The term 'franchising' covers a variety of arrangements in which the owner of of a product, process, service or even just a name (in the terms of a celebrity) allows someone else to use it in exchange for some payment.

This rest of this page refers particularly to 'business format franchising'.

It is a method of starting a business which minimizes risk by using or emulating a tried and tested 'business formula'. A contract is forged between 'the franchisor' - (the organisation that supplies the franchise) and 'the franchisee' - (the party that purchases the franchise).

The franchise package supplies most of the things that one needs to launch the business successfully:- training, licence to use franchise name, customer base, supplies and raw materials, equipment, promotional material etc.
In addition to a set-up fee, the franchisor may charge an ongoing fee based on the percentage of sales or profits of the business.

The key point is that it should be a proven business system that is offered - not merely the right to sell a product or service.

Business format franchises generally fall into one of two categories;

1. a 'job franchise' (in which the franchisees actually do the work that provides the service to the customers)

2. a 'management franchise' (in which the franchisee is mainly organising others to do this labour)

It is important to appreciate the difference between the two categories because it will help you to find a franchise that suits your skills.

In order to prevent franchisees within the same organisation competing for the same customer base, territorial limits are often stipulated within the franchise contract.

Also, the franchise contract may stipulate certain standards regarding the quality of service or products supplied by the franchisee, thus upholding the brand image.

When choices have to made, we tend to go for the 'familiar'. Thus, a company can win business by 'branding' a product or service to make it more familiar to potential customers.
A franchise opportunity enables you to buy into this brand image and win custom that would otherwise go elsewhere.

Comments and Advice.
For many people franchising is an excellent way of starting up in business. It is in the franchisor's long term interest for you to succeed and so there is often continuing support at hand, unlike buying an existing business or starting from scratch on your own.

You may feel that the restrictions stipulated in a franchise contract-with regards to your choice of suppliers, recruitment policy or products- contradict the ethos of 'working for yourself'. However, in the majority cases, these are in place to uphold the franchise brand name and are part of a successful business formula.

You may also find it painful to see a percentage of your hard earned profits being diverted towards the franchisor. Again, in most cases, the majority of this money is spent on advertising / marketing and benefits the group as a whole.

When considering a franchise, try to understand why they are offering you the business in the first place. Very often, franchising is an extremely quick low-risk method of expanding a successful business across the world. The franchisee has the local knowledge and takes on the majority of financial risk. In return the franchisor is offering a successful business formula that has been proven to work. But before you go ahead, ask yourself whether the support, training, stock, experience and brand name justifies the investment asked.

Watch out for companies that create franchises as an 'end product'.
Be aware that some companies use the term 'franchise' to describe what is really a commission agency, network marketing opportunity or other form of start-up.

Always thoroughly check the contract, you don't want to discover three years down the line that your successful business has to be sold back to the franchisor after they increase the cost of your supplies to unreasonable levels, and at the same time forbid you to seek a more competitive price.

Seek independent specialised legal and financial advice from experts in the field. You may have to pay relatively high fees for such a service but it could save a great deal of disappointment in the future.

Don't expect to be able to change the franchise contract, it is often a standardised format used across the network.
Before accepting the advice of a third party franchise 'broker' be aware that they may not be entirely independent.

Be aware of the high level of investment or borrowing that you may need to succeed, but don't overstretch yourself.

As with every business start-up, you have to be careful.
Franchising used to have a bad name but regulation in recent years has improved the industry beyond recognition (in the UK at least). It is now a very realistic method of starting up a long term successful business.

Pros:

-You are often investing in a tried, tested and successful business formula.
-You are gaining the benefit of a franchisor's experience and knowledge thereby reducing the scope for mistakes. In particular you are spared many of the administrative headaches associated with setting up a business.

-In many cases you will be taking advantage of the name and reputation which has already been built up by the franchisor.
-On many occasions the franchisor offers training and ongoing support within the package.
-You can benefit from the franchisor's activities in such areas as advertising, marketing, research and development and you can take advantage of their enhanced buying power.
-Many high street banks see franchising a sound investment and are more likely to lend more, and on better terms, than if you were starting your business from scratch.
-A properly tested and structured franchise system, offered by a competent franchisor, offers more of a safety net than going into business independently.
-You do not necessarily need direct experience in your chosen area so this can open up access to many types of business which you may not have otherwise considered.
-If you carry out your research properly, you should have a clear idea of how you will be spending your time.
-As with any form of self employment, you will be working for your own future and not someone else's.
-It is a well respected method of starting up in business.
 
Cons:
 
-Often a percentage of your profits goes to the franchisor.
-You are not entirely your own boss.
-Your business practice may be restricted with regards to; choice of suppliers, employment policy, customer base and territory etc. You may find this frustrating.
-A reasonable sized investment is required (ranging from about £5,000 to £200,000).
-The failure of a franchisor can leave the franchisee with a business which is not as viable as an independent operation.
-If the control of the franchise changes hands it could be for the better, but it could be for the worst.
-You are very much dependent upon the franchisor and other franchisees to maintain the integrity of the brand. One bad apple can adversely affect the whole network.
-You may not be entitled to resell your franchise.
-Franchising is a complex area with many sources of potential conflict between the franchisor and franchisee, particularly regarding the terms of the contract.
 
Source: Start in Business