Taking a Franchise – the Basics

There are many potential benefits of buying a franchise, such as having access to well-established business and accounting systems, centralised marketing and a proven business model. Being part of a well-known national brand also has an appeal for many businesspeople.

In exchange for the franchise, the franchisee must pay agreed charges, normally including a royalty on sales.

The Intellectual Property Office has identified the principal advantages of being a franchisee as follows:

Limiting risk – the business is not a new one but a tried and tested venture that has been successful elsewhere;
Training – the franchisor usually provides extensive training and advice;
Corporate image – the brand, trade marks, designs etc. have already been protected and established in the marketplace;
Savings in time – the business model is already in place and the franchisee can focus on running a successful business;
Economies of scale – it may be cheaper for franchisees to obtain the required supplies and services than for non-franchisees; and
Customers – they may already be familiar with the brand and trust it more readily.

However, there are also potential disadvantages to being a franchisee. Often, the costs of running a successful franchise can be appreciably greater than the cost of going it alone, due to the impact of sales commissions and central charges.

It is also common for the franchise agreement to limit the range of activities that the franchisee can carry out, which may prevent a profitable opportunity from being exploited.

The agreements need to be read carefully and thought through, especially the ‘get out’ terms and the clauses which specify the degree of geographical or other exclusivity to which the franchisee is entitled.

If you are considering a franchise, it is critical to do your research carefully and diligently before committing yourself. Taking expert professional advice is crucial and the earlier you do so, the less likely you are to waste time and possibly make an expensive mistake.

Information on the tax aspects of franchising can be found on the HMRC website. 

Source: Commercial Client library Content