run your business under a recognisable name.
Thanks to this, you do not have to incur huge costs for advertising and promoting a brand that is unknown, but you start operating on the market immediately. You can enjoy the reputation and recognition previously achieved by someone else.
Trademarks, despite being intangible assets, are often very valuable. They contain all the experiences related to the brand, that is, first of all, its recognition and reputation. The company name and logo can be registered with the patent office and thus obtain a number of benefits.
The Most Important Advantages of Registering a Trademark With a Patent Office Include:
► Exclusive use of the trademark: No other company operating in the same industry can use it without the consent of the trademark owner – as the trademark owner, you have the right to prohibit such practices from competition.
► Increasing the reputation and prestige: Thanks to the registration of a trademark, it is possible to legally use the symbol ®️ (registered trademark symbol) next to the name and logo, which always increases the prestige of the brand.
► The possibility of prohibiting the use of a similar mark by competitors: The protection right obtained by registering a mark in the patent office is very wide – apart from identical marks, it also covers similar marks.
Trademarks are intangible assets that are actually owned by the franchisor. The franchisor will simply grant you a license (consent) to use the mark – that is, to run your business under its name and logo.
It is best understood on an example:
Ms. Bailey runs her company under the name “B’s Beauty” and deals with the production and sale of cosmetics. It registered its name as a trademark in the patent office for marketing cosmetic products. After some time, Ms. Byron founded a company that also started the production of cosmetics and branded the cosmetics with the name “B’s Beauty”. Due to the fact that Ms. Bailey was the first to register her name in the patent office, she can prohibit Ms. Morris from using the name “B’s Beauty”, because the existence of two cosmetic manufacturers with such a similar name on the market may lead to misleading consumers.
Know-How i.e. Proven Knowledge of Running a Given Business
The franchisor is usually an experienced entrepreneur whose interests have developed to such an extent that he wants to share his experience and business idea with other entrepreneurs, of course for an appropriate fee.
Know-how is all the information about running a given business. Know-how includes, among others:
► Knowledge of the production technology of a given product.
► Knowledge of the specifics of the provision of a given service.
► Information about the way the company operates.
► Information on the sales methods developed.
► Information on marketing techniques.
As part of a franchise agreement, your franchisor is obliged to tell you the secrets of the success of your business so that you can repeat this success.
Each business has its own specifics, so when you join a franchise network, you will receive appropriate training and instructions.
The franchisor requires confidentiality from his franchisee. The licensee undertakes to keep the know-how and other confidential information on the functioning of the enterprise for its own use.
Why? Transferring the know-how, i.e. a specific secret of the company’s success to third parties, may seriously threaten the company’s interests. Know-how should not be in the wrong hands, therefore the franchisor secures the company’s interest with the franchisee’s confidentiality clause. Such a clause may be valid for any period of time (in accordance with the relevant provisions in the franchise agreement).
Contractual penalties, also specified in the franchise agreement, may be imposed on the franchisee for breaking the trade secret.
The operation manual will be your operating manual for your franchise business.
The operating manual should cover all aspects of operating a franchise outlet, such as:
► Characteristics of the entire franchise system, e.g. information on where the system headquarters is located; what is the franchisor’s business philosophy; what is the relationship between the franchisor and the franchisee; is it a master franchise; what is the company’s goal for the coming years.
► Expectations and requirements of the franchisor towards the franchisee, e.g. providing premises and equipment for the franchise unit (the franchisor may provide an architectural plan of the premises); own contribution; commitment to the work of the unit; acting for the benefit of the entire franchise system; legal regulations that the franchisee should read.
► Obligations of the franchisor towards the franchisee, e.g. constant assistance and advice, conducting training, providing tools needed in the business, etc. (see the section below: Specification of services provided by franchisors to franchisees ).
► Organisational procedures, e.g. franchise outlet opening days and hours; requirements for employees employed by the franchisee, including the principles of their training; specification of the special clothing of employees (if any); health and safety requirements; determining the sources of supply of goods; pricing policy; quality standards; defining regular procedures, e.g. goods complaint and defect removal procedures; organisation of accounting; franchise fee collection procedure; description of control procedures on the part of the franchisor; activities to be undertaken in the field of advertising and marketing; standards for the use of trademarks provided by the franchisor; insurance issue.
► Templates of forms, e.g. templates of employment contracts and confidentiality agreements with employees of the franchisee; contract templates used in contacts with clients.
The Operation Manual contains information to help you dispel any doubts or questions as they arise. Therefore, as you can see, you can’t move without an operating manual.
The operating manual should be updated on an ongoing basis to be in line with changes in the market and changes in the company itself.
Identification of the Services Provided by Franchisors to Franchisees
From your perspective as a franchisee, it is a very important point of the package, which indicates what scope of help and commitment you can count on from your franchisor. Of course, the range of services you can count on will vary depending on the type of business and the way it is organised.
If you run a small point of sale in a shopping mall as part of a franchise, the franchisor’s services will probably come down to the supply of goods. If, on the other hand, you decide to go for a restaurant franchise, the franchisor will probably reveal his recipes for preparing meals and offer to train your staff.
Most often, the franchisor takes on the responsibilities related to the development of products and services as well as advertising and public relations (taking care of the good image) of the entire franchise network.
The services provided by the franchisor to its franchisees are divided into initial services, i.e. those that the franchisor incurs before launching the franchise point, and ongoing services, i.e. provided after the franchise point is launched.
In the table below you will find examples of preliminary and ongoing services (of course, their scope is determined individually in the franchise agreement and depends on the specifics of a given industry, therefore it is an open catalogue):
► Franchisee training.
► Constant advice on problematic issues.
How To Find and Choose the Franchise That’s Right for You.
Where to Find a Franchise?
Franchisors are committed to promoting their business idea. You can find ads in newspapers, radio, television and on websites. You can also browse ready-made catalogues and find a business that suits you.
When looking for one for yourself, you can also go to a franchisor’s fair. Participation in such fairs may be an opportunity for you to talk “face to face” with potential franchisors and get to know their cooperation offer better.
It is also worth talking to existing franchisees who can tell you from their own experience what to look for and what to consider when choosing an idea.
You can find a reliable franchisor in the ranks of the British Franchise Association, whose members comply with the Code of Ethics for Providing Franchise in the UK and Europe.
A well-known saying goes: seek and you will find – and in this case it is also right. Decide wisely and responsibly, try to carefully review the franchisors’ offers. Your choice will determine – at least – the next few years of your financial and business operations.
It is important that you choose according to your beliefs and intentions and that you identify with the ideological assumptions of the franchise you are involved in.
How To Choose the Right Franchise? – Interests and Partialities
When choosing a franchise that is right for you, you should be guided by your interests or passions. It is worth that work, apart from money, brings you satisfaction.
If you’ve never seen yourself as someone who runs your restaurant, the choice of the catering industry is most likely not for you. If you are interested in fashion, it may be worth following this direction instead of starting your business in the sports industry by force.
Another factor that will help you decide which way to go is your predisposition and previous work experience.
For example, if you worked in a real estate office and you know the industry well, it is worth using the experience you have already acquired and decide on a franchised real estate agency (of course, provided that you liked your job).
In the case of a franchise, work experience in a given industry is not required because the franchisor trains and prepares the franchisee to take up business in it. Nevertheless, such experience certainly helps you navigate in the chosen industry and increases your self-confidence.
It is similar with experience in running a business or managing a team of employees. Most often, franchisors do not require such skills, because they can be acquired during training, but experience in this matter can be an additional advantage in recruiting for a franchisee and facilitates subsequent activity.
As you can see – it is worth taking a look at the resources you already have and be guided by them when choosing the franchise that is right for you.
How To Research the Market When Choosing the Right Franchise?
If you already know which industry will be right for you based on your interests and experiences, it is worth researching the market in which you want to operate.
If you are interested in learning foreign languages, and there are already three language schools in your town of 5,000 inhabitants, it is unlikely that you should follow this direction, because it may turn out that your town is too small a market for another school. You can then check what the market looks like in neighbouring cities. A similar situation can happen when you want to start another restaurant in an area where there are already several or a dozen of them.
► Start the analysis by identifying the target group of customers. Think about who will be the buyer of your products or services. A company’s success depends (to put it simply) on whether it finds customers. A well-known brand of the franchisor naturally makes it easier, but think about whether the place where you want to open a business allows you to access potential recipients.
► Research the size of a given market segment and its dynamics. It is worth knowing whether, for example, a given industry is currently experiencing rapid development or is stagnating or even collapsing. Is the selected market segment small or large enough to find a place for your company? Look for industry forecasts (from reliable and trusted sources).
The franchisor determines the guidelines for the place of establishment of the franchisee’s business (number of inhabitants of the city, location near a shopping centre, etc.). The franchisor may not agree to the establishment of a unit in an area that it judges as unprofitable (e.g. one where there is already one franchise outlet; one where we will not find customers, etc.).
► Assess your financial possibilities. Are you able to open a company in a given industry? Some of them require large amounts of money (such as the catering or clothing industry), others are smaller (such as finance and banking, education).
The franchise financial plan, which the franchisor should provide you, will help you evaluate. You should also create a second, own financial plan of the same franchise to check whether the franchisor’s forecasts are credible (you can read more about the financial plan here: How to prepare a financial plan? ).
► Pay attention to potential competition – who is already operating in the market in your industry and how they are doing. Check if you have too much competition and if you can compete with it in some way (price, quality, scope of services provided, order execution time).
The success of a given business is sometimes closely dependent on its location and the market in which it operates. That is why, in addition to the area of your interests and preferences, you need to examine the competitiveness and potential of the market in which you want to operate as a franchisee.
What To Look for When Choosing the Right Franchise?
Before deciding to join a specific franchise network, research all available information about the franchisor.
► How long has a given franchise system been on the market?
► How many facilities does it consist of?
► How many employees are they hiring?
The longer a franchise has been in operation and the larger it is, the greater the likelihood of success for you.
► Is it a British or an international network?
► What is the competition on the market?
► Does it belong to the British Franchise Organisation?
When Looking at a Specific Franchisor, Ask Yourself About:
► Knowledge and recognition of the brand you will be using.
You can check whether the franchisor cares about the PR of the entire brand, for example by browsing its profiles on social media and reading customer comments. When joining the franchise system, you will be using this brand – that’s why it’s worth checking how it is perceived, what are the opinions about it and whether it has recently experienced a serious image crisis.
► Products and services it offers.
Are these high-quality products and services? Would you use them yourself? Does the franchisor plan to expand the range of these products or services in the future? When checking these issues, it is worth becoming a client of the franchise yourself and verifying them personally.
► Pricing policy; the prices of the products and services you will sell.
The franchisor may not impose prices on goods / services on you in the contract or oblige you to apply certain minimum prices. However, it can set maximum prices for products / services and provide suggested prices. Determine what is the margin on individual products / services and whether you can organise promotions on your own.
► Time to break even point and payback time for initial investment.
Each franchise system is usually closely monitored by the franchisor, who has a large amount of data on each of the outlets. When choosing a franchise, it is worth verifying after what time (on average) the break-even point is reached and what is the average payback period for the investment in the franchise.
► Number of franchisees, their financial condition, financial history of the franchise.
It is important not only to look into the future of the company, but also to know its past. Find out how many franchise outlets are currently operating, how many have been closed so far, and for what reasons.
► The range of support offered by the franchisor.
Find Out What Support You Can Count on From the Franchisor:
► Training offered by the franchisor.
Find out how long such training lasts, where it takes place, and what you will learn from it. It is worth knowing if the training is only intended for beginner franchisees, or if you will also take part in them while running the facility.
► Recruitment of employees.
Find out who will be hiring and training employees – is it your responsibility, or whether the headquarters will be responsible for it.
► A special guardian assigned to you.
► Constant advice on issues that are problematic for you.
► Supportive measures in the event of a crisis.
► Marketing issues.
Determine whether there is a joint marketing fund from which the marketing activities of the entire network are financed, whether you will receive some advertising and sales materials from the franchisor, or whether the franchisor is promoting the opening of a new facility.
Below, we have compiled a checklist of questions that you can ask to see if a particular opportunity is right for you:
► What is the total cost of launching an outlet?
► What are the costs of starting one?
► How much are the fees?
► What percentage of your profits will you pay to the franchisor?
► How long will the preparatory period last from signing the contract and how long can the facility be launched?
► What pre-opening services (for opening a business) does the franchisor offer you?
► What ongoing services (in the course of business) does the franchisor offer you?
► Does the franchisor provide you with training, which will include the training, where will it take place and how long will it take?
► What expenses should you be prepared for and what are the costs of the franchisor?
► Does the franchisor organise the ceremonial opening of new facilities and what is it about?
► Are there minimum profit / turnover thresholds that you need to achieve in a given month?
► What are the marketing and advertising issues – are they only handled by the franchisor, or are these obligations divided into franchisor and franchisee?
► Is there a joint marketing fund and how much will you have to contribute?
► What requirements for the interior and equipment of the premises will you have to meet and how often will you have to replace them?
► What are accounting issues and who is responsible for them?
► Does the franchisor have the right to inspect you and how often will he conduct such inspections?
► Does the franchisor have a recovery plan planned for any of the franchise outlets in the event of an image crisis?
How Much Does It Cost To Run a Franchise?
In the previous steps of the guide, you learned what a franchise is, what are its advantages and disadvantages and what is running a business in this form. If you are thinking about joining a network, the costs you incur will certainly be an important issue for you. Therefore, in this step you will find out how much it costs to start one.
The costs depend largely on what type you choose. In Britain, you can meet both franchises, which you will be able to join for a few thousand pounds, and those where your own contribution is up to several million pounds (e.g. petrol stations).
When calculating how much money you will need, consider the following:
1. What are the initial costs of the franchise, i.e. the costs of entering a given franchise system and what do they result from?
2. What are the investment costs on your side (e.g. renting and equipping premises, purchasing goods, licenses, obtaining permits, etc.)?
3. What are the commission costs that you will be required to pay to the franchisor in the course of business?
As for the costs you will have to pay, note the following types of franchise costs:
1. Initial franchise fee.
2. Current franchise fee.
3. Contribution to the joint marketing fund.
Initial Franchise Fee
The initial fee is what you pay when you join a franchise system. It should cover the franchisor’s costs related to the creation and sale of the package.
By paying the initial franchise fee you finance your right to use the business idea created by the franchisor.
The initial franchise fee is determined by each franchisor individually, however, there are several factors that will affect its amount.
Factors influencing the amount of the initial franchise fee:
► Initial and ongoing services provided by the franchisor – usually the greater the scope of the franchisor’s assistance in opening a new facility, the higher the initial franchise fee.
► The size of the area in which the franchisee will operate – the larger the geographic area, the higher the fee for joining the franchise system.
► The period for which the franchise agreement is concluded – the longer the period, the higher the fees.
► Entry fees imposed by the competition – the so-called “The invisible hand of the market” – if the franchisor has a lot of competition (eg in the food industry, in which there are many franchises), he will have to look at the competition and adjust his requirements for franchise fees to it. If it requires a much higher upfront fee than its competitors, it will not attract potential franchisees.
In the case of a distribution franchise, franchisors often include franchise fees in the price of goods delivered to franchisees. Thanks to this solution, you can start a distribution franchise without having a lot of capital to start.
Some franchisors opt out of charging an upfront fee to attract franchisees (however, exercise caution in any “promotional” franchise offerings).
Current Franchise Fee
The ongoing franchise fee is a fee that you will pay regularly (usually once a month). It is intended to cover the license to use the trademark and the support provided to you by the franchisor.
The ongoing franchise fee can be a fixed amount or an amount charged as a fixed percentage of your income, sales or turnover.
The amount and nature of the ongoing charge are set out in the franchise agreement. Before joining a franchise, inquire carefully about all franchise costs that you will be required to pay as a franchisee.
The franchise costs depend on the industry in which it operates. The most expensive franchises include, among others franchises in the catering industry, clothing and gas stations. The cheapest franchises are, for example, those from the education, finance and banking or tourism sectors (excluding hotels).
Contribution to the Joint Marketing Fund
Your success, the success of the franchisor and the entire franchise system depend on your brand recognition and positive image. Therefore, a common practice is to create a special fund by the franchisor, the money from which is used only for the promotion, marketing and PR of the franchise brand.
Thanks to this fund, the franchisor has the necessary funds to promote the brand in national and local media, funds for conducting marketing campaigns or producing advertising materials for the entire network.
The amount of the contribution to the marketing fund depends on the projected costs and the scope of the company’s promotion. This is usually a fixed amount that is paid monthly.
Remember that if a franchise fee is not included in the franchise agreement, the franchisee is not required to pay it. Contractual penalties cannot be imposed for failure to pay these fees on time (although it is logical that in order for cooperation with the franchisor to remain at a good level, such fees should be paid on time).
During the first months of operation of the franchise unit (during “start-up”), the franchisor often does not charge monthly fees and contributions to the marketing fund, so as not to burden the facility that has not yet reached the break-even point, i.e. has not started earning for its current needs.
Other Costs of Starting a Franchise
In addition to the costs typically associated with a franchise, you also need to add specific costs related to the type of business you plan to run.
If you decide to run a franchise food truck, you will be interested in paying the costs related to the health insurance, catering equipment, employees’ salaries, fuel and food costs.
If you decide to run your clothing store, you will be primarily interested in the cost of renting premises and equipment, the costs of purchasing goods and employee salaries. As you can see, business costs depend on its specifics.
Of course, in addition to renting the premises and its equipment, you will also pay administrative and tax fees, i.e. social security contributions and tax charges.
Also consider the costs associated with hiring employees, which can consume a large part of your budget in a given month.
Additional costs that you should consider when running a business under a license include:
► Purchase of a company car.
► Utilities (internet, telephone).
► Stocking up.
► Purchase of technical equipment (or leasing them).
► Staff training.
► Marketing and sales costs.
► The cost of purchasing a cash register.
► Costs of purchasing an electronic payment terminal.
► Accounting costs.
► Costs of purchasing an accounting program.
► Costs related to obtaining appropriate permits, eg from the State Sanitary Inspection.
► Professional, property and employee insurance.
► Costs of possible equipment repairs.
It is important that you make your own cost estimate when determining the total cost of investment in a given franchise, and not only believe the franchisor’s calculations (the franchisor’s forecasts can be a guide for you when calculating costs yourself). It is worth noting that franchisors often do not include in the transferred financial plan the franchise, for example, the costs of insurance, business travel, repairs or the purchase of additional equipment.
Where To Get Money for the Franchise?
When assessing whether you can afford to join a given franchise, a very important issue is whether you will be able to use external sources of financing, e.g. in the form of a bank loan. Some franchisors require that a certain percentage of the money invested by the franchisee should come from their own savings, not from loans or credits.
Regardless of whether you have your cash or you will need to use a loan or credit card, the most important thing is to have a good business plan in which you can estimate your costs and future profits.
If you do not have your own funds, taking a bank loan can help. However, it is important to find out whether financing franchise fees with a loan is acceptable in a given franchise, because sometimes there are franchisors who do not accept such a solution or provide for a percentage limit on the contribution from a bank loan.
Nevertheless, if you don’t have any of your savings, taking a loan is the easiest solution. A franchisor that accepts such an exit can help you choose the best loan offer.
Another solution to finance joining the franchise may be applying for a subsidy from the employment office. However, the problem may lie in the requirements of the office: to be able to count on a subsidy, you must be unemployed and your business must survive a minimum of one year from its opening. The big advantage, however, is that if you meet all the conditions of the office, you will not have to return the money received later.
Another way to get money can be taking a loan, for example from Bank National Westminster, which grants them on preferential terms to people who start their own business. You can also borrow money from your family or friends.
What the Franchise Agreement Looks Like and What It Should Contain.
The franchise agreement governs the relationship between the franchisor and the franchisee and defines the rights and obligations of each party. Signing a franchise agreement will be a very important step for you, because you will be associated with the selected franchisor for a longer period of time.
That is why it is very important that you clearly know and understand what you are signing and what you are committing to before signing a franchise agreement. In this step, you will learn what the franchise agreement looks like, what rights and obligations it should contain and what to pay attention to when analysing it.
At the Beginning, a Few Rules Worth Sticking To
Rule # 1: Ask the Franchisor for a Sample Franchise Agreement.
If the franchisor does not provide you with such a pattern, ask for it.
If your prospective franchisor does not want to provide you with a model agreement before signing it, you should exercise extreme caution – he may have something to hide.
However, you should not be surprised to learn that the franchisor will ask you to sign a confidentiality clause before handing over the agreement, as there are many details in the agreement that the franchisor certainly does not want to disclose to its competitors.
Rule # 2: Read the Franchise Agreement Carefully Before Signing It.
The franchise agreement regulates all the most important issues regarding your cooperation with the franchisor. You must be aware of the rights and obligations arising from it. Therefore, even if you trust your franchisor, read the contract carefully before signing it and check whether what you agreed during the negotiations is reflected in it.
Rule # 3: Don’t Sign What You Don’t Understand.
It seems obvious, and yet we sometimes downplay this principle.
If you find anything you don’t understand when reading the franchise agreement, do not sign the agreement.
Rule No. 4: Consult an Advisor or Attorney.
The contract should not raise any doubts in you, so it is worth consulting a professional advisor or lawyer who will explain to you any incomprehensible points of the contract and possibly suggest changes.
Rule # 5: Be Aware of Your Rights and Obligations.
By signing a contract with a franchisor, you become its partner, not an employee. You have the right to act on the basis of clear rules and run a business with a sense of security and fair cooperation.
Rule # 6: Don’t Be Afraid To Initiate Changes to Your Agreement.
Although we can often not change much in the formula given by the franchisor, it is worth trying (within reason, of course, not being guided by a blind desire for profit).
Do not agree to unfair provisions in the contract. Avoid any understatement on the part of the franchisor. Don’t be afraid to make constructive comments and try to change the content of the contract, if necessary.
A licensed business will also be your business and you will feel both the successes and the failures of the company.
Rule No. 7: Be Confident in Your Decision.
When you are sure when you sign the contract that you agree with all of its provisions and that you have done your best to check that it is well built, that’s great. You are ready to start your own business under a franchisor’s license.
What Does the Agreement Contain?
The main difficulty in getting to know the specifics of a agreement is that… there is actually no such specifics. Why?
Because the agreement is the so-called unnamed contract. The legislator did not set a rigid framework for such an agreement or the elements that it must contain. You will not find a reliable agreement template on the internet.
Each franchisor creates a franchise agreement according to its standards and rules agreed individually with the franchisee. Therefore, there is a great deal of freedom in creating this type of agreement.
Nevertheless, the franchisor and franchisee should be concerned that the contract they sign contains some of the important elements listed below.
Franchisor and Franchisee Details
An agreement usually begins with the indication of the date of its conclusion and the listing of the parties that contain it, i.e. with the indication of who is the franchisor and who is the franchisee.
You should also provide all registration data of both parties to the contract (address, Tax and NI numbers, VAT number, etc.).
Please double check that your details and franchisor details are correct.
Duration of the Contract
Each franchise agreement should contain information about its duration and the method of termination. Pay special attention to it.
► Franchise agreement for a specified period.
It is more binding because the possibility of parting with the franchisor during the agreed period of cooperation is very limited.
This type of contract should describe situations in which it will be possible to terminate the cooperation early (e.g. in the event of a serious breach of cooperation rules by one of the parties).
Both parties should have the right to terminate cooperation with a fixed-term contract, but the franchisor usually has more rights to do so.
► Franchise agreement for an indefinite period.
In this case, the cooperation can be terminated at any time after the expiry of the notice period, which should also be included in the contract.
Principles of Joining the Franchise System
The agreement describes what actions both parties must take in order for the new unit to come into being and start operating.
Area of Operation of the Franchisee
In addition to determining the area in which the revenues of the franchise entity will be located, the contract may contain franchisee privileges, such as:
► Territorial exclusivity.
Under the agreement, the franchisee may obtain territorial exclusivity, i.e. ensuring that no other branch of the same franchisor is opened in a specific area.
Territorial exclusivity applies only to active sales, not to promotion of a facility in a given area and customer acquisition. Such exclusivity may apply, for example, in a shopping centre, in an area specified on the map, or even in the entire city.
► Priority right.
The right of priority is that when the franchisor plans to open a new franchise point in a given area (previously agreed in the contract with the franchisee), the proposal to run it in the first place is directed to this franchisee.
Ms Anna has signed a franchise agreement with priority rights in force throughout Manchester. After several years of operation of the facility in this city, the franchisor decided to open a second facility there. Due to the privilege of priority, he first approached Mrs. Anna with a proposal to lead a new point.
a) Anna agreed and after some time she started to run two franchise facilities in Manchester at the same time.
b) Ms Anna decided that she had too many obligations and did not accept the franchisor’s offer. The franchisor therefore started cooperation with Mr. Lucas, who became his new franchisee and runs a second franchise facility in Manchester.
Rights and Obligations of the Franchisor and Franchisee
It is important to detail, understand and accurately define the rights and obligations of the franchisor and franchisee. The more ambiguities and fluent terms in the text of the contract, the more difficult it is to resolve disputes arising during cooperation.
The main core of the franchise agreement should be clearly defined rights and obligations of each party to the agreement. Not only do you (as a franchisee) have obligations, the franchisor also has obligations to you.
The rights of one party to the contract are usually a mirror image of the obligations of the other party (that’s why we only describe the obligations of both parties below – the rights are their opposite).
For example: when you, as a franchisee, are required to pay franchise fees, it will be the right of the franchisor to charge them from you, etc.
The franchisor does not only have rights – he also has certain obligations towards you.
First of all, the franchisor must be the beneficial owner of his business and all the rights it licenses to you, i.e. trademark rights, know-how and other intellectual property.
All of this should be clearly documented legally. Before signing the franchise agreement, you have the right to ask the franchisor to prove that you are the owner of all the values for the use of which you consent to.
Another duty of the franchisor is to provide you with the necessary training and knowledge to start, so that you can efficiently open your franchise point. Therefore, the agreement should contain provisions about training, assistance and advice on the part of the franchisor.
The franchisor bears the main burden of marketing and advertising the brand of the franchise network under which all franchisees operate.
It is he who should conduct market research and deal with the consistency of identification of all franchise outlets. It is primarily his responsibility to advertise the brand (using the common marketing budget of all franchise units).
Firstly, the provisions on contractual penalties may only concern non-pecuniary matters. Therefore, all provisions relating to a contractual penalty relating to non-payment or delay in paying financial debts are invalid.
Second, the amount of the penalties depends on the decisions of the parties to the contract. It is not governed by any regulations. Nevertheless, the penalties included in the contract cannot be grossly excessive.
The very definition of gross excessive contractual penalty is not fully specified, but – for example – a contract of GBP 500 cannot be accompanied by a contractual penalty of GBP 5,000, because such a penalty will be too excessive in relation to the subject of the contract.
For what can the franchisor financially penalise the franchisee?
► For premature termination of cooperation due to the fault of the franchisee.
► For conducting competitive activities during the term of the contract.
► For providing a third party with confidential information related to the functioning of the company and the know-how of the franchisor.
Mr. Brookes analysed a franchise agreement. He found a provision in it that in the event of failure to pay the franchise fee by the 10th day of each month, a contractual penalty will be charged in the amount of 3% of the franchisee’s turnover in that month. Mr. Brookes also found another provision regarding a contractual penalty, namely that in the event of breach of the confidentiality principle, the franchisee will be obliged to pay GBP 20,000,000 to the franchisor as a contractual penalty. It must be clearly stated that both of these provisions are against the law. In the first case, the contractual penalty concerns the franchise fees, i.e. the financial obligation. In the second case, the contractual penalty is grossly excessive.
Legal Basis of the Franchise Agreement
Although the agreement has not been regulated separately in any legal act, in the event of certain ambiguities, you can look for a solution in:
► Articles of the Civil Code (regarding the method of concluding the contract, defects in declarations of will, failure to perform an obligation, repairing the damage caused).
► The Industrial Property Law Act, which regulates, inter alia, issues related to the protection and use of a trademark.
► The Act on Combating Unfair Competition, in particular with regard to the obligation to keep business secrets.
In the European Code of Franchise Ethics, we will not find a model of an ideal agreement. However, it is an important act that determines good market practices.
The British Franchise Association brings together reliable entrepreneurs. It is worth looking for “your” franchisor in its ranks. This will guarantee us a safe contract, and thus – safe cooperation.
Bad and Good Franchise Agreement – Comparison
Is inconsistent with applicable law.
It is consistent with the law.
Violates the principles of social coexistence.
Does not violate the principles of social coexistence.
Benefits only one party (in such cases, most often the franchisor).
Benefits both sides.
Distributes responsibilities unequally.
It plays a role as in cooperation between two entrepreneurs.
It contains procedural / legal “traps”.
Clearly defines the scope of rights and obligations of the franchisor and franchisee.
It is signed for a too short period of time (it does not give the franchisee a real profit).
It is signed for a period that enables the franchisee to make real profit.
Imposes the price of services / goods on the franchisee.
May define the suggested prices of services / products.
Obliges the franchisee to apply minimum prices.
May define maximum prices for services / products.
Leaves the franchisee virtually without organisational and marketing support.
Provides the franchisee with organisational and marketing support.
The moment of signing the agreement is extremely important. Signed by both parties, it binds you with the franchisor and builds a system of dependencies between you. Remember to carefully analyse the contract and be careful. A bad contract can get you into financial and legal trouble.