If you’re buying a franchise for the first time, it can be difficult to know where to start. Here’s our comprehensive guide to get you started.
- What does buying a franchise mean?
- Advantages and disadvantages of franchises
- Should you buy a franchise or start your own business?
- Should you buy a franchise or an existing business?
- Can anyone buy a franchise?
- Do you need to be a limited company to buy a franchise?
- When buying a franchise, what questions should you ask?
- What general business advice is available on buying a franchise?
- What legal advice will you need when buying a franchise? Do you need a specialist franchising solicitor?
- What’s the process of buying a franchise?
- Can I buy a franchise from an existing franchisee? What’s the process?
- Can I buy a franchise from overseas? What’s the process?
- Do you need a licence to buy a franchise?
- Can you buy a franchise online?
- What are the financing and funding options if you don’t have the upfront capital available to buy the franchise?
- How does a franchisee get paid?
- How much does buying a franchise cost? How do you tell if it’s a good price?
- How profitable is buying a franchise?
- What are the main things a franchisee will expect to pay for?
- Can a franchisee be considered an employee of the franchisor?
- What is a business format franchise and why would you want to buy one?
- What is a master franchise? Why and how do you buy one?
- What is a buy to let franchise? Why would you buy one and what is the process?
- What is a franchise buy out?
- What is a pilot operation or a pilot franchisee?
- What is the difference between franchising and distributorship (under a distribution agreement)?
- What is the difference between being a franchisee and a licensee (under a licensing agreement)?
- What’s the difference between being a franchisee and a reseller (under a reseller agreement)?
- What is the difference between being a franchisee and operating an outlet?
- What is the difference between being a franchisee and being part of a joint venture?
What does buying a franchise mean?
When you buy a franchise, the owner of the franchise business (the ‘franchisor’) sells you the right to operate a copy of their business. You’re known as the ‘franchisee’. You pay a regular fee to the franchisor for granting this right, and you’ll (hopefully) make a profit from running the business.
In addition to selling you the operating rights, the franchisor gives you the right to use the brand name and gives you instructions how to follow their proven business model and processes. Although you remain an independent trader, the franchisor will put restrictions on how you operate the business to preserve its reputation and identity.
Your responsibilities will be to pay the franchise fee, promote the franchise brand, and keep up the quality standards expected by the franchisor.
Advantages and disadvantages of franchises
Buying a franchise allows you to set up a business without starting from scratch. The key advantages are:
- It’s less risky to buy a business that’s already successful
- Because the franchisor will continue to make improvements to the franchise, you’ll benefit from these
- You’ll get a recognised brand name and trademark
- You’ll get the benefit of any national advertising and promotion
- You get support and training from the franchisor
- You’ll normally get an exclusive right to operate within a specified region or exclusive client base, so you’ll have reduced competition
- It’s easier to get finance
There are some disadvantages of buying a franchise. These include:
- Buying a franchise can be expensive as in addition to the franchise fee, you’ll have to buy or rent premises, equipment and stock. You may also have to pay royalties or management frees, even if you’re not yet in profit. There may also be training fees.
- There may be restrictions put on you. For example, you may not be able to change the nature of the business or pursue your own ideas.
- When you sell the franchise, the franchisor must approve the buyer.
Should you buy a franchise or start your own business?
This largely depends on your commercial objectives and personal goals. For example:
If you’re looking for a quick start with limited risk, buying a franchise is ideal particularly if you feel you’d like support. For example, you’ll have an established customer base, suppliers and other contacts.
If you think that you’d be happy to operate the business within the restrictions imposed by the franchisor, then maybe a franchise if for you. Otherwise, starting your own business may be preferable.
While buying a franchise can be expensive, starting a business can be too. For example, in addition to paying a fee to Companies House to incorporate, you may need to hire professionals to help you with the company documents. Find out more in our article Do you really need a solicitor when starting a business? You may also need to buy or rent premises, stock and equipment. Even so, this may still be cheaper than buying a franchise.
Should you buy a franchise or an existing business?
Buying an existing business is preferable to buying a franchise if you want independent control over the business, and the freedom to pursue your own ideas. Similarly, if you’re looking to turnaround a poorly performing business, they going your own way is better than a franchise.
Can anyone buy a franchise?
If a limited company buys a franchise, the franchisor will probably ask the directors and shareholders to sign personal guarantees so despite the ‘limited’ liability of the company structure, you may still be on the hook if the company runs into problems and owes the franchisor money. Similarly, where a limited liability partnership buys a franchise, the franchisor will seek a personal guarantee from the individual partners or ask all the partners to sign the agreement as separate parties.
Although an individual can buy a franchise, the franchisor will only accept someone that shows promise of running a successful business. The same barrier would apply for any partnership, LLP and company seeking to buy a franchise.
You’ll need sufficient finances to buy the franchise and capital for the launch of the franchise. The franchisor may restrict the amount you’re able to finance the franchise payments by way of bank loans in order to make sure you’ve sufficient funding.
While there is no age restriction on buying a franchise, in practice a franchisor would be reluctant to sell a franchise to a young franchisee as they’re unlikely to have the skills and knowledge required to successfully run a business. If under 18, they’ll also be restricted in terms of their access to bank cards and credit that may be needed to run the operation successfully.
Do you need to be a limited company to buy a franchise?
No, you don’t need to be a limited company to be a franchisee.
When buying a franchise, what questions should you ask?
If you’re happy to be bound by certain restrictions, and confident you have the skills to operate a franchise, the next question will be which franchise should you buy.
A good start is to ask the franchisor’s existing franchisees. Some questions you might them are:
- What was your total investment and what kind of costs did you face?
- Were the franchisor’s projections for your business performance accurate?
- Did the franchisor provide all the promised help and assistance for the start of the business?
- How useful was the support, training and manual?
- Is there a high demand for the franchise’s goods or services?
- Is the franchisor prompt and efficient in dealing with problems?
- How much control is exercised by the franchisor in practice?
- Is the franchise providing a satisfactory return?
What general business advice is available on buying a franchise?
You can find additional information about the process of buying a franchise and whether it’s suitable for you at the ‘which franchise’ website. This website is a credible source for general franchising advice, as it’s the official online partner of the British Franchise Association.
What legal advice will you need when buying a franchise? Do you need a specialist franchising solicitor?
You’ll need to get legal advice when buying a franchise to help you with your initial research (due diligence) and when negotiating the franchise agreement itself. We always advise engaging the specialist services of a franchising solicitor so that the agreement protects your interests as well as the franchisors’.
What’s the process of buying a franchise?
Once you’ve chosen your franchise, you may ask the franchisor to sign an exclusivity agreement so they don’t enter talks to sell the franchise to another buyer during the due diligence and negotiation period.
In addition to this, you should sign a confidentiality agreement to make sure the franchisors keep confidential anything you tell them during due diligence and negotiations.
Make sure you have enough funds to pay for the franchise. If you’ll be getting a bank loan, make sure you have a firm commitment from the bank. You may have to pay a deposit at this stage.
The next stage is to negotiate a draft franchise agreement that contains detailed terms of the arrangement. If the franchisor has a large network, they may have a standard franchise agreement as a starting point, though you’ll want to negotiate some of the terms. Your lawyer can help with this.
Terms that the franchisor will expect include:
- The right to monitor your performance
- A ‘restrictive covenant’ that you won’t compete with them during the term of the franchise
- A provision protecting the franchisor’s intellectual property
- Limitations on certain of your rights
Terms which you will expect include:
- That franchisor provides you and your staff with training
- Details about who will be providing the goods and services needed to run the franchise, and what quality standards they should meet
- A provision detailing the responsibility for marketing, advertising, and promotions
- Whether you can sell the business and whether the franchisor has pre-emption rights (right of first refusal)
- The duration of the franchise agreement, whether you have the option of renewal, and how you can terminate early
Find more information on what to look out for in our guide to reviewing a franchise agreement.
After the agreement is finalised, you’ll sign it. You may also have to sign other documents and agreements like a separate sub-lease of any premises.
Upon signing, you’ll be able to start running the franchise, you’ll convert any premises into a franchise outlet and begin the franchisor’s training.
Can I buy a franchise from an existing franchisee? What’s the process?
Yes, it’s possible to buy a franchise from an existing franchisee if your franchise agreement allows it. This sale is known as a franchise resale. The franchisor usually has to approve the buyer.
One practical difference of buying from an existing franchisee is that you will be charged a premium on the franchise, as it has an added benefit of already being set up. You’ll have suppliers, trained employees, customers and cash flow from day one. To account for this added value to the business, the price will be higher than buying a franchise from a franchisor. You may also be subject to additional fees such as a transfer fee.
If you and the current franchisee are happy to proceed with the sale, and the franchisor has agreed, you will enter either a share purchase agreement or an asset purchase agreement with the franchisee, in addition to a franchise agreement with the franchisor.
When all the documents have been signed, you should receive training from the franchisor to help you run your franchise. You’ll then be able to continue management and operation of the franchise.
Can I buy a franchise from overseas? What’s the process?
Yes, you can. There are a number of ways to do this.
One option is to buy an overseas franchise from a UK franchisor who will have to train and support you, either remotely, through a subsidiary office in that country, or through an appointed agent.
Direct franchising (franchise arrangement with remote, long-distance control) is not common because tax difficulties arise when an overseas franchisee pays fees to a franchisor in the UK. The franchisor may also struggle to provide adequate training, support, and control.
Purchasing a franchise overseas where a subsidiary office is located in the overseas country is more common. That’s because the subsidiary of the UK franchisor will be the franchisor, and you’ll get training and support from them, rather than the UK company. They’ll have more resources and experience in the market of that country.
A second option is to buy a franchise from a master franchisee. This would allow you to receive training directly from the master franchisee, who will be based in the overseas territory. They will have the resources and experience to provide you with adequate support As the franchise agreement would be entered into with the master franchisee, the master franchisee will take the role of franchisor in the arrangement.
A third option is to buy a franchise by entering a franchise development agreement with a franchisor. This will grant you the right to develop the franchise business in an overseas territory. The arrangement is very similar to entering a direct franchise agreement, except that in a franchise development arrangement, the franchisee is known as the developer and has the obligation to develop the franchise brand.
You can also buy a franchise from a non-UK franchisor to run a franchise in the UK. The overseas franchisor will have a number of options to ensure you get the support you need to run the franchise business within the UK. As with any franchise, you should make sure the franchise is credible, and that you have sufficient skills and confidence to operate the business with more limited support, compared to running a UK-based franchise.
Do you need a licence to buy a franchise?
No, you don’t usually need a licence to buy a franchise, unless the business itself needs a licence. Under most franchise agreements the obligation to comply with applicable laws and obtain the correct licence will be your responsibility.
You can ask your lawyers whether you need a licence. Alternatively, check Government’s licence finder to find out yourself.
Can you buy a franchise online?
Yes, you can find franchises online. The ideal place to look is on the British Franchise Association’s website.
The BFA is a regulatory body that grants credible franchises with BFA membership status. To gain this status, the franchise will have passed a standards-based accreditation.
What are the financing and funding options if you don’t have the upfront capital available to buy the franchise?
If you’ve no money to buy a franchise, you may be able to borrow from a bank or other lender, assuming you’re creditworthy. However, the franchisor may be reluctant to sell if they’re not confident that you have sufficient funds to be successful.
If you’re considering buying a franchise with financial support, alternative methods of finance include:
- Pulling equity from your home by using a home equity loan or a home equity line of credit (HELOC). If you wish to consider this option, you should seek the advice of a financial advisor.
- Finding a business partner who could provide finances.
You may want to read our article Do you really need a solicitor for financing your business?
If you’re borrowing, you’ll need to show the bank your business plan. This should include:
- Executive summary
- Personal details
- Your experience and skills
- Overview of the franchise
- Business operation
- Marketing strategy
- Financial projections
- Borrowing needs
- Capital stake
- Personal finances
How does a franchisee get paid?
You’re not paid under a franchise agreement, rather you take a profit from the business of the franchise. So, if your franchise is making a loss, you’ll not get paid.
Given that you still need to pay royalty fees when making a loss, you should think carefully what you’d do in this situation, and indeed if buying a franchise is right for you.
How much does buying a franchise cost? How do you tell if it’s a good price?
There is no average cost of a franchise because it depends on the franchise and its reputation. A small franchise may require a minimum investment of £500, whereas a large reputable franchise like Clarks may cost £150,000.
Make sure you do your homework by asking existing franchisees about their profits and costs, and consult your lawyer or accountant too, to make sure you’re not overpaying.
How profitable is buying a franchise?
This will depend on your business management skills, and the reputation of the franchise. A well-known brand will make things easier, but your abilities will also play a part.
What are the main things a franchisee will expect to pay for?
Potential fees that you may have to pay for are:
- A development fee, exclusivity fee, or initial franchise fee. These are upfront fees charged for giving you territorial exclusivity, or the right to operate the franchise.
- Store opening fee. This is an upfront fee payable on opening each franchised outlet.
- Service fee or royalty. This is usually a charge calculated as a percentage of your gross turnover, or a fixed amount.
- Marketing contribution. This fee is charged for the marketing campaigns the franchisor develops and runs on your behalf. This fee is usually a percentage of the gross turnover. However, the franchisor may also require you to commit to a minimum spend on your own local marketing campaigns.
- Training fees. This is a charge for the training you will get to operate the business. The franchisor may choose to arrange periodic training.
- Other fees. These fees could include lease rentals, software licences and support fees
Can a franchisee be considered an employee of the franchisor?
It’s unlikely, but not impossible. If you do have a query about how employment law applies to the relationship between you and your franchisor, it’s best to ask one of our expert employment solicitors.
What is a business format franchise and why would you want to buy one?
A business format franchise (also known as a second-generation franchise), has two key elements:
- The franchisee operates its business under the franchisor’s trade name or trade mark, so the outside world views the franchisee as the franchisor (think Subway and McDonalds)
- The franchisor must be able to exert substantial influence or control over the way the franchisee operates its business.
By buying a business format franchise, you get the benefit of buying a business with an established reputation. This means it will be easier for your business to trade in the market and subsequently generate a profit.
Choosing to buy a franchise also provides independent traders with a name to operate under. This allows traders to continue profit making through sales, whilst avoiding the hassle of setting up their own business and building its reputation.
What is a master franchise? Why and how do you buy one?
A master franchise is an arrangement where the franchisor grants a franchisee the right to sub-franchise within a territory. A master franchise is a good opportunity for investors with enough finance to develop a network of franchises in a territory. You’d need be familiar with the local market, have relevant experience in the industry and good management skills.
When a master franchisee enters into sub-franchises, the head franchisor will make sure they accept only the highest quality of sub-franchisees.
You buy a master franchise by entering into a franchise agreement. This may require you to open and operate a specified number of operations.
What is a buy to let franchise? Why would you buy one and what is the process?
A buy-to-let franchise is a specific type of franchise in the property market. By buying a buy-to-let franchise, you’ll be purchasing a letting agency where your profits will be made through a commission on the sale of property.
The process of buying a buy-to-let franchise is the same as buying a franchise from a franchisor. You would need to enter a franchise agreement, in addition to obtaining the relevant licences required by law.
What is a franchise buy out?
A franchise buyout is when a franchisee buys out the franchise. As a result of the buyout, the franchisee will become the owner of the entire franchise. This includes any franchisees existing under franchise agreements with the franchisor.
Buying out a franchise is more expensive than buying a franchise because the seller is selling complete ownership of its business.
What is a pilot operation or a pilot franchisee?
A pilot operation is when a company wants to start a franchise business, so starts up a pilot operation to test business format/idea.
If you’re buying a franchise, you should find out whether the franchisor has conducted a pilot operation, as they’ll have gained insight into the business and identified areas of improvement, the level of demand for services and goods in a location, and the strengths and weaknesses of the business. This means the business will be thoroughly tested and more likely to be successful.
Similarly, make sure the franchise you are buying is not the franchisor’s pilot operation. A pilot operation usually only operates for a year or two. As the full strengths and weaknesses have not been identified, it can be risky.
What is the difference between franchising and distributorship (under a distribution agreement)?
A distributorship is where a manufacturer or supplier of goods (the ‘principal’) appoints a third party (the distributor) to market and resell its goods under a distribution agreement.
Here are the key differences between franchising and distributorship:
|Buying and selling goods||While you may choose to buy goods from the franchisor, this isn’t necessarily part of the franchise deal. You may have a choice where your buy your raw materials. But you’ll need to make sure these are of good quality so you comply with the quality control procedures imposed by your franchisor.||The distributor has to buy goods from the principal for the relationship to exist.|
|Exclusivity||A franchisor may not need you to enter an exclusivity agreement to deal with just their brand.||A principal may require you to sign an exclusivity agreement. This will prevent you from dealing with competing products, thereby protecting the principal’s commercial interests.|
|Trade name and branding||You’ll always use the trade name and branding of the franchisor, as the purpose of the arrangement is to operate a business with the franchisor’s brand.||You’ll trade under your own name. A rare exception includes car distributors where the car manufacturer will give you permission to display its brand on your premises.|
|Know-how transfer||You’ll need the franchisor’s know-how in order to provide goods and services that are of the same quality of the other franchisees.||You don’t need any know-how from the principal in order to resell the goods.|
|Control||The franchisor has a great deal of control over you, so that it can maintain the quality of its brand.||The principal usually has very limited control over the way you operate. This is because you buy goods from the distributor on your own account.|
|Royalties||A franchisor will expect a royalty in return for the know-how and goodwill it gives you. There’ll also be a royalty for any profits made from using the franchisor’s brand and distinctive raw material.||No royalty is paid to the principal. The principal’s profits are based on the sale of the goods to you.|
What is the difference between being a franchisee and a licensee (under a licensing agreement)?
Under a licence, the licensor grants someone (the ‘licensee’) the right to use their intellectual property rights and know-how of the licensor, usually to manufacture to produce and sell goods.
This is different from a franchise, as the franchise agreement doesn’t usually relate to the manufacture of products. Instead, a franchise agreement regulates the way in which the franchisee runs the business, made possible through using the franchisor’s brand, intellectual property and know-how.
What’s the difference between being a franchisee and a reseller (under a reseller agreement)?
A reseller is someone that finds buyers for a seller’s goods. Although similar to a distributor, the reseller doesn’t take ownership of the goods, instead they act as a middle-man, helping sellers find buyers.
Whereas a reseller has very little connection with the seller, a franchisee will build a close relationship with the franchisor to ensure its business is similar, if not identical, to the whole franchise.
The franchisee will also be using the intellectual property rights and software of the franchisor, whereas the reseller has no access to a supplier’s technologies.
A franchisee also owes greater obligations towards a franchisor. For example, the franchisee must promote the franchise brand and inform the franchisor of potential improvements for the business. In contrast, a reseller has no such obligation to promote and improve the business of the seller/supplier. Instead, the reseller provides a means for a seller/supplier to access a customer base.
The formalities of becoming a franchisee and reseller are also different. To become a reseller, you will enter a reseller agreement with the supplier or manufacturer.
What is the difference between being a franchisee and operating an outlet?
An outlet is a store that sells products or services to the general public after buying these from a manufacturer or wholesale supplier.
As the outlet may buy a large quantity of product, the manufacturer/wholesale supplier will usually sell them at a discount. The outlet can then sell at a higher price to make a profit from its sale.
This is different from a franchise, as the franchisee shares the brand of the franchisor, and provides the same service as the other franchisees.
A franchisee also receives a great deal more support from the franchisor and receives training and know-how to help the franchisee’s business.
When operating an outlet, you may be buying goods from several different suppliers to sell through your outlet. You will, therefore, not receive any additional support when running the outlet, or any additional training. It’s also unlikely that you will have the obligation to promote and develop the brand of any manufacturer, unlike your obligations as a franchisee.
The formality for becoming a franchisee and for operating an outlet are also different. An outlet is usually purchased by entering a sale and purchase agreement.
What is the difference between being a franchisee and being part of a joint venture?
A joint venture involves two or more parties pooling resources to complete a specified business activity or project together.
By entering an arrangement where the losses are distributed between the parties, the parties can increase their resources and technology to pursue a profitable venture.
As a joint venture party, you will be entitled to distribute profits according to the arrangement detailed in the joint venture agreement and share the costs between yourselves as agreed in the agreement.
This is different to being a franchisee where you retain your own profits and incur your own losses, independent from the franchisor and the other franchisees. Also, as a franchisee, you must pay an ongoing fee to the franchisor for using the franchisor’s brand for business. Contrastingly, a joint venture party does not usually have to pay an ongoing fee for having access to the other parties’ resources. Read more about our Joint Venture Agreement services here and check out our joint venture agreement FAQs.