What Is a Franchise: Complete Beginners Guide For 2024

Explore franchising and the benefits and limitations.

Updated: July 11, 2024
Matt Crabtree

Written By

Matt Crabtree

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Franchising is a proven business model that gets stronger every year in the UK. In the UK alone, 70% of Starbucks’s 1,066 stores are franchised with plans to incorporate more stores into the franchise model shortly.

However, paying a parent company a franchise fee can incur substantial costs, requiring many franchisees to seek franchise funding. 

In this article, we’ll explore franchising and the benefits and limitations this business opportunity can deliver to franchisees.

1. Funding Options★★★★★Learn more
2. Love Finance★★★★★Learn more
3. iwoca★★★★★Learn more
4. Norton Finance★★★★Learn more
5. 365 Business Finance★★★★Learn more

A franchise is a business model. The parent company (franchisor) grants a franchise agreement so you (the franchisee) can sell the franchisor’s goods or services across a particular area. The franchisor will help you to set up this business.

How Does a Franchise Work?

A franchise works to allow a franchisee the business opportunity to use a well-known chain’s branding and products or services. In return for these rights, the franchisee must pay a franchise fee and abide by a set of conditions when running the business.

The franchisee will run their own business, although they will use a fully operational concept that is already well-known in the public domain. The franchisee will receive all branding, training, logos, products and uniforms and will need to meet the standards of the franchisor.

How Can I Open a Franchise Business?

Follow these easy steps if you want to open your own franchise business in the UK.

1. Apply

The first step to take is to register your interest with the franchisor. The vetting process for well-known franchises is very strict and can take a long time to receive a decision. A series of interviews and an assessment of your relevant experience will take place.

You must demonstrate your commitment to becoming a franchisee with the parent company and find out as much information as possible about what a franchise entails. 

Most franchisors will incorporate a vast range of resources on their website to show you what life as a franchisee will involve. 

You could also attend a Franchising Event run by the British Franchise Association or the International Franchise Association to discover more about this unique business opportunity.

2. Location

Some franchisors will accept you as a franchisee first before providing you with a location for your own business. However, some franchisors may be looking for a franchisee to operate at a specific location.

You must determine what area you can work in. How far are you willing to travel from your home each day? Are you able to relocate anywhere in the UK?

Eventually, many franchisees will not spend a vast amount of time in the franchise business location as they will be confident that their managers can look after the store. 

However, at first, the franchisee will be very involved in the business, setting up operations and managing all staff.

3. Funds

You must have sufficient franchise funds in place when you apply for a franchise. Every franchisor will have their own fees and requirements in place, although we will look at McDonald’s as an example.

The upfront fee to purchase a McDonald’s franchise will depend on the restaurant’s value and predicted profitability. If you want to purchase a McDonald’s franchise in a prime location, you will need higher amounts of cash.

The lowest cost of a McDonald’s franchise typically falls at around the £400,000 mark. A large portion of this amount must be found in liquid assets, such as cash in your bank account. 

You can borrow the remaining franchise finance costs from a bank in the form of a business loan if you need to.

You must also factor other fees and costs into your franchise model plan. For example, your franchise agreement will include a requirement to pay a percentage of your restaurant’s net sales to the parent company.

This fee is paid monthly and is pre-agreed in your franchise agreement. For example, you may need to pay a fixed fee of between 12.5% and 21% of the restaurant's net sales. This fee includes your rent for your store. 

An additional monthly service fee of 5% of net sales as well as a marketing fee of 4.3% of net sales must also be paid. So, if your franchise agreement required a fixed fee of 16% of net sales per month, in addition to a 5% monthly service fee and a 4.3% marketing fee, you would need to pay McDonald’s 25.3% of your restaurant net sales per month.

Are Franchise Opportunities a Good Idea?

The franchise industry in the UK is worth over £17 billion, presenting worthwhile opportunities if you want a slice of the franchising pie. With nearly 50,000 franchising stores across the country, the franchising sector employs a staggering 710,000 people. 

Furthermore, 6 in 10 franchised stores turn over more than £250,000, providing clear business opportunities and a valid potential to succeed. So, despite the substantial upfront cost and relevant monthly deductions, a franchise can prove to be a strong business choice and source of income.

Which Businesses Are Usually Franchised?

Most popular businesses are franchised in the UK. The most common type is the food business, such as McDonald’s, KFC, Subway, Pizza Hut, Dominos and Burger King.

However, there are also franchising opportunities in childcare, education, cleaning, fitness, and beauty.

What Are the Benefits of Running a Franchise Business?

The franchise system offers prospective franchisees a wide range of benefits.

Here are our top 5 benefits of running a franchise business:

1. Your Own Business

A franchise is your own business. Even though the franchisor is allowing you to use their brand and sell their products, you still need to organise your workforce, manage stock and run the business effectively.

2. Ready to Go

You can start to operate your business immediately as the franchisor has set you up with everything you need. There is no need for you to conduct market research or try out different products. The franchisor will provide you with all materials to get started on your first day.

If you start a new business that is not a franchise, you will need to find out if your proposed business would be successful in that location. You are taking a higher risk and may experience a higher rate of failure.

You will also receive ongoing support from the franchisor as well as other franchisees.

3. Brand Success

Franchises are successful as they are built on a popular and already successful brand. When running a KFC franchise, you are promising the customer the same products and the same service so the customer knows what to expect. 

Starting a new business that is not a franchise requires a great deal of marketing to build brand awareness and let the customer know what your business is about. This can take time and is not always successful.

4. Lower Costs Overall

When starting a franchise business, you do need to pay an upfront fee to the franchisor. However, this is one cost only and will involve everything you need to operate the business.

If you open a new business that is not a franchise, costs can spiral as you remember new items that you need to purchase, underestimating the initial startup costs.

5. Good Reputation

As well as attaining a good reputation with customers, the reputation of your franchise will help you with franchise funding. 

Business banks will realise the higher chance of success of a franchise in comparison to a new independent business. You could, therefore, have a better chance of securing a business loan. 

This is a good opportunity to have when you are an existing business owner looking to expand and own several franchise businesses.

What Are the Limitations of Running a Franchise Business?

The franchise model is a significant commitment.

Here are our top 5 limitations to be aware of when running a franchise business:

1. Long Term Commitment

When following this business format, franchise agreements can state that you must run the franchise for 10 years or more. This is a long-term commitment that does not turn into a success overnight. 

Your franchisor will want guarantees that the investment they are making into you is the right decision for them.

2. Upfront Costs

Substantial upfront costs are required when entering the franchise industry with business ownership. You will need to pay upfront costs of at least £400,000 before business operations can begin. 

However, a large portion of this franchise investment must be available in liquid assets, such as cash in your business bank account.

3. Sales Revenue Fees

You will need to pay the franchisor a percentage of your fees each month, or each year. The precise terms will vary according to each franchisor and will be calculated as a percentage of your sales revenue. 

McDonalds requires a fixed percentage of between 12.5% and 21% per month, per your franchise agreement, in addition to a 5% monthly service fee and a 4.3% marketing fee. 

This could mean that you need to pay between 21.8% and 30.3% in total of your net sales revenue to McDonald’s each month. This is before employee wages, stock, and other costs are deducted.

4. Lack of Freedom

The franchise agreement will state that you must follow the recipes and business model of the franchisor. Therefore, you cannot change the pricing structure or create new items for the menu. Some business owners may feel trapped by this lack of freedom.

5. Relocation

Unfortunately, you cannot tell a franchisor where you want the new store to be. The franchisor will conduct a vast array of research and will know where there is a gap in the market for their brand and will tell the franchisee where the new store will open.

Of course, you cannot be forced into opening up a new store positioned a long way away from your home. But you may face limited opportunities if you cannot relocate or travel to other areas of the UK.

How Can I Raise Franchising Funds?

If you are sure that franchising is the business model for you, you need to raise franchise funds. If you have a substantial amount of cash in your business savings account, you could apply for a business loan to secure the rest of the money.

You could see if you are eligible for government grants to support businesses, although this type of funding is rare to purchase a franchise business. Securing a business loan will provide you with a greater chance of success.

Franchise Bank Loan Pros and Cons

Are you considering applying for a bank loan to raise funds for a franchise? 

Check out this section for a succinct overview of the pros and cons of applying for a bank loan for your franchise business:

✔️ Access funds — A bank loan is the dominant way that most franchisees can pay their upfront costs. However, remember that most franchisors require a portion of the upfront fee to be paid in your own money, not through a bank loan.❌️ Increased debt — Securing a business bank loan to open a franchise will require significant debt levels. For example, if you have £150,000 towards a £400,000 franchise, you will need a bank loan of £250,000. That is a significant amount of debt.
✔️ Quick decision — Bank loan decisions are usually made within a short period so you should find out if you are successful quite quickly. If you are unsuccessful, you can look elsewhere for funding.❌️ Higher monthly repayments — When operating a franchise, around 25% of your sales revenue will need to be paid to the franchisor before other debts are paid. Taking out a bank loan will add to the monthly debt repayments you will need to pay before realising a profit.
✔️ Improve credit rating — Ironically, accessing a bank loan can help to improve your credit score over time as long as you pay every payment on time.❌️ Higher risks — Taking out a bank loan for a franchise is a risk. What if your franchise is not successful? What if operating a franchise is not everything you hoped it would be? Regardless of the profits made by the franchise, you will still need to pay the bank loan repayments each month.
✔️ Develop your reputation — If you are successful in securing a bank loan and opening a franchise business, subsequent success can develop your reputation with the bank. This can help to improve your chance of securing finance to open further franchise stores.❌️ Negatively impact your credit score — Missing a bank loan repayment will negatively impact your credit score. This will affect your future credit applications and may also impact your franchise.

Best Franchise Bank Loans — Reviews

If you are looking for a substantial bank loan towards your franchise funding, look no further.

Here are our top 5 bank loans currently available:

1. Funding Options Unsecured Business Loan — Best Overall Loan

  • Maximum loan amount: £15,000,000
  • Loan terms from 6 months to 6 years
  • Typical APR: 7.6%
  • Minimum trading: 12 months
  • Minimum turnover: £100,000

This unsecured loan by Funding Options accepts loan applications for up to £15,000,000. You could secure a large enough loan to fund your franchise, with one easy payment each month.

Loan terms can be stretched from as little as 6 months to as long as 6 years, offering versatility to meet your unique needs. The typical APR offered under this loan is 7.6%, although this may vary depending on your circumstances.

To be eligible for this loan, you must have a good credit history and show that you have successfully traded in business for the last 12 months, achieving a turnover of at least £100,000.

2. Love Finance Instant Business Loan — Best for Fast Loans

  • Maximum loan amount: £500,000
  • Receive funds within 24 hours
  • Starting APR: 4.9%
  • Loan terms up to 5 years

The Instant Business Loan from Love Finance is a great option if you need to raise cash fast. You could apply for up to £500,000 and receive the money within 24 hours if your application is successful.

APR rates start at 4.9%, depending on your circumstances, and you could spread repayments across 5 years.

Automated options mean that you can make a decision faster than ever before, with access to Love Finance’s financial services always available 24/7.

3. iwoca Flexi-Loan — Best for Flexible Repayments

  • Maximum loan amount: £500,000
  • Loan terms from 1 day to 2 years
  • Fast application process
  • No early repayment fees
  • Personal guarantee required
  • Easy top-ups and credit limit extensions

The iwoca Flexi-Loan is the perfect choice if you need to borrow money for your franchise over the short term. 

You can borrow up to £500,000 and spread repayments across several days through to 2 years. If you can pay back the loan early, there are no early repayment fees.

The application process is fast and the loan is not secured against an asset. However, you will need a personal guarantee to secure the loan. 

Topping up your loan and borrowing more money is easy, effortlessly increasing your credit limit.

4. Norton Finance Secured Homeowner Loans — Best for Longer Terms

  • Maximum loan amount: £500,000
  • Loan terms from 1 year to 30 years
  • Typical APR: 6.7%
  • Loan secured against your home

Norton Finance offers a secured homeowner loan at a low rate of 6.7% APR. This is a good choice for potential franchisees who are new to business and cannot raise a business loan. 

Using your home as security for a loan is a risk, but is a common method used by many new business owners who need to raise franchise funds.

You can borrow up to £500,000 towards your franchise funds and spread the cost of repayments across 1 year to 30 years. 

5. 365 Business Finance Cash Advance — Great Alternative Loan

  • Maximum loan amount: £300,000
  • Receive funding in 48 hours
  • One clear fee
  • Flexible loan terms
  • Repay a percentage of your business credit and debit card sales
  • No security is required

A cash advance from 365 Business Finance is a loan with a difference. You can borrow up to £300,000 and pay one complete fee with no hidden extras, receiving funding within 48 hours.

Zero security is required and flexible loan terms are consistently available. Instead of paying a fixed payment every month even if your sales revenue is lower than expected, you will pay a percentage of your sales through debit and credit card. 

This is a fresh way of repaying a loan when business sales may fluctuate and not always reach expectations.

Final Thoughts

A franchise is a superb business opportunity that offers a greater chance of success than starting a new business on your own. You gain the support and knowledge of a well-established brand and can rely on some success from day one of your franchise journey.

The upfront cost to start a franchise is substantial although the monthly fees are reasonable to an extent. A franchise could be a smart way to build a successful business.

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