HOW FRANCHISING WORKS?

• Franchise


  A way of doing business that involves a franchisor and a franchisee
• Franchisor


  A business with an established brand, intellectual property and business systems
• Franchisee


  A person or business that pays an initial fee and an ongoing share of profits to the franchisor for the right to do business under their name and using their business systems
• Benefit of purchasing a franchise

  • Utilise the reputation of the franchisor
  • Use tried and tested business processes
  • Use recognised branding
  • Access a solid customer base
• Successful franchises

  • Starbucks
  • Subway
  • Skechers
• McDonald's


  The most successful franchise on the planet
• Over 90% of McDonald's restaurants operate as a franchise in over 100 different countries
• Advantages of purchasing a franchise

  • Don't have to establish own brand and reputation
  • Buying into an established business
  • Lower risk of failure
• The average UK McDonald's franchise has annual sales between 1.5 and 4.3 million pounds
• Positives of investing in a franchise

  • Support and advice from franchisor
  • Training provided by franchisor
  • Key business areas like advertising and marketing taken care of at corporate level
• Franchise rights and equipment cost

  350 thousand to 1.8 million pounds in the UK
• Ongoing fees paid by franchisee to franchisor


  • Annual franchise fee of 12.25% to 21% of net sales
  • Monthly service fee of 5% of net sales
  • Contribution to marketing fund of 4.3% of net sales
• The total ongoing fees can be up to 30.3% of net sales
• Drawbacks of purchasing a franchise

  • High initial investment
  • Lose proportion of profits through ongoing fees and royalties
  • Less control over business decisions like product range, marketing and pricing
• Overall, the franchise model is a low-risk way of starting a well-recognised, successful business, but this low risk often comes at a cost in terms of a high initial investment and losing a proportion of profits through ongoing fees and royalties