The term 'franchising' can describe some very different business arrangements. It is important to understand exactly what you're being offered. There are two types of franchise methods - business format franchising and product trade name franchising.
Business format franchise
This is the most common form of franchising within the UK. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.
The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name, and benefits from the franchisor's help and support. This help and support usually takes the form of a turn-key system in order to assist the franchisee with business issues such as site selection, store layout and design, staff recruitment and training, marketing and supplier contacts.
In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue. The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.
There are many examples of business format franchising opportunities such as fast food franchises, retail franchises, coffee shop franchises, gymnasium franchises and environmental cleaning franchises.
Product and trade name franchising
This type of franchising involves no upfront initial fees. The most important thing in product and trade name franchising is that the franchisor provides their product to a franchisee. The franchisee is required to purchase the product or range of products exclusively from the franchisor. The franchisor also provides national marketing and advertising campaigns, logos and trademarks.
Product and trade name franchising has three distinctive characteristics:
- the franchisee sells goods which are supplied by the franchisor or person affiliated with the franchisor
- the franchisor helps the franchisee to secure accounts
- within six months of opening the business, the franchisee must pay the franchisor or a person affiliated with the franchisor