Starting up with a franchise

Starting a Business with a Franchise in the UK: A Comprehensive Guide

Kurt GraverBusiness Start-up Advice

For many aspiring entrepreneurs and business owners, starting a franchise can seem appealing. The idea of running your own business with the backing of an established brand and proven business model is undoubtedly tempting. However, as with any business endeavour, there are many factors to carefully consider before deciding if franchising is the right path forward. 

This comprehensive guide will walk you through everything you need to know about starting a franchise business in the UK – from understanding the legal landscape to evaluating franchising options to securing financing. Read on for expert tips and advice to help inform your franchise ownership journey!

Overview of Franchising in the UK

While there are no UK laws specifically governing franchises, several regulations and voluntary codes of conduct apply to franchisor-franchisee relationships:

  • The Consumer Protection from Unfair Trading Regulations prohibits false or misleading information given to prospective franchisees. This encourages transparency in the franchising process.
  • The Competition Act regulates anticompetitive practices like price fixing between franchisors and franchisees. 
  • The British Franchise Association’s voluntary code sets standards for ethical franchise relationships. Franchisors who are association members agree to provide clear disclosure and follow good business practices.
  • Franchisors must provide a disclosure document to potential franchisees outlining key details about the opportunity, like fees, projected financial performance, and litigation history.
  • The franchise agreement is a legally binding contract governing all aspects of the franchisor-franchisee relationship. Franchise agreements usually span 10-20 years with options to renew.

Conducting Due Diligence on the Franchisor 

Thoroughly vetting the franchisor by conducting in-depth due diligence is a crucial step before signing any franchise agreement. Important actions include:

  • Reviewing the franchisor’s audited financial statements, litigation history, leadership team bios, and other background details provided in the disclosure document. 
  • Contacting existing and former franchisees to gain insight into their experiences with the franchisor, including the initial onboarding process, ongoing support, and overall profitability.
  • Closely evaluating the terms of the franchise agreement and understanding all obligations – seek professional legal help reviewing the contract.
  • Researching online reviews and complaints about the franchisor.
  • Consider hiring a franchise consultant for an objective third-party perspective.

Look for transparency from the franchisor, realistic financial projections, fair contract terms, evidence of franchise profitability, and a reputation for ethical practices. Franchisors who are members of the British Franchise Association inspire confidence by agreeing to follow the association’s code of conduct.

Understanding the Franchise Agreement

The franchise agreement is the legally binding contract between the franchisor and the franchisee, so it’s imperative to understand these terms thoroughly. Key sections to review include:

Initial fees and ongoing royalties – This covers the upfront franchise fee to start, as well as any continuing royalty payments based on gross sales. Royalties often range from 5-8%.

Length and renewal terms – Typical franchise agreements last 10-20 years. Understand requirements for renewal. 

Operational standards – The agreement outlines standards for operations, branding, permitted vendors, products/services, and more that franchisees must follow.

Territorial rights – Exclusive regions define where franchisees can operate to avoid intra-brand competition. Population size, demographics, and other factors determine regions.

Marketing obligations – Franchisors often require franchisees to participate in local marketing or contribute to national advertising funds.

Trademark usage – Contracts detail how franchisees can use the franchisor’s branding, logos, and other trademarks. 

Transfer/termination clauses – Understand the policies if you want to sell the franchise and the conditions where the franchisor can terminate the agreement.

Some franchise agreements are non-negotiable, while others may have flexibility on specific terms. Seek experienced legal help to understand the rights and limitations under the contract thoroughly.

Securing Financing for a Franchise  

Buying into a franchise brand requires capital upfront and ongoing fees. Funding options include:

  • Personal savings – Many franchisees invest their own savings to partially or fully fund the business. Having 20-30% of the total costs in cash is ideal.
  • Small business loans – Banks and alternative lenders offer financing specifically for funding a franchise. Lenders favour proven concepts with a successful track record.
  • Business partners – Bringing on an investment partner spreads the financial risks and responsibilities of franchising. Partners provide capital in exchange for equity.
  • Home equity loans – Existing home equity can be tapped as an affordable financing option. However, it risks your home if the business falters.
  • Government grants – Limited grants may be available for women, minority, veteran, or disabled entrepreneurs seeking to start a franchise.

In evaluating financing, weigh factors like required down payments, interest rates, terms, borrowing limits, collateral, credit score requirements, and personal guarantees. An accountant and financial advisor can provide strategic advice on optimising funding.

Choosing the Right Franchise 

With over 1,000 franchising opportunities in the UK, how do you narrow your selection? Important criteria to evaluate include:

Required investment – Franchise investments vary widely, from under £10,000 up to over £500,000 for larger concepts. Assess your available capital and risk appetite.

Time commitment – Some franchises, like restaurants or retailers, require hands-on, full-time work from the owner. Others may allow semi-absentee ownership. Consider your desired role.

Ideal regions – Research if regions are available in your preferred geographic areas before getting set on a franchise brand.

Skill set – Opt for franchises that align with your abilities – for example, franchises ideal for skilled salespeople versus operational experts.

Passion for industry/product – Operating a business you find genuinely interesting will make the venture more fulfilling through challenges.

Support and training – Look for franchisors who provide robust training and have field staff to support franchisees.

Profit potential – Review projected financials to assess profit possibilities and time to break even on your investment.

Key Benefits and Risks of Franchising

Benefits of starting a franchise business include:

  • Lower risk due to an established brand and proven business model
  • A turnkey business system with franchisee training 
  • Ongoing support from franchisor staff
  • Buying power of larger organisation for expenses
  • Established marketing and branding to gain customer awareness 
  • Opportunity to expand and open multiple locations
  • Potential for passive ownership after initial setup

Risks and challenges to also consider:

  • High upfront investment and ongoing royalty fees 
  • Restrictive terms of franchise agreement
  • Limited control over some business decisions
  • Reliant on continuing the relationship with the franchisor
  • Franchisor performance reflects on your business
  • Finding the optimal location for the territory
  • Potential conflicts balancing franchisor demands with profit goals

Conclusion: Is Franchising Right for You?

For aspiring business owners, becoming a franchisee allows you to run your own business with significantly lower risks and hurdles than an independent startup. But franchising also involves sacrifices like high costs, contractual restraints, and reduced autonomy.

Carefully weigh your available capital, risk tolerance, career goals, and passion for running a business. Do in-depth self-reflection – the most successful franchisees have an entrepreneurial spirit and can follow proven systems. With eyes wide open after meticulous planning and research, franchising can unlock an exciting new chapter in your professional journey.

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