A franchise is a way of doing business that involves a franchisor and a franchisee.
The franchisor is a business with an established brand, intellectual property and business systems.
The franchisee is 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.
Instead of having to build your own business from scratch.
The main benefit of purchasing a franchise is that you can utilise the reputation of the franchisor
along with tried and tested business processes, recognised branding and a solid customer base.
Starbucks, Subway & Skechers are all examples of successful franchises,
however McDonald’s is probably the most successful franchise on the planet
and is one that you have no doubt heard of. With over 90% of its restaurants
operating as a franchise in over 100 different countries, McDonald’s is a great example of how
the franchising model can be a success for both the franchisor and franchisee.
One of the clear advantages of purchasing a franchise such as
McDonald’s is that the franchisee doesn’t have to establish their own brand and reputation.
They are piggy backing on an established brand name
and well recognised reputation. Brands with a good reputation are not easy to
build and franchising cuts out this process of building a brand for the business owner.
Another advantage is that you are buying into an established business and because of this the
risk of failure is much lower than going it alone. McDonald’s has a proven track record
with the average UK franchise having annual sales between 1.5 and 4.3
million pounds, making the prospect of becoming a McDonald’s franchisee a very sought-after option.
Support, advice and training are also positives of investing in a franchise. Many franchisors provide
training and support to their franchisees as it is in their best interest for the franchisee to
be successful. McDonald’s offers an industry recognised training programme before the
franchisee takes control of their restaurant. Across the course of the programme, they build
their knowledge, gain experience and learn the skills needed to be a McDonald’s franchise owner.
Further to this they have access to ongoing support and have key areas of their business,
such as their advertising and marketing taken care off at a corporate level.
Leaving them to concentrate on the running of the restaurant.
Well, this all sounds great but there are negatives to purchasing a franchise. The
first being the cost. Investing in a McDonalds franchise costs anywhere between 350 thousand
to 1.8 million pounds in the UK and this is just for the franchise rights and equipment.
Another drawback are the ongoing fees. The franchisee must pay a percentage of their profits
to the franchisor along with a percentage to cover advertising costs. In the case of McDonald’s there
is an annual franchise fee of between 12.25% and 21% of net sales. Plus, an additional monthly
service fee of 5% of net sales, for the use of the McDonald's system and finally a contribution
to the marketing fund which is currently set at 4.3% of net sales. Which works out at the top end
to be 30.3% of net sales. All these fees massively reduce the amount the franchisee makes from their
investment in the franchise and is a negative when compared to operating your own business.
When setting up your own business you also have full control over how it is run
and have the freedom to make decisions about things such as the product range,
marketing strategy and pricing. However, this is not the case when running a franchise as the
franchisor has developed set ways of working to keep the brand consistent. A McDonald’s franchisee
cannot change the product range, pricing and advertising of products
as these are all set by McDonald’s to ensure the brand stays consistent for its customers.
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.
Thanks for watching the video to the end and if you now know a little more about
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